On March 11, 2021, President Biden signed the American Rescue Plan Act of 2021 (the “Act”) which provides for an additional $1.9 Trillion of Covid relief to individuals and businesses. The Act largely aligns with the framework President Biden put forth prior to taking office. The Act includes extensions of unemployment, funding for Covid testing and vaccinations, state and local funding, grants for impacted small businesses, and more direct stimulus checks.
Below we will discuss several of the major provisions in detail as well as summarizing the miscellaneous tax‐related provisions of the Act.
PPP PROVISIONS
The Act did not make changes to PPP rules other than allowing more nonprofit entities to be eligible. But we felt it important to note that PPP funds are limited and the program is scheduled to end March 31, 2021. Many banks will stop taking applications this week to allow time to process those already filed but not approved. There is legislation in the works to extend the program to May 31, 2021, but passage is uncertain at the time of this letter. We also want to note that rules were revised for Schedule C filers to make more people eligible, but those that already received a loan cannot go back and amend to receive a bigger loan.
RESTAURANT REVITALIZATION GRANTS
For eligible businesses, $28.6B in grants is being made available to recoup Pandemic Related Revenue loss. The proceeds can be used on expenses similar to PPP forgivable expenses (payroll, rent, utilities, etc.). With maximum grants of $5M per location ($10M per group of restaurants), these grants could provide valuable cash infusion to one of the hardest hit industries. The calculation for Pandemic related Revenue loss is 2019 Revenue less 2020 Revenue. Calculated grant amounts are reduced by any PPP loans received. As of now, we are not aware of any other burden to prove the revenue loss is pandemic related. Also similar to PPP, the grants are tax‐free income and expenses paid with Grant funds remain deductible.
EMPLOYEE RETENTION CREDIT
While the Act did not make any major changes to the Retention Credit or its rules, it did extend the period of eligibility from June 2021 through December 31, 2021. Meaning eligible businesses could qualify for credits up to $28,000 per eligible employee during 2021. The credit for 2021 remains at 70% of qualified wages, up to a max of $10,000 per employee per calendar quarter, for a max credit of $7,000 per employee per calendar quarter of 2021. The various other rules and restrictions remain unchanged.
CREDIT FOR PAID SICK AND FAMILY LEAVE
The credit originally made available by the Families First Coronavirus Response Act (FFCRA), passed prior to the CARES Act, is extended through September 30, 2021. The credit is equal to wages paid for sick or family leave, up to a daily max, as required by the Department of Labor in accordance with the FFCRA. The Act also resets employee sick days on March 31, 2021. So if an employee previously maxed out their 10 sick days due to Covid quarantine, they are again eligible for another 10 days starting April 1, 2021. Information on required pay and the related credit are available on the DOL website.
One important thing to note is that the requirement for businesses to pay sick leave ended on Dec. 31, 2020 but the credit remains available for those that do pay eligible sick and family leave.
TAX‐FREE UNEMPLOYMENT
For those that received unemployment in 2020, a portion of it is now nontaxable. For those with Adjusted Gross Income of $150,000 or less, the first $10,200 of unemployment compensation is now tax free. The income threshold is per tax return, no matter your filing status. And the $10,200 of nontaxable benefits is per taxpayer, so a married couple could receive $20,400 of tax‐free unemployment for 2020.
State conformity to tax‐free treatment is uncertain. Many states, including Ohio, could maintain taxable treatment due to constrained budgets.
STIMULUS PAYMENTS
As promised in January, the bill provides additional stimulus payments after the December/January payments were reduced from $2,000 to $600. The new $1,400 stimulus payments are paid per person and includes adult dependents for the first time. Not included in the Act, is a catch‐up payment for adult dependents that were previously excluded from stimulus eligibility. There was discussion of making retroactive payments, but that language was not included in this Act.
The payments are an advance of a 2021 tax credit and are based on the 2019 tax return, unless the 2020 tax return has already been processed by the IRS. If your 2020 tax return would qualify you for a bigger stimulus (reduced income, additional dependent, etc.), don’t worry if it is not filed yet. The Act provides for additional catch‐up payments if the 2020 tax return is filed within 90 days of the due date (April 15th) and the 2020 tax return results in a bigger stimulus. As with previous stimulus payments, there is no repayment provision if your 2021 tax return makes you ineligible for the credit.
The income limitations are consistent with prior stimulus payments although the modified phase‐out makes less taxpayers eligible. For Married Filing Joint and Surviving Spouse returns the phase‐out starts at $150,000 of Adjusted Gross income and is completely phased out at $160,000. For Single or Married Filing Separate, the threshold is $75,000, phased out at $80,000. And Head of Household returns are phased out between $112,500 and $120,000.
We also want to note that stimulus payments are not taxable income. We have heard this question numerous times and want to clarify that these will not be reported as income in 2020 or 2021. We do however, need to know how much clients have received in payments as an additional credit is possible on personal tax returns if the full stimulus payment was not received based on prior year income.
MISCELLANEOUS PROVISIONS:
•Increased unemployment benefits of $300/week through 9/6/2021
•Emergency Injury Disaster Loans (EIDL) grants are now tax‐exempt income regardless of PPP forgiveness
•Excess Business Loss limitation for non‐corporate taxpayers extended one year, through 2026
•Additional Child Tax Credit for 2021 subject to lower AGI thresholds
•• Additional credit of $1,000 per child under 18; $1,600 if under 6 at the end of the tax year
•• The additional credit is phased out when Adjusted Gross Income reaches
$75,000/$112,500/$150,000 based on filing status; same phase‐out limit as Stimulus payments discussed above. The phase‐out is $50 per each $1,000 AGI exceeds the threshold.
•• Process is in the works for advanced payments of credit, but credit could need repaid if 2021 income is too high. The IRS will develop a website for people to opt‐out of receiving the advanced payments if they wish.
•Expansion of Earned income credit for 2021 – increased credit calculation, increased AGI thresholds, and increased eligibility if no qualifying children.
•Expansion of Child and Dependent Care credit for 2021 – increase in dollar amount of credit, increase in percentage of credit, and increased AGI limits.
•Increase in income exclusion for employer provided dependent care for 2021 to $10,500
•Income exclusion for student loan discharge in 2021 through 2025. The Act does not forgive any student loans, but is setting up tax‐free treatment for a potential future bill.