Despite several obstacles, President Biden’s stimulus plan was successfully shepherded through both chambers of Congress using the tricky budget reconciliation process. At $1.9 trillion, the American Rescue Plan (ARP) Act is slightly smaller than the $2.2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act, but is larger than the $920 billion Consolidated Appropriations Act, 2021 (the Act) passed at the end of the last year. The ARP Act follows the general contours of the previous stimulus legislation in that it provides Recovery Rebate payments to individuals, expanded and extended unemployment benefits, and loans and grants for eligible business. However, the tax portions of the ARP Act bear some notable differences from the previous stimulus plans. These differences are discussed in depth below.
Tax Provisions for Individuals
The ARP Act is heavily focused on financial assistance for individuals, where these provisions account for a substantial portion of the legislation’s overall cost.
Individual Stimulus Payments
The most prominent provision for individuals is another round of Recovery Rebates, or stimulus payments as they are commonly known. Payments would generally be issued per household and equal to the sum of $1,400 per eligible individual ($2,800 for married joint filers), plus $1,400 for each eligible dependent (including older children and adult dependents). However, eligibility for these payments will phase out at lower income levels compared to the previous stimulus payments.
Under the ARP Act, individuals with an adjusted gross income (AGI) over $75,000 ($150,000 for married joint filers) will see a reduced payment, and individuals with an AGI over $80,000 ($160,000 for married joint filers) will not receive a payment, regardless of the number of dependents. Previously, the phase-out levels were higher and were increased for each additional dependent of a taxpayer.
These payments are structured as refundable tax credits against 2021 income taxes, and will be issued in advance during 2021. Amounts and eligibility for the advance payment will be based on information from 2020 tax returns, or 2019 returns if a taxpayer has not yet filed a 2020 return. For households whose payment was based on 2019 income data, and who would be eligible to receive a larger payment based on 2020 data, the IRS is directed to issue a supplementary “top up” payment within 90 days of the filing deadline or Sept. 1, 2021, whichever is earlier. As was the case with prior rounds of stimulus payments, taxpayers receiving a larger advance payment than is ultimately determined to be eligible will not be required to pay it back.
The ARP Act further extends federal unemployment benefits until Labor Day (the federal benefits were set to expire March 14). These additional federal benefits (on top of state benefits) remain at $300 per week. From a tax perspective, the extension of these benefits is less significant than another provision related to unemployment benefits. This new provision provides that the first $10,200 of benefits received in 2020 are not be taxable for households with up to $150,000 of income.
Individual Tax Credits
For 2021 only, the ARP Act temporarily expands and increases the child tax credit to $3,600 for each child ages 0-5 and to $3,000 for children 6-17, where these amounts are also refundable (even if eligible taxpayers have no earned income). Compared to previous levels, these are increases of $1,600 and $1,000, respectively. The additional $1,600 and/or $1,000 portion of the 2021 child tax credit begins to phase out for individuals whose AGI exceeds $75,000 ($150,000 for married joint filers), depending on the number of children. Generally, individuals above these thresholds will still receive at least the original child tax credit amount of $2,000 per child until their AGI exceeds $200,000 ($400,000 for married joint filers). Furthermore, the IRS is directed to issue half of the expected 2021 child tax credit in periodic payments beginning July 1, 2021. The remaining half of the total 2021 credit would be claimed on an individual’s 2021 income tax return. Unlike the rules for advance stimulus payments, there are circumstances in which the advance payments for child tax credits may need to be repaid if a taxpayer ultimately is determined to be ineligible.
In addition to expanding the child tax credit, the ARP Act expands the credit for child and dependent care expenses for 2021 only. The bill increases the cap on qualifying expenses from $3,000 for one child ($6,000 for more than one child) to $8,000 for one child ($16,000 for more than one child). The credit rate would increase as well. For taxpayers whose AGI is below $125,000, the credit rate would increase to 50% (from 35%) of qualifying expenses. The credit rate then gradually phases down to 20% when a taxpayer’s AGI reaches $185,000. The 20% rate then begins to phase out at $400,000 of AGI, and is phased out completely at $440,000 of AGI. The child and dependent care credit also is made refundable.
The ARP Act makes other beneficial changes to the earned income tax credit for 2021, and to the premium tax credit for 2021 and 2022. These two credits are generally available to lower-income taxpayers.
Student Loan Forgiveness
The final tax provision for individuals may be a signpost of future Congressional intent. The ARP Act makes any student loan forgiveness passed between Dec. 31, 2020 and Jan. 1, 2026 tax-free. Qualifying student loans would include all federal student loans, and certain private education and institutional loans. The ARP Act does not actually grant any current student loan forgiveness, but the change in federal tax treatment of any forgiveness otherwise granted may indicate future legislative efforts.
Tax Provisions for Businesses
The ARP Act contains quite a few business tax provisions as well, where certain of these business tax provisions are significant.
Restaurant Revitalization Grants
For restaurants and bars there is a new $29 billion grant program. These grants can be up to $10 million per company with a limit of $5 million per physical location, with special earmarks for applicants with revenue of $500,000 or less. Grant funds can be used to cover payroll, mortgages, rent, utilities, outdoor seating construction, and numerous other expenses. As with the recent change to the tax treatment of expenses paid out of forgiven Paycheck Protection Program (PPP) loans, the grants are not taxable and expenses paid out of grant funds remain deductible.
Targeted EIDL Advances and Nonprofit PPP Loan Changes
The ARP Act also extends Economic Injury Disaster Loan (EIDL) advances to certain businesses that were unable to obtain original EIDL advances under the CARES Act. Like the original EIDL advances, these new “Targeted” EIDL advances are not required to be repaid, are nontaxable, and the expenses paid out of the advances remain deductible. Separately, the ARP Act makes some changes to the PPP loan program so that more non-profits may apply for PPP loans.
Employee Retention Credits
Perhaps the most notable business tax provision under the ARP Act is a further extension to the employee retention credit. The CAA made the employee retention credit available through June 30, 2021, and the ARP Act now extends the employee retention credit through Dec. 31, 2021. The credit is also restructured such that it is claimed against the employer’s share of the Hospital Insurance (HI) payroll tax instead of the employer’s share of OSADI (Social Security) tax and the equivalent amount of tax for railroad employees.
The employee retention credit during 2021 is equal to 70% of qualified wages and health plan costs, and although it is initially claimed against payroll taxes, excess amounts are fully refundable. The per-employee amount of the 2021 employee retention credit is based on $10,000 of qualified wages and health plan costs per calendar quarter. Thus, the maximum per-employee credit amount for 2021 is now $28,000 (70% of up to $40,000 in qualified wages and health plan costs). An employer’s amount of qualified wages depends on the number of employees that the employer had in 2019. For employers with more than 500 full-time employees, qualified wages generally are wages paid when employment services are not provided. For employers with 500 or fewer full-time employees, all wages paid by eligible employers are credit-eligible. In any case, qualified wages do not include those wages that were used to support PPP loan forgiveness.
The ARP Act also modifies the employee retention credit to benefit “recovery startup businesses,” defined as businesses established after Feb. 15, 2020 with average annual gross receipts that do not exceed $1 million. These recovery startup businesses can claim an employee retention credit of up to $50,000 per calendar quarter. Additionally, the ARP Act provides that “severely financially distressed employers,” which are employers with gross receipts that fell by more than 90% over the comparable quarter during 2019, will be able to treat all wages as qualified wages.
Credits for Paid Sick and Family Leave
The final business tax provision is an extension and enhancement of the payroll tax credit for employer provided sick and family leave. These credits now include the employer’s share of payroll taxes incurred on creditable wages, in addition to the credit for the wages themselves. The credit was set to expire for wages paid after March 31, 2021, and is now extended for wages paid through Sep. 30, 2021. The credit remains limited to 10 days of paid sick leave, but the 10-day period resets April 1, 2021. Thus, if an employee has taken up to 10 days of qualifying leave prior to April 1, 2021, then the employee can take up to an additional 10 days of qualifying leave after that date and the employer will be eligible for the credit for that employee again. The definition of qualifying sick leave is also expanded to include leave taken to obtain immunization related to COVID-19 or to recover from any injury, disability, illness, or condition related to COVID-19 immunization.
The family leave qualifications are also expanded to include all qualifying uses of paid sick time, including for leave provided if the employee is subject to a quarantine or isolation order due to COVID-19 or is caring for someone in a similar situation. Additionally, the family leave overall wage limit is increased from $10,000 per employee to $12,000 per employee. The legislation also adds a rule that provides that any paid leave program is ineligible for the credit if it discriminates against highly compensated employees. And as with the employer retention credit, there is a slight restructuring and the credit is now claimed against the employer’s share of HI tax. The denial of double benefit rule is still applicable, and the employer must include any credit received in gross income.
Worldwide Allocation of Interest
The ARP Act includes one unfavorable provision that affects businesses with international operations. Specifically, the legislation repeals the one-time election that an affiliated group of corporations would use to allocate and apportion interest expense of the U.S. members as though all members were a single corporation. The election would have been available for the first time during 2021.
Section 162(m) Executive Compensation Deduction Limitation
Another unfavorable provision that affects businesses pertains to the ability to deduct executive compensation in excess of $1 million for certain businesses whose securities are registered by the U.S. Securities and Exchange Commission (SEC). Specifically, the ARP Act would increase the number of the highest paid executives subject to the limitation (other than the CEO and CFO) from three to eight, which means that a total of 10 employees are subject to the limitation. This change is not scheduled to take effect until 2027, however.
Extension of Section 461(l) Excess Business Loss Limitation
The last unfavorable provision that affects businesses pertains to the ability of individuals to deduct business losses in excess of $500,000 during a given year. This limitation under Section 461(l) was scheduled to expire after Dec. 31, 2026, but the ARP Act extends it for one more year so that it now expires after Dec. 31, 2027.
One notable non-tax item in the ARP Act is an item that was in the House version of the legislation that did not survive the Senate’s procedural rules. This was an increase in the federal minimum wage to $15 per hour. The Senate parliamentarian ruled that this was not sufficiently related to spending to pass muster under the Senate’s budget reconciliation rules. Democrats attempted to attach it anyway, but the proposed amendment fell significantly short with eight Democrats joining with Republicans to defeat the measure. Any increase to the federal minimum wage now likely must emerge as either standalone legislation or must be attached to another larger legislative package.
The ARP Act contains many significant tax provisions including additional assistance for individuals and businesses, with some unfavorable provisions for businesses. Individuals with children and low income individuals without children will likely benefit most from many of the ARP Act’s provisions. For businesses, the changes are generally minor but extensions of current programs such as the employee retention credit could prove to be very beneficial.
However, there is another significant feature of the legislation that is only briefly touched on above, which is that the legislation was passed using budget reconciliation. This is a process that can only be used once per fiscal year. This means that to pass any additional stimulus funds, tax increases, or infrastructure programs Congress will either have to wait until Oct. 1, 2021, come to agreement on a bipartisan bill that has at least 60 votes in the Senate, or eliminate or change the filibuster rules to bypass the typical 60 vote threshold in the Senate.
For more information about the ARP Act and how it may impact your individual or business taxes, please contact your local CBIZ tax professional.
Published on March 09, 2021