On March 10, 2021, Congress passed its latest COVID-19 relief legislation. The $1.9 trillion “American Rescue Plan Act of 2021” (H.R. 1319, or ARP) secured final congressional approval in the House by a vote of 220-211. The bill now moves to President Biden, who is expected to sign this into law on Friday, March 12, 2021. (Update: The President signed this into law on March 11, 2021). This is the third major pandemic bill within the past 12 months bringing the total relief to over $5 trillion.
Following passage in the House on February 27, 2021, the bill moved to the Senate last week. This legislation was handled under the special “reconciliation” provisions, meaning it could pass in the Senate with a simple majority and not the 60 votes needed with normal legislation. However, the Senate made several changes to the bill. Here are some of those changes:
- $15 per hour minimum wage. This provision, which was part of the House bill, was removed by the Senate Parliamentarian under the reconciliation rules.
- Economic Impact Payments (“EIC” or Rebates) for 2021. These rebates for 2021 amount to $1,400 per taxpayer plus $1,400 per dependent child. Qualifying dependents include full-time students under the age of 24 and adult dependents. However, the credit is phased out for married taxpayers with AGI above $150,000 and $75,000 for single taxpayers. The phase-out range in the Senate was changed to a more narrow range: $150,000 – $160,000 and $75,000 – $80,000. Note: 2019 AGI is used to determine eligibility, unless a 2020 tax return has already been filed. If 2020 AGI (for those taxpayers filing later) is higher than 2019, the rebates are not clawed back.
- Unemployment Benefits. This was a late revision that created some high anxiety and drama last Friday. Under the change, unemployment benefits of $300 per week would be extended through September 6, 2021.
- Unemployment Benefits up to $10,200 Exempt from Tax. In addition, up to $10,200 of unemployment benefits received per person in 2020 would be exempt from income tax. Note: this exclusion only applies for taxpayers (both single and married) with adjusted gross income (AGI) of less than $150,000. Any AGI of $150,000 and above will not receive this exclusion – this is a cliff; there is no phase-out. Impacted taxpayers that are close to this threshold may want to look at making an IRA contribution or other retirement contribution (or HSA) for 2020 to reduce their AGI below this threshold. Unemployment benefits had been fully taxable in the past, but again, this change applies for the 2020 year.
Thus, taxpayers receiving unemployment benefits in 2020 may need to amend their 2020 tax returns if these have already been filed, and the IRS will have to retool its tax programs to account for this change with 2020 tax returns, too. The tax treatment in 2020 for the new $10,200 exclusion of unemployment benefits will consequently need to be addressed at the state level. More guidance is expected.
- Limit on Excess Losses Extended. The Tax Cuts and Jobs Act (TCJA) imposed a limitation on losses of $500,000 for married taxpayers and $250,000 for single taxpayers. This limitation did not apply for 2018, 2019, and 2020 due to changes from the CARES Act but applies in 2021 and runs through 2025. The Senate change would extend this limitation for one additional year through 2026.
- Compensation Deduction Limited. The current deduction limitation for those earning more than $1,000,000 would be expanded to apply to the eight highest-paid employees of a publicly traded company (in addition to the CEO or CFO).
- Employee Retention Credit (ERC). The credit is made available to new small business start-ups by exempting them from the two ERC eligibility tests (1 – partial or full shutdown due to government order or 2 – gross receipts decline). This applies to a business that began operations after February 15, 2020 with annual gross receipts of $1 million or less. The ERC credit for startups would be capped at $50,000 per quarter.
The American Rescue Plan is not primarily a tax bill; however, about one-third of the overall bill relates to tax measures. The following is a selection of various business and individual tax provisions in this legislation:
- ERC. The bill extends the credit from June 30, 2021 through December 31, 2021. The ERC rates remain at 70% of qualified employee wages up to $10,000 per quarter. The new bill further addresses qualified wages that overlap with other relief programs. An employer with payroll under PPP loans, “shuttered venues,” and new “restaurant revitalization grants” (RRG) are not entitled to ERC on the same wages.
- RRG. Restaurants have been one of the hardest hit industries by the pandemic. The ARP offers a special relief package for restaurants. “Restaurant,” for this purpose, is defined as follows: “a restaurant, food stand, food truck, food cart, caterer, saloon, inn, tavern, bar, lounge, brewpub, tasting room, taproom, licensed facility or premise of a beverage alcohol producer where the public may taste, sample, or purchase products, or other similar place of business in which the public or patrons assemble for the primary purpose of being served food or drink.”
This relief is intended to provide restaurants a grant, not a loan, and covers nearly any expense of a restaurant. The restaurant will likely be required to report expenses incurred with grant funds, and these expenses will not be eligible for certain tax credits (such as the ERC). The grant is determined as follows:
- 2019 gross receipts of restaurant less 2020 gross receipts of restaurant
- Next, reduce this amount for any PPP loans the restaurant already received (first draw or second draw)
The RRG program does not seem as complicated as the PPP loan provisions. The new RRG will be administered by the SBA (that also handled the PPP loans). Finally, the RRG would be treated like PPP loans for tax purposes such that there would be no income recognized for this grant; the expenses incurred with the grant would be deductible; and there would be a basis adjustment on the grant for the shareholders or partners of the entity. Click here to read the RRG legislation.
PPP Loans for Exempt Organizations. The new bill also expands the eligibility of not-for-profits that qualify for PPP loans. It applies to not-for-profits listed in Section 501(c) other than 501(c)(3), 501(c)(4), 501(c)(6), or 501(c)(19), provided:
- The organization does not receive > 15% of receipts from lobbying activities;
- The lobbying activities do not make up > 15% of activities;
- The cost of the organization’s lobbying activities did not exceed $1,000,000 during its most recent year end before February 15, 2020; and
- The organization does not employ more than 300 employees.
- FFCRA Leave. The ARP extends the FFCRA paid sick time and the paid family leave credits beginning April 1, 2021 and ending September 30, 2021. The bill increases the limit on the credit for paid family leave to $12,000 and resets the limit on the number of days for paid sick leave on April 1, 2021.
- COBRA Subsidy. The bill provides that “assistance-eligible individuals” (“AEIs”) qualify to receive a 100% subsidy for COBRA insurance premiums for any period of COBRA coverage beginning April 1, 2021 and ending September 30, 2021. An AEI is a qualified employee who is eligible for and elects COBRA coverage due to involuntary termination of employment (or a reduction of hours).
- Multi-Employer Pension Plans. There are many multi-employer pension plans that are unfunded or underfunded, and this legislation takes steps to address that. Several of the changes within APR include:
- A pension plan may elect to retain its 2019 plan funding status for plan years 2020 or 2021;
- If a solvency test is met, the plan can elect for the 2020 and 2021 years to make changes by amortizing net investment losses over a 30-year period, instead of 15 years under current law;
- There is special financial assistance from the PBCG for plans in critical situations, and the PBGC premium rate will be increased to $52 per participant in 2031 (up from $31 in 2021).
- Repeal of Election for Worldwide Allocation of Interest. For foreign tax credit purposes, a corporation must allocate deductions between U.S. source gross income and foreign source gross income. In the past, a corporation could only look at its U.S. corporations in the group for these allocations of interest expense and not any foreign corporations. For tax years after 2020, the parent of a U.S. affiliated group may elect to allocate the interest expense of each member of its worldwide group as if all domestic and foreign affiliates are a single corporation. The ARP, however, repeals this special provision allowing taxpayers to elect to allocate interest expense on a worldwide basis.
- Child Credit Enhanced for 2021. The child tax credit is raised from $2,000 per child to $3,000 per child in 2021. In addition, it is increased to $3,600 for children under age six and is available in 2021 to children through the age of 17. The increased child credit amounts are subject to not one, but two phase-outs. First, the increased credit amounts (for the child credit being raised to $3,000/$3,600 up from $2,000) are phased out at AGI of over $75,000 for single taxpayers, $112,500 for heads-of-households, and $150,000 for married filing jointly at the rate of $50 for each $1,000 of AGI above these thresholds. After application of this first phase-out, the regular child credit of $2,000 per child is subject to the regular phase-out under current law.
- Child and Dependent Care Credit Increased (Credit is also Refundable). For 2021, the maximum credit is $4,000 for one child and $8,000 for two or more children. The credit is for 50% of eligible expenses, up to a limit based on income. It is reduced by 1% for each $2,000 of the taxpayer’s AGI for the year in excess of $125,000. Further, for 2021 only, the exclusion for employer-provided dependent care assistance is raised to $10,500 from $5,000. Employers should be aware of this change and revise their dependent care assistance plans to accommodate these higher thresholds in 2021.
- Exclusion from Gross Income on Certain Discharges of Student Loans. This applies from 2021 through 2025. The student loan debt exclusion applies to loans specified in the new bill.
Again, this is an overview of various business and individual provisions in this latest relief package. Please contact your Sikich advisor with any questions you have.