President Biden signed the COVID-19 relief bill, American Rescue Plan Act of 2021, into law. The legislation will have major impacts on individuals and businesses. Below is a summary of the ARPA provisions summarized in the following sections: Individual Provisions and Business Provisions.
Unemployment Received in 2020 Partially Excluded from Income for Some Taxpayers
Under ARPA, in the case of any tax year beginning in 2020, if the adjusted gross income (AGI) of the taxpayer for the tax year is less than $150,000, the gross income of the taxpayer does not include so much of the unemployment compensation received by the taxpayer (or, in the case of a joint return, received by each spouse) as does not exceed $10,200.
For purposes of applying this partial exclusion, the taxpayer’s AGI is determined after application of Code Sec. 86 (partial inclusion of social security and tier 1 railroad retirement benefits in gross income), Code Sec. 135 (exclusion of income from United States savings bonds used to pay higher education tuition and fees), Code Sec. 137 (exclusion of amount received under an adoption assistance program), Code Sec. 219 (deduction for qualified retirement contributions), Code Sec. 221 (student loan deduction), Code Sec. 222 (deduction for qualified tuition and related expenses), and Code Sec. 469 (limitation on passive activity losses and credits), and without regard to the inclusion of unemployment compensation in gross income under Code Sec. 85 . ( Code Sec. 85(c)(2) , as amended by ARPA Sec. 9042(a))
2021 Individual Recovery Rebate/credit
Under ARPA, an eligible individual is allowed an income tax credit for 2021 equal to the sum of: (1) $1,400 ($2,800 for eligible individuals filing a joint return) plus (2) $1,400 for each dependent of the taxpayer. The credit is refundable.
Phaseout of credit. The amount of the credit is ratably reduced (but not below zero) for taxpayers with adjusted gross income (AGI) of over:
- $150,000 for a joint return;
- $112,500 for a head of household; and
- $75,000 for all other taxpayers.
The credit is completely phased out (reduced to zero) for taxpayers with AGI of over:
- $160,000 for a joint return;
- $120,000 for a head of household; and
- $80,000 for all other taxpayers.
Advance rebate of credit during 2021. Each individual who was an eligible individual for 2019 is treated as having made an income tax payment for 2019 equal to the advance refund amount for 2019.
The “advance refund amount” is the amount that would have been allowed as a credit for 2019 had the credit provision been in effect for 2019.
However, if a taxpayer has filed his or her 2020 tax return when IRS determines the amount of the rebate, information on that 2020 return is used to determine the amount of the rebate. Thus, although the credit is technically for 2021, the law treats the rebate as an overpayment for 2019 (or 2020, if the return for that year has been filed) that IRS will rebate as soon as possible during 2021.
Child Tax Credit Expanded for 2021
Under ARPA, for tax year 2021, the CTC is temporarily expanded as to eligibility, and amount, as follows:
- The definition of a qualifying child is broadened to include a child who hasn’t turned 18 by the end of 2021.
- The CTC is increased to $3,000 per child ($3,600 for children under age 6 as of the close of the year). (But, the increased credit amounts are phased out at modified AGI of over $75,000 for singles, $112,500 for heads-of-households, and $150,000 for joint filers and surviving spouses, at a rate of $50 for each $1,000 (or fraction thereof) of modified AGI over the applicable threshold.
- The CTC is fully refundable for 2021 for a taxpayer (either spouse for a joint return) with a principal place of abode in the U.S. for more than one-half of the tax year, or for a taxpayer who is a bona fide resident of Puerto Rico for the tax year. That is, refundability will be determined without regard to either the earned income, or alternative, formula.
Temporary advance payments of the CTC. IRS must establish a program to make monthly (periodic) advance payments (generally by direct deposits) equal to 50% of eligible taxpayers’ 2021 CTCs, in July 2021 through December 2021. Each advance payment is 1/12 of an “annual advance amount” for the calendar year. But, if IRS determines it’s not feasible to make monthly advance payments, IRS may make advance payments based on a longer interval and adjust the amount of the advance payment accordingly.
Expansion of EITC for Taxpayers with No Qualifying Children
- New law. ARPA provides that, in the case of any tax year beginning after December 31, 2020, and before January 1, 2022, one of the requirements for being an eligible individual is that the individual has attained “the applicable minimum age” before the close of the tax year (rather than “attained age 25”)
- The reference to age 65 is removed.
- The term “applicable minimum age” means, except as provided below, age 19.
- In the case of a “specified student” (other than a “qualified former foster youth” or a “qualified homeless youth”), the applicable minimum age is 24.
- In the case of a qualified former foster youth or a qualified homeless youth, the applicable minimum age is 18.
- EIC Rules, Under Which Certain Separated Married People Need Not File Jointly, Are Liberalized
- ARPA provides modifies and liberalizes rules under which certain separated married people need not file jointly
- Taxpayers May Have Up to $10,000 of “Disqualified” (Investment) Income and Still Claim EIC
- Under ARPA, the threshold amount for disqualified income is raised to $10,000.
- The $10,000 amount will be adjusted for inflation for tax years beginning after 2021.
Student Loan Discharges
ARPA excludes from gross income certain discharges of student loans after December 31, 2020, and before January 1, 2026. The “student loan discharge” exclusion applies to these types of loans:
- Loans provided expressly for post-secondary educational expenses if the loan was made, insured, or guaranteed by a federal, state, or local governmental entity or an eligible educational institution.
- Private education loans.
- Any loan made by any educational institution qualifying as a 50% charity (for purposes of the income tax charitable deduction) if the loan is made under an agreement with any governmental entity (described in item (1)) or any private education lender that provided the loan to the educational organization, or under a program of the educational institution that is designed to encourage its students to serve in occupations with unmet needs or in areas with unmet needs and under which the services provided by the students (or former students) are for or under the direction of a governmental unit or a tax-exempt charitable organization.
- Any loan made by an educational organization qualifying as a 50% charity or by an tax-exempt organization to refinance a loan to an individual to assist the individual in attending any educational organization but only if the refinancing loan is under a program of the refinancing organization which is designed as described in item (3)).
But, the discharge of a loan made by either an educational institution or a private education lender is not excluded under the above rules if the discharge is on account of services performed for either the organization or for the private education lender.
The exclusion applies to a partial or a full discharge of a student loan.
COBRA Premium Subsidy
New law. Assistance-eligible individuals (AEIs) may receive a 100% subsidy for COBRA premiums for any period of COBRA coverage during the period beginning on April 1, 2021 (the first day of the first month beginning after enactment) and ending on September 30, 2021.
Increase in the Exclusion for Employer-Provided Dependent Care Assistance
New law. For 2021 only, the exclusion for employer-provided dependent care assistance is increased from $5,000 to $10,500, and from $2,500 to $5,250 in the case of a separate return filed by a married individual.
Targeted Economic Injury Disaster Loan Advances
Under ARPA, eligible small businesses may receive targeted economic injury disaster loan (EIDL) advances from the Small Business Administration. (ARPA Sec. 5002) Amounts received as targeted EIDL advances are not included in the gross income of the person who receives the amounts.
No deduction or basis increase is denied, and no tax attribute is reduced by reason of the gross income exclusion
Restaurant Revitalization Grants
Under ARPA, eligible restaurants, food trucks, and similar businesses may receive restaurant revitalization grants from the Small Business Administration.
Amounts received as restaurant revitalization grants are not included in the gross income of the person who receives the amounts.
No deduction or basis increase is denied, and no tax attribute is reduced by reason of the gross income exclusion
Paid Sick and Family Leave Credits
Changes under ARPA apply to amounts paid with respect to calendar quarters beginning after March 31, 2021. ARPA, 2021:
- Extends the FFCRA paid sick time and paid family leave credits from March 31, 2021 through September 30, 2021.
- Provides that paid sick and paid family leave credits may each be increased by the employer’s share of Social Security tax (6.2%) and employer’s share of Medicare tax (1.45%) on qualified leave wages.
- Permits the Treasury Secretary to waive for failure to deposit penalties on “applicable employment taxes” if the failure to deposit is due to an anticipated credit. “Applicable employment taxes” are defined as the employer’s share of Medicare or Tier 1 RRTA tax.
- Allows for the credits for paid sick and family leave to be structured as a refundable payroll tax credit against Medicare tax only (1.45%), beginning after March 31, 2021.
- Increases the amount of wages for which an employer may claim the paid family leave credit in a year from $10,000 to $12,000 per employee.
- Expands the paid family leave credit to allow employers to claim the credit for leave provided for the reasons included under the previous employer mandate for paid sick time. For the self-employed, the number of days for which self-employed individuals can claim the paid family leave credit is increased from 50 to 60 days.
- Permits the paid sick and family leave credit to be claimed by employers who provide paid time off for employees to obtain the COVID-19 vaccination or recover from an illness related to the immunization.
- Increases the paid sick and family leave credit by the cost of the employer’s qualified health plan expenses and by the employer’s collectively bargains contributions to a defined benefit pension plan (as defined under Code Sec. 414(j) ) and the amount of collectively bargained apprenticeship program contributions.
- Establishes a non-discrimination requirement where no credit will be permitted to any employer who discriminates in favor of highly-compensated employees as defined under Code Sec. 414(q) , full-time employees, or employees on the basis of employment tenure.
- Resets the 10-day limitation on the maximum number of days for which an employer can claim the paid sick leave credit with respect to wages paid to an employee. The current 10-day limitation runs from the start of the credits in 2020 through March 31, 2021. For the self-employed, the 10-day reset applies to sick days after January 1, 2021 for self-employed individuals.
- Clarifies that while no credit for paid sick and family leave may be claimed by the federal government or any federal agency or instrumentality, this would not apply to any organization, including state and local governments.
Employee Retention Credit
The new legislation:
- Extends the ERC from June 30, 2021 until December 31, 2021. The legislation would continue the ERC rate of credit at 70% for this extended period of time. It also continues to allow for up to $10,000 in qualified wages for any calendar quarter. Taking into account the CAA extension and the pending ARPA extension, this means an employer would potentially have up to $40,000 in qualified wages per employee through 2021.
- Limits the ERC to $50,000 per calendar quarter of an eligible employer that is a “recovery startup business”. A “recovery startup business” is one that: (1) began operations after February 15, 2020 whose average annual gross receipts for a 3-taxable-year period ending with the taxable year which precedes such quarter does not exceed $1,000,000, and (2) experiences a full or partial suspension of operations due to a governmental order or experiences a significant gross receipts decline.
- Allows the credit to be claimed against Medicare (1.45%, Hospital Insurance – HI) taxes only. Since the employer/employee tax rate for Medicare is 1.45%, it could take longer to immediately claim the credit under the ARPA for the third and fourth quarters of 2021. Instead of just withholding the taxes immediately, it could be more likely that more employers would need to file Form 7200 (Advance Payment of Employer Credits Due to COVID-19).
- Continues the year-over-year gross receipts decline requirement at 20%; and the threshold for qualified wages (even if the employee is working) would continue to be 500 employees, as expanded by the CAA. Also, certain governmental employers would continue to be exempt from claiming the ERC, except certain tax exempt organizations that would include colleges and universities or medical or hospital care providers.
- Requires the Treasury Secretary to issue guidance providing that payroll costs paid during the covered period would not fail to be treated as qualified wages to the extent that a covered loan under the Small Business Act is not forgiven. As with the expansion of the ERC under the CAA, this would continue to mean that Paycheck Protection Program (PPP) recipients would be eligible if the loan did not pay the wages in question.
- Qualified wages paid by an employer taken account as payroll costs under (1) Second Draw PPP loans; (2) shuttered venues assistance and (3) restaurant revitalization grants are not eligible for the ERC.
The new legislation:
- Extends continued unemployment provisions to September 6, 2021. This would include the: (1) pandemic unemployment assistance (PUA), (2) federal pandemic unemployment compensation (FPUC), (3) pandemic emergency unemployment compensation (PEUC), (4) the funding for waiving the one-week unemployment benefit waiting period, (5) the temporary financing of short-time compensation (STC) payments for states with programs, (6) STC agreements for states without programs, (7) temporary assistance for states with federal unemployment advances, and (8) the full federal funding of extended unemployment compensation.
- Further temporary suspension on the accrual of interest on federal unemployment loans to states and a waiver of interest payments under the ARPA assists certain employers that otherwise would have to pay an unemployment tax assessment.
- Extends the FPUC unemployment payment of $300 per week through September 6, 2021.
- Does not extend the 50% credit for reimbursing employers.
Paycheck Protection Program Modifications
The new legislation:
- Allocates an additional $7.25 billion towards PPP funding, however, the application period has not been extended and remains March 31, 2021.
- Adds “additional covered nonprofit entity” as an eligible nonprofit eligible for First Draw and Second Draw PPP loans. An “additional covered nonprofit entity” is an organization listed in Code Sec. 501(c) other than those Code Sec. 501(c)(3) , Code Sec. 501(c)(4) , Code Sec. 501(c)(6) , or Code Sec. 501(c)(19) . An “additional covered nonprofit entity” is eligible for a PPP loan if: (1) the organization employs no more than 300 employees; (2) it does not receive more than 15% of its receipts from lobbying activities; (3) lobbying activities do not comprise more than 15% of the organization’s total activities; and (4) the cost of lobbying activities does not exceed $1,000,000 during the most recent tax year that ended prior to February 15, 2020.
- Adds the following to eligible entities for PPP loans: (1) Code Sec. 501(c)(3) nonprofit and veterans’ organizations with up to 500 employees; and (2) Code Sec. 501(c)(6) nonprofit organizations (business leagues, chambers of commerce, real estate boards, boards of trade and professional football leagues); and (3) domestic marketing organizations with no more than 300 employees per physical location.
- Adds Internet-only news publishing and Internet-only periodical publishers to businesses eligible for First and Second Draw PPP loans. To be eligible, the organization must employ no more than 500 employees.
- Provides that amounts used from First Draw and Second Draw PPP loans for premiums used to determine the credit for COBRA premium assistance as provided under Code. Sec. 6432 are eligible for loan forgiveness. See Pension and Benefits Related Provisions below for further information regarding COBRA.