American Rescue Plan: What Taxpayers Need To Know
On March 11, 2021, President Biden signed into law the latest round of stimulus legislation, known as the American Rescue Plan Act of 2021 (ARPA). Like the two rounds of stimulus before it, this new law is expansive. It provides funding for COVID-19 vaccinations and testing; aid for state and local governments and schools; and additional relief for industries hardest hit by the pandemic, such as restaurants and airlines. Most significant for taxpayers, however, are changes to income and payroll taxes, expansion of unemployment benefits, and another round of stimulus payments.
Two provisions in the ARPA apply retroactively to tax year 2020.
- Partial Exclusion of 2020 Unemployment Compensation – The ARPA provides an exclusion from income for the first $10,200 of unemployment compensation received if the taxpayer’s adjusted gross income (AGI) is less than $150,000. The AGI limitation is the same for all filing statuses and does not include any phase-out. Once AGI reaches $150,000, all unemployment compensation will be taxable. It is important to note that AGI is determined without regard to the $10,200 exclusion of unemployment income.
- Premium Tax Credit (additional information on 2021 and 2022 implications can be found below) – The ARPA eliminates the recapture provisions that are applicable to 2020 for taxpayers receiving excess premium tax credits.
For tax returns that have already been filed or that are in the process of being prepared, this can lead to considerable uncertainty. Click here for guidance from the IRS regarding implementation of the exclusion of 2020 unemployment compensation.
The ARPA created a new grant program and made modifications to existing grant programs.
- Restaurant Revitalization Grants – The ARPA created a grant that will be administered by the SBA for businesses in which the public or patrons assemble for the primary purpose of being served food or drink. Restaurants are not eligible if they have more than 20 locations (using a 50% aggregation test), applied for or received a Shuttered Venue Operator grant, are publicly traded, or are operated by a state or local government. The funds can be used for a myriad of eligible expenses (including any expenses that the SBA deems to be essential) and will be excluded from gross income of the recipient. Additional guidance will be needed regarding the application process for these grants.
- PPP Loans – The ARPA provides $7.25 billion in additional funding for the Paycheck Protection Program (PPP) loans. Additionally, it provides for a limited expansion of entities that are eligible for the PPP by including certain nonprofit entities and Internet publishing organizations.
- Shuttered Venue Operator Grants – The ARPA reduces the amount of the grant by any second draw PPP loans received by the business. It also increased the funding for the program.
Recovery Rebates and Stimulus Payments
One of the most talked about provisions of the ARPA relates to additional recovery rebate checks (a.k.a. stimulus checks) that will be sent to individuals. The amount is $1,400 ($2,800 for joint filers) plus $1,400 for each dependent of the taxpayer. Just like the prior recovery rebate checks, there is a phase-out based on AGI. Unlike the other recovery rebate checks, the phase-out range is very small. The AGI phase-out ranges are:
- Joint filers: $150,000 to $160,000
- Head-of-household filers: $112,500 to $120,000
- All other filers (single, married-filing-separately): $75,000 to $80,000
Additionally, instead of just being a 2021 credit, there is an advanced payment component for 2021 (similar to the administration of the previous recovery rebate checks). Checks will be issued based on 2019 or 2020 tax return information based on which tax return has been filed and processed. This rebate check will be reconciled on 2021 individual income tax returns in the form of a credit. It’s important to note that taxpayers have until the earlier of 90 days after the 2020 tax return due date or until Sept. 1, 2021, to file their 2020 tax return to receive an advanced payment based on their 2020 tax return.
Payroll Tax Changes
Significant payroll tax provisions in the ARPA include an extension of the employee retention credit (ERC) to the third and fourth quarters of 2021. However, that extension includes new rules to consider, like new eligibility for “Recovery Startup Businesses,” an expanded credit for “severely financially distressed” employers, and an increased statute of limitations for assessments to five years.
The ARPA also made changes to paid leave credits, which were initially created as a part of the Families First Coronavirus Response Act. The ARPA extended the paid leave credit for paid leave provided through Sept. 30, 2021 (past the original expiration date of March 31, 2021). Additionally, it increased the eligible wage maximums and allowed for qualified paid leave related to getting a vaccine.
Tax Increase Provisions
The ARPA includes several tax increases. Note that these provisions have rather limited application and/or are not effective for many years.
- Worldwide Allocation of Interest – The ARPA repealed the one-time election available to an affiliated group of corporations that allowed an alternative method for allocating and apportioning interest expense. This applies to tax year 2021 and forward.
- Overall Loss Limitation of Section 461(l) – The ARPA extends the application of this provision to 2026. It was previously set to expire at the end of 2025.
- Limitation on Deduction of Compensation of Certain Publicly Held Corporation Employees – The ARPA expanded the $1 million limitation to not only include the principal executive officer and principal financial officer, but also to include the eight other highest-paid employees. This applies to tax year 2027 and forward.
Some of the most significant tax law changes in the ARPA relate to the child tax credit. The changes found in the ARPA only related to tax year 2021. The credit was increased to $3,000 per child ($3,600 for a child under the age of six) and makes the entire credit refundable. Additionally, it increased the maximum age of qualifying children from 16 to 17. Like with many other provisions, there is a phase-out based on AGI in excess of threshold amounts.
If the AGI threshold is met, the excess credit that is over the $2,000 credit that was in place for 2020 is phased out by $50 for every $1,000 of AGI over the threshold. Once the excess is eliminated, the amount of the credit will remain at $2,000 until the AGI reaches a second threshold ($400,000 for married-filing-jointly and $200,000 for all others) before it phases out in total. However, it is important to note that the child tax credit will be paid out in the form of an advance credit based on 2019 or 2020 tax return information starting on July 1, 2021. The payments will be made periodically through the end of 2021. The amount will be trued-up on the 2021 tax return and any excess amount will have to be paid back. There is a safe harbor for taxpayers that received excess credit that allows the individual to keep $2,000 of credit as long as they fall under specific filing thresholds.
In addition to the child tax credit, the ARPA expanded the earned income tax credit (EITC). For 2021 only, the EITC for individual filers without children was doubled to 15.3%. Additionally, the amount of income at which the credit is maximized rose from $8,880 to $11,610. It also expanded the age range that is eligible to get the credit to 19 with further exceptions for students, former foster children, and homeless youth. There was also a permanent change to the EITC related to the elimination of restrictions, including eliminating the restriction related to lack of identification numbers of dependents as well as allowing a married but separated person to claim the EITC as an unmarried person (subject to certain conditions). Finally, the restriction around the amount of disqualifying investment income was raised from $3,650 to $10,000.
Other provisions in the ARPA that also impact individual filers include:
- Expanded Child Dependent Care Credit – For 2021 only, the credit was made fully refundable. It was also increased to 50% of qualified expenses. The credit percentage will be reduced by one point for each $2,000 of AGI in excess of $125,000. The credit percentage will not be reduced below 20% until AGI reaches $400,000, at which point the reduction of credit percentage continues until reaching zero. The amount of eligible expenses qualifying for the credit are increased to $8,000 for one individual and $16,000 for two or more individuals.
- Premium Tax Credit – The change in ARPA applies to 2021 and 2022 for the premium tax credit. It changed the affordability percentages used in calculating the credit to make the credit available to individuals with incomes below 400% of the federal poverty line and increases the credit amount for those already qualified. For 2021 only, advance premium tax credits will be available for individual receiving unemployment compensation.
- Student Loan Discharges – The ARPA does not call for student loans to be discharged. However, it does state that student loans that are forgiven in 2021 through 2025 will not be included in income. Additionally, it removed the restriction on student loans being excluded from income for only specific reasons and changed it to any forgiveness.
Several business-focused provisions in the ARPA include:
- COBRA Premium Subsidy – The ARPA provides premium assistance for COBRA continuation coverage through Sept. 30, 2021. It provides for an 85% reduction of COBRA premiums for eligible individuals. Employers will be reimbursed for unreceived premiums through a credit against hospital insurance tax. It also excludes premium reductions from income and includes a penalty for employers that fail to provide adequate notice to former employees whose COBRA continuation period has lapsed. It applies to premiums and wages paid after April 1, 2021, and through Sept. 30, 2021.
- Increased Exclusion for Dependent Care Assistance Programs – The ARPA provided for an increase to the maximum exclusion of employer-provided dependent care assistance from $10,500 (for married-filing-jointly or $5,250 for married-filing-separately). This increase is only for 2021.
- Exclusion of Targeted Economic Injury Disaster Loans (EIDL) – The ARPA includes guidance around the EIDL loan and how it should be treated for tax purposes. The EIDL will not be subject to income tax and the exclusion from income will not result in the denial of any deduction, reduction of tax attributes, or denial of any increase in basis.
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The ARPA is a complex set of laws and provisions that taxpayers need to closely consider when thinking about 2020 tax returns as well as future tax returns. Please reach out to your KSM advisor for help determining how the ARPA applies to you, or complete this form.
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