There are several significant tax provisions in the bill, including the following:
Additional Stimulus Payments
The bill provides individual stimulus payments of $1,400 per eligible recipient, to be made as quickly as possible. Unlike previous rounds, taxpayers will also receive payments for college-aged and adult dependents. The payments are based on 2019 tax returns, unless 2020 have been filed, and reconciled on the 2021 tax return. Similar to the prior payouts, a windfall is created – if too much is received in an advance payment based on a prior year when compared with the 2021 filing, no payback is required. This creates a situation identical to last tax season where taxpayers need to weigh the advantages of quickly filing or holding back the 2020 return in order to maximize the stimulus payment.
Payments will be phased out over extremely narrow ranges of adjusted gross income: from $75,000 to $80,000 for single taxpayers; $150,000 to $160,000 for those married filing jointly.
Expanded Child Tax Credit and Child and Dependent Care Credit
For 2021 only, the bill expands the amount, eligibility, and refundability of the child tax credit. The credit increases from $2,000 to $3,000 ($3,600 for a child under 6), the age limit increases from 16 to 17, and the full amount of the credit is refundable (compared to $1,400 under current law.) The credit phases out in two tranches: The excess credit (amount over the “normal” 2020 credit) begins to phase out at $75,000 of adjusted gross income for a single taxpayer ($150,000 for a married couple filing jointly), while the standard credit continues to phase out at AGI limits of approximately $200,000 ($400,000 if MFJ).
A portion of the 2021 child tax credit may also be paid in advance, and will be reconciled against the actual credit claimed on the 2021 tax return. Unlike receipt of the stimulus payments, however, any excess payment received will need to be paid back as additional tax on the 2021 return, similar to the premium tax credit (which was also enhanced by the bill).
The child and dependent care tax credit also gets a one year boost: from a high of $2,100 for two eligible children in 2020 to as much as $8,000 in 2021. The credit will also be fully refundable.
Tax-free Unemployment Benefits
The bill extends $300 weekly supplemental unemployment benefits through September 6. And more importantly for 2020 tax considerations, the first $10,200 of unemployment income received during that year will now be tax free for those with adjusted gross income less than $150,000.
Restaurant Recovery Plan
A new $25B grant program was created to assist bars and restaurants during 2021. Eligible taxpayers can receive a tax-free grant of up to $10M -- $5M per physical location -- that is generally equal to the loss in revenue from 2019 to 2020, reduced by any PPP proceeds received in either 2020 or 2021. As with the PPP, the grant must be spent on certain eligible costs during a covered period that runs from February 15, 2021, through the end of the year. More information on this program is forthcoming.
Extension of the Employee Retention Credit
The ERC is extended through the end of 2021. Originally slated to expire at the end of June, the credit will be computed for the second half of 2021 in the same manner as the first: a 70% credit rate and maximum wages of $10,000 per employee/per quarter. The taxpayer will need to establish for each of the final two quarters of 2021 that either 1) business was either fully or partially suspended by government order, or 2) receipts for the quarter dropped by more than 20% when compared to the same quarter in 2019. An election is available to determine the gross receipts drop on the immediately preceding quarter.
For certain “recovery startup businesses,” the new ERC will be limited to $50,000 per quarter. A recovery startup business is a business that started after February 15, 2020, has average 3-year taxable income of less than $1M, and that does not otherwise have an eligible quarter in the last six months of 2021.
Lastly, “severely financially distressed employers” who have less than 10 percent of gross receipts in a quarter when compared to the same quarter in 2019 will be able to ignore a limitation that applies once FTE count reaches 500.
Paid Sick and Family Leave Credits Extended and Enhanced
The credits for paid sick and family leave first made available by the Families First Coronavirus Response Act (FFCRA) are extended through September 30, 2021. Though there was no extension of the requirement to pay employees for these types of leave, if an eligible employer chooses to do so, several favorable changes are also made for credits after March 31, 2021.
The bill increases the amount of wages that can be used in the paid family leave credit calculation from $10,000 to $12,000 per employee and expand upon the eligible reasons to which paid leave can apply, such as for receiving a COVID-19 vaccination or recovering from a COVID-19 caused condition or disability. In addition, the paid sick leave 10-day limitation resets for period after March 31, 2021.
Self-employed individuals may continue to claim the paid sick and family leave credits. The bill increases the number of days to be included as qualified family leave equivalent amounts from 50 to 60 for periods between April 1, 2021 and September 30, 2021. Paid sick leave equivalent days are also reset for self-employed individuals retroactive to January 1, 2021.
Shuttered Venue Operators Grant
The bill removes the prohibition on a PPP borrower from claiming the Shuttered Venue Operators (SVO) grant. Instead, the grant amount will be reduced by any PPP proceeds received by the taxpayer after December 27, 2020. The SVO grant program enacted as part of the December stimulus bill is reportedly set to open before the end of the month.
Excess Business Loss Limitation Extended
The ARPA extends section 461(l) excess business loss limitations for non-corporate taxpayers by one year. First enacted by the Tax Cuts and Jobs Act, the provision that limits losses to $250,000 ($500,000 for those married filing joint) is currently set to expire in 2025 but is now extended through 2026. The CARES Act previously suspended this limitation for the 2020 tax year, but it will be reinstated for 2021.
Increase for Dependent Care Assistance Programs
The ARPA enhances tax-free benefits for employees under a Dependent Care Assistance Program plan in 2021. Excluded employer contributions increase from $5,000 to $10,500, or from $2,500 to $5,250 for those taxpayers married filing separately.
Key Items Not Included
Though the minimum wage increase from $7.25 to $15 per hour was initially included in the bill, it was removed in order continue utilizing a budget reconciliation process that required less votes in the Senate. The issue remains top of mind for congressional democrats and it may see its way into future bills.
And while the Paycheck Protection Program received an additional $7.25 billion in funding, and was expanded to include additional nonprofits, the Act did not extend the current March 31, 2021 application due date. With just weeks left to apply and billions remaining on the table, it’s possible the date will be extended but not certain.
Please contact your RubinBrown representative with questions or concerns on any of the provisions within the American Rescue Plan Act.
By: Tony Nitti, CPA, MST
By: Amie Kuntz, CPA, MA
Readers should not act upon information presented without individual professional consultation.
Any federal tax advice contained in this communication (including any attachments): (i) is intended for your use only; (ii) is based on the accuracy and completeness of the facts you have provided us; and (iii) may not be relied upon to avoid penalties.
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On March 11, 2021, President Biden signed the American Rescue Plan Act (ARPA) into law. The $1.9T stimulus package passed Congress largely along party lines, with one Democrat voting in opposition.