Biden Signs American Rescue Plan of 2021 (ARPA)
This week, President Biden signed into law the American Rescue Plan of 2021 (ARPA). This is the latest in a series of COVID-19 funding/stimulus legislation. At a 1.9 trillion-dollar price tag, it is a bit short of the cost of the CARES Act but significantly more than the Consolidated Appropriations Act of 2021. The legislation impacts individuals, businesses as well as providing funding for state and local governments.
One of the items that drove the delivery of this new round of relief was the expiration of some federal unemployment benefits on March 14, 2021. ARPA expands and continues COVID-19 related unemployment benefits and is a major part of the legislation.
IMPACT ON INDIVIDUALS
2021 Individual Recovery Rebate/Credit
- As soon as the last recovery rebate or stimulus checks went out in early January, talks turned to the next round of checks. ARPA delivers another round of checks of $1,400 ($2,800 for joint filers) and $1,400 for each qualifying dependent. Under ARPA qualifying dependents include full time students under age 24 and dependents. The amounts this time around are higher, but the phase outs happen much faster. For joint return filers, the phase out begins at $150,000 and at $160,000 the credit is completely phased out. The phase outs for head of household filers are between $112,500 and $120,000 and the amounts for singles they are $75,000 and $80,000.
- IRS will base the current amounts on the 2020 return assuming it has been received and processed by IRS. Otherwise, it will make the decision to send or not send checks based on the 2019 return. As with the prior stimulus payments, these are considered an “advance credit”. This means that IRS is providing the funds now, but it really is a 2021 credit. For those that do not get the check based on their 2019 adjusted gross income (AGI) if 2020 is not on file, the recovery rebate credit will still be available on the 2021 return although eligibility would depend on 2021 AGI.
- As with the prior stimulus checks, if IRS issues a check based on your 2019 or 2020 AGI and your 2021 AGI exceed the phase out limits for the credit, you do not have to pay the money back.
- Alternatively, if your 2020 AGI would otherwise qualify you for a rebate but 2019 AGI does not and the 2020 return has not been processed by IRS at the time the checks are sent, your eligibility for credit on your 2021 return would depend on your 2021 AGI.
Tax-Free Portion of Unemployment Benefits
- This is another retroactive change back to 2020 that may impact 2020 returns that have already been filed. For tax years beginning in 2020, if the modified AGI of the taxpayer for the year is less than $150,000, then up to $10,200 per taxpayer is not included in gross income.
- There is no difference in the $150,000 AGI threshold whether you are a joint or single filer and there is no phase out of this benefit. If you are under $150,000 AGI then you get it. If you are over, then you are out of luck and no benefit is available.
- The $10,200 benefit is per spouse, so on a joint return it is possible that $20,400 of unemployment compensation could be excluded from income.
- We believe that amended returns will need to be filed to make any applicable adjustments to reflect the tax-free portion of unemployment benefits for 2020 returns that have already been filed. It is not likely that the IRS will automatically make these adjustments.
Child Tax Credit is Expanded for 2021
- For 2021 returns the definition of “qualifying child” is broadened to include a child that has not turned 18 by the end of the year. This means that for 2021 tax year only, a 17-year-old child will be considered a “qualifying child” for Child Tax Credit purposes.
- The IRS is also directed to set up a process where temporary advance payments of 2021 Child Tax Credit can be made in the second half of 2021. We will have to see how the IRS implements this process.
Child and Dependent Care Credit is Enhanced for 2021
- For tax years beginning in 2021, the Child and Dependent Care Credit the dollar amount that can be considered for the credit, is increased to $8,000 per qualifying child up to a maximum $16,000 for two or more children. These are subject to similar income level phase-out limitations as in the past.
IMPACT ON BUSINESSES
Increase in the Exclusion for Employer-Provided Dependent Care Assistance
- Generally, an eligible employee’s income does not include amounts paid or incurred by an employer for dependent care assistance provided to the employee under a qualified dependent care assistance program.
- Prior to ARPA, the maximum amount that an employee could deposit into a flexible spending account was $5,000 or $2,500 in the case of a separate return filed by a married individual. For 2021 only, the exclusion for employer-provided dependent care assistance program is increased to $10,500 for a joint return and $5,250 in the case of a separate return filed by a married individual.
- You can expect that employers that have dependent care flexible spending accounts to amend their plan documents and allow an additional election period for those employees that want to increase the amount contributed.
Paid Sick and Family Leave Credits
- ARPA extends the Families First Coronavirus Relief Act (FFCRA) paid sick time and paid family leave credits from March 31, 2021 through September 30, 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.
- 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 to recover from an illness related to the immunization.
- 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 credit period in 2020 through March 31, 2021. For the self-employed, the 10-day reset applies to sick days after January 1, 2021.
Employee Retention Credits (ERC)
- It seems that no governmental stimulus legislation is complete without additional updates/changes to the Employee Retention Credits (ERC) or the Paycheck Protection Program (PPP) and ARPA is no different.
- ARPA extends the ERC from June 30, 2021 until December 31, 2021. The calculation of the 2021 ERC remains the same at 70% of the first $10,000 in qualifying wages paid per employee per quarter. An employer eligible for the ERC for all quarters of 2021 would be eligible for up to $40,000 in qualified wages per employee, resulting in an ERC of $28,000 per employee for the year.
- The quarter over quarter reduction in gross receipts test continues at 20% and the threshold for qualified wages (even if the employee is working) remains at a business size of 500 employees.
- Qualified wages paid by an employer considered as payroll costs for (1) a second draw PPP loan, (2) shuttered venues assistance and 3) restaurant revitalization grants remain not eligible for ERC.
Paycheck Protection Program (PPP)
- 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.
- ARPA adds additional non-profit entities as eligible for first or second draw PPP loans. An “additional non-profit entity” is an organization listed in Section 501(c) other than (c)(4), (c)(6) or (c)(19). These entities must have fewer than 300 employees, does not receive more than 15% of its receipts from lobbying, lobbying activities do not comprise more than 15% of the organization’s total activities and the cost of lobbying does not exceed $1,000,000 during the most recent tax year that ended prior to February 15, 2020.
Restaurant Revitalization Fund (RRF)
- ARPA establishes a $29 billion dollar Restaurant Revitalization Fund within the US Small Business Administration (SBA).
- An eligible business may receive a tax-free federal grant equal to the amount of its pandemic related revenue loss calculated by subtracting its 2020 gross receipts from its 2019 gross receipts.
- If the restaurant is not in business for all of 2019 the total is the difference between 12 times the average monthly gross receipts for 2019 and the average monthly gross receipts in 2020. SBA may adjust this formula.
- If the restaurant is not in business until 2020 it can also receive a grant equal to the amount of eligible expenses subtracted from its gross receipts. SBA also has the authority to adjust this formula as well.
- The amount of the pandemic-related revenue losses for a business are reduced by any amounts received from either a first or second draw PPP loan.
Congress certainly has been keeping us busy with multiple pieces of legislation in their quest to help the American people through the COVID-19 pandemic. This makes two tax seasons in a row that major
legislation was enacted, both of which contained changes that were in some part retroactive to the year of the tax returns were (are) in the process or preparing. We will continue to keep up with what seems to be a myriad of changes and bring you the most current information.
If you have questions about anything contained in this article, please contact your Maillie representative for further discussion.