By Naya Pearlman, CPA, J.D., LL.M. and Ken Maeng, J.D.
3.11.21 | Client Alert
President Biden is expected to sign into law the American Rescue Plan (ARP) Act of 2021. The ARP is a monumental $1.9 trillion-dollar economic stimulus package that helps provide relief to businesses and individuals continuing to be impacted by COVID-19. The bill contains certain employment related business tax relief measures, including extensions of the employee retention credit and COVID-19 related paid sick leave and family leave tax credits. In addition, the bill allocates more funding for the Small Business Administration loan programs, such as the Paycheck Protection Program and the Restaurant Revitalization Grant. It also provides a number of tax-related provisions for individuals, including a third round of direct stimulus payments, enhanced child tax credits and dependent care credits for the 2021 tax year only, and changes to the tax treatment of unemployment compensation for the 2020 tax year.
For highlights of key tax-related provisions of the ARP, please read below.
EMPLOYER TAX RELIEF
Extension of the Employee Retention Credit
Originally set to expire at the end of 2020 under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the Consolidated Appropriation Act, 2021 (CAA) extended the availability of the employee retention credit (ERC) through the first two quarters of 2021. The ARP further extends the program until the end of 2021, making the credit available for the 3rd and 4th quarters. Beginning after June 30, 2021, the credit will be a refundable payroll tax credit against the employer’s Medicare tax.
Under the CAA provisions for the 2021 ERC, eligible employers can claim a refundable credit against applicable employment taxes for each calendar quarter in an amount equal to 70% of up to $10,000 of qualified wages, including certain allocable health plan expenses, for each employee. For the 2021 tax year, an employer who pays wages after January 1, 2021 can qualify for the employee retention credit if the employer experienced either (i) a full or partial suspension of the operation of a trade or business due to a governmental order during any calendar quarter in 2021 or (ii) a significant decline in gross receipts (greater than 20%) during a calendar quarter (measured by comparing the corresponding 2019 calendar quarter). Employers can elect to use an alternate quarter test to determine gross receipts eligibility, which compares the preceding calendar quarter with the same calendar quarter in 2019. In the case of any employer that was not in existence in 2019, the 2019 calendar quarter can be substituted by the corresponding 2020 calendar quarter.
The bill further provides special eligibility provisions for certain recovery startup businesses and for severely financially distressed employers, which are defined in the statute. It also clarifies that employers that receive the ERC and a PPP loan, Shuttered Venue Grant, or Restaurant Revitalization Grant (as discussed further below) cannot apply the same wages that are taken into account with these other programs if loan payments are forgiven or grant amounts are not repaid.
Extension of Paid Sick Leave and Family Leave Credit
Previously, the Families First Coronavirus Response Act (FFCRA) provided a refundable payroll tax credit to eligible employers required to provide paid sick leave and family leave for COVID-19 reasons until December 31, 2020. The CAA extended the period for which the credit could be claimed until March 31, 2021 but did not mandate that the employer provide paid leave beyond 2020. The ARP extends the availability of the tax credits from March 31, 2021 to September 30, 2021.
In general, eligible employers are permitted to take a credit against applicable employment taxes for each calendar quarter an amount equal to 100% of the qualified sick leave wages or family leave wages paid by the employer. Wages taken into account for qualified family leave are capped at $200 per day and $12,000 in the aggregate with respect to all calendar quarters, and wages taken into account for certain qualified sick leave are capped at $511 per day up to 10 days, but that 10-day period is reset after March 31, 2021. Paid sick leave for COVID-19 related reasons is also expanded to allow for time-off for COVID-19 immunization and to recover from any vaccine-related conditions or illness. The extension of the paid sick leave and family leave tax credits are also available to self-employed individuals.
More Funds for SBA Paycheck Protection Program
The ARP provides for an additional $7.25 billion for the small business administration (SBA) loan program known as the Paycheck Protection Program (PPP). The ARP also expands eligibility for PPP loans to more types of non-profit organizations than previously allowed as well as certain internet news publishing organizations not previously eligible.
SBA Restaurant Revitalization Fund
As support for the hard-hit restaurant and bar industry, the new legislation provides for Restaurant Revitalization Grants of up to $5 million for each restaurant or bar location, with a maximum of $10 million to organizations with multiple locations. Businesses, including their affiliates, that maintain more than 20 locations are not eligible for this program. The amount of the grant will be based on the pandemic-related revenue loss, which is defined in the statute as the difference between the applicant’s 2020 revenues and 2019 revenues. For any eligible entity that was not in operation for the entirety of 2019, the loss can be computed by taking the difference between the average monthly gross receipts of the entity in 2019 multiplied by 12 less the average monthly gross receipts of the entity in 2020 multiplied by 12. In the case of any eligible entity that opened after January 1, 2020, the pandemic-related revenue loss can be determined by taking the expenses that were incurred by the eligible entity less gross receipts received or based on a formula determined by the SBA. The pandemic-related revenue loss will be reduced by any PPP loan amounts received in 2020 or 2021.
The bill allocates approximately 20% of the grant funds to restaurants and bars that had 2019 revenues of less than $500,000, with the balance to eligible larger operators. The grant funds can be used for payroll costs, payments of principal or interest on any mortgage obligation (other than prepayments of a mortgage obligation), rent payments (other than any prepayments of rent), utilities, maintenance expenses, supplies including protective equipment and cleaning materials, food and beverage expenses that are within the scope of the normal business practice, as well as other expenses that the SBA determines to be essential to maintaining the eligible entity. These grants will not be subject to income tax and the exclusion from income will not result in the denial of a deduction for the expenses funded.
INDIVIDUAL TAX RELIEF
The ARP provides a third economic impact payment of up to $1,400 for each qualifying taxpayer ($2,800 in the case of a joint return) and for each dependent of the taxpayer. Similar to the previous stimulus payments, these direct payments are treated as a credit against 2021 taxes and subject to income limitations. Eligibility begins to phase out for taxpayers with adjusted gross income (AGI) of more than $75,000 for single filers, $112,500 for heads of households, and $150,000 for joint filers, and direct payments are completely phased out when AGI reaches $80,000 for single filers, $120,000 for heads of households, and $160,000 for joint filers. 2020 tax returns are used in determining income eligibility unless 2020 tax returns have not yet been filed, in which case 2019 tax return amounts will be used.
Extension of and Partial Tax Exemption for Pandemic Unemployment Assistance
The bill extends unemployment compensation that was set to expire on March 14, 2021 by almost six months supplementing the unemployment benefit by $300 per week through September 6, 2021. In addition, for the 2020 tax year only, the ARP provides that the first $10,200 of unemployment benefits ($20,400 of unemployment benefits for married couples) will be exempt from tax for taxpayers with less than $150,000 of adjusted gross income. The same AGI limitation appears to apply to all single, head of household, and joint filers.
Expansion of Child Tax Credit
For the 2021 tax year only, the child tax credit will be temporarily increased to $3,000 per child (or $3,600 for a child under the age of six) from $2,000 per child under current law, and the 2021 credit will be fully refundable. The excess of the amount of the credit over the existing child tax credit amount is phased out by $50 for every $1,000 of modified adjusted gross income (MAGI) in excess of the threshold amount of $75,000 for single filers, $112,500 for head of households, and $150,000 for joint filers. Once the excess amount is phased out, the amount of the credit remains at $2,000 until the existing law thresholds are reached at $400,000 for joint filers and $200,000 for all other filers.
Child and Dependent Care Credit
For the 2021 tax year only, the amount of the child and dependent care credit will be refundable and the amount of expenses eligible for the credit will be increased to $8,000 (from $3,000) for one child or dependent and $16,000 (from $6,000) for two or more children or dependents. The bill also increases the credit amount to 50% of qualified expenses, subject to an income phase-out.
Exclusion of Forgiven Student Loan
Under current law, forgiven student loans are excludable only under certain conditions such as by reasons of disability or death. The ARP expands the student loan forgiveness exclusion rule for any discharge of federal student loans during the period after December 31, 2020 and before January 1, 2026. The exclusion, however, does not apply to loans discharged by a private education lender. While no action on loan forgiveness has yet been taken by the Biden Administration or Congress, it is an area of interest and discussion that may come to pass.
As more information and guidance is released about the ARP, we will keep you informed of the potential tax impact. If you have any questions, please contact your Berdon advisor.
This alert is for general information purposes only and is not intended, and should not be construed, as legal or tax advice.