Two months after passing its second major COVID-19 relief package of nearly $1 trillion, Congress is poised to push for another large relief package, the “American Rescue Plan” (H.R. 1317, a/k/a “CARES 3”). This package is not only a priority for Congress but also for the new Biden administration. The latest package is twice as much its predecessor, totaling nearly $2 trillion. The House made the first major step in passing CARES 3 legislation early on February 27, 2021 by a 219-212 vote.
With the ink barely dry on the “Consolidated Appropriations Act, 2021” (“CAA” or “CARES 2”), Congress and the new administration are embarking on another relief bill of $1.9 trillion. Congressional leaders will put a full court press onto advance this legislation over the next few weeks, and if the legislation passes, over $5 trillion in economic relief will be provided by Congress in less than one year to assist individuals and businesses impacted by the pandemic. The bipartisanship exhibited in CARES and CAA, however, is gone, and this latest legislation has reverted to partisan politics.
Highlights in the CARES 3 Proposal
Let’s turn to the American Relief Bill and unpack some of the aid contained in this proposed legislation. Here are several selected tax provisions in this bill:
- Another Round of Individual Rebates. These rebates (known as “Economic Impact Payments,” or EIP) were a key feature in CARES and CARES 2, with rebate amounts varying (some would say, depending on the CARE-ing mood of Congress at the time). The latest proposal would offer rebates of $1,400 per person (or $2,800 for a married couple) and $1,400 per dependent child (age 17 and under). The amount of the rebates would be phased out based on the individual’s income. For married couples filing jointly, the phase-out would begin at $150,000 and be fully phased out at $200,000. For single taxpayers, the phase-out starts at $75,000 and is fully phased out at $100,000.
The taxpayer’s income on their 2020 tax return is used for this purpose, and if no 2020 tax return has been filed yet, their 2019 return will be referenced. As with CARES and CARES 2, the rebates in CARES 3, if adopted, would be issued to taxpayers via direct deposit, or checks or debit cards would be mailed to taxpayers. If passed, the IRS would once again be tasked with calculating, preparing, and issuing these rebates in a matter of weeks during their busiest time of the year as they also process 2020 tax returns.
Lastly, a taxpayer can still benefit if their income was too high in 2019 and 2020 to be entitled to a rebate, by claiming a credit on their 2021 tax return if lower.
- Unemployment Benefits. Many individuals faced unemployment at the onset of the pandemic. While the unemployment rate spiked last spring and has since come down significantly, there are still many that are without work. As the CAA extended unemployment benefits only through March 14, 2021, the American Rescue Bill will extend the unemployment benefits for six months until August 29, 2021. According to the House Ways & Means Committee summary of the bill, “the section will extend the federal supplemental unemployment benefit (FPUC), which is added to both state and federal benefits; the mixed-earner supplement is added for eligible workers through August 29, 2021. It also increases the FPUC amount from $300 to $400 for weeks ending after March 14 and before August 29, 2021.” There are also other proposed changes about how the unemployment program is administered and operated at the state level.
- 2021 Tax Credits for Families (Child Credit; Dependent Care Credit; and EITC). The American Relief Bill, if adopted, would also enhance a number of tax credits on 2021 tax returns that impact families.
- First, the Child Tax Credit would be increased from $2,000 per qualifying child to $3,000; and to $3,600 for children age six and under. As with the EIPs noted above, the child tax credit is subject to a phase-out. The phase-out for this credit, although, applies to taxpayers with income up to $400,000. This revised child tax credit would be refundable, and the Treasury Department is looking to accelerate part of the 2021 credits and have them paid periodically (perhaps every other month) to families beginning in July 2021.
- Furthermore, the Dependent Care Credit, allowed to working taxpayers paying for childcare, would be doubled for 2021. The max credit for dependent care in 2020 is $3,000, but this would jump to $8,000 in 2021. Further, this credit is refundable if it otherwise exceeds a taxpayer’s tax liability in 2021.
- Finally, the Earned Income Tax Credit (EITC) would be enhanced in 2021 for lower income individuals with dependent children. The change would also strengthen the EITC for individuals with no qualifying children. This credit is refundable.
- FFCRA Credits Expanded. One of the new incentives established in 2020 was the payroll credit provided to employers for employees taking leave due to COVID or family care situations resulting from COVID. This credit will be enhanced with the new legislation.
- Extension of Employee Retention Credit (ERC). The ERC was extended by the CAA through June 30, 2021, and this latest legislation would extend the ERC through the end of 2021.
- PPP Loans. Several of the proposed changes would expand the type of not-for-profit organizations that can apply for PPP loans. A new category termed “additional covered nonprofit entity,” which includes not-for-profits listed in Section 501(c) other than Sections 501(c)(3)s, 501(c)(4)s, 501(c)(6)s, or 501(c)(19)s, will be eligible to receive an initial PPP loan. Note: the not-for-profit cannot receive more than 15 percent of its receipts from lobbying activities; and the lobbying activities cannot total more than 15 percent of its overall activities. Further, the organization cannot have more than 300 employees.
- “Restaurant Revitalization Grants” (“RRG”). While there are few PPP loan provisions in this latest proposal, there is a whole new section created to aid the restaurant industry. The proposed change would establish a new incentive known as a “Restaurant Revitalization Grant” (“RRG”) and be directed at helping restaurants survive and retain their workers. The RRG would be determined as follows:
- First, measured as the amount of gross receipts of a restaurant in 2019 compared with 2020.
- This difference would then be reduced by any PPP loans (first draw or second draw) received by the restaurant.
The SBA would administer the RRG program, and the grant must be used by the restaurant for general operating expenses, such as payroll, supplies, utilities, mortgage and rent payments, food, and other costs. The RRG grant would be treated similarly to the PPP loan in that it would be non-taxable to the restaurant business; the expenses would be deductible; and there would be a basis increase for the debt forgiveness income.
- Multi-employer Pensions. The proposed legislation offers several provisions to address under-funded multi-employer pension plans.
- $15 Minimum Wage. This is one of the key issues in this proposed legislation. According to the Senate Parliamentarian on February 25, 2021, a $15 minimum wage item would violate Senate special rules under what is referred to as “reconciliation.” There is some discussion of permitting the $15 minimum wage by imposing a penalty tax on those that don’t offer the higher wage or, perhaps, a tax credit for those that offer this new wage rate. At this point, it is unclear what may happen with the $15 minimum wage, and it might eventually be removed from the CARES 3 bill and possibly re-introduced as part of separate legislation later.
- Worldwide Interest Expense Netting. This is one of the only offsets (or tax increases) included in the overall legislation. It would change the rules in 2021 for allocation of interest expense for large multi-national companies.
- Third-Party Payment Reporting. Added late last week to the proposed bill was a measure aimed at small providers of goods and services. Under current law, third-party payers must prepare and file Form 1099 for total payments in a year made to a provider of $20,000 or more, or more than 200 transactions. The late addition to the bill last week would drop this payment threshold to $600 per year.
Prospects and Timeline for CARES 3
As noted, the House passed the American Rescue Plan on February 27, 2021. The next step in the process will play out in the Senate. Under the reconciliation measure previously noted, the legislation can pass with a majority vote and is not subject to the 60-vote filibuster. If 50 votes are secured in the Senate, then Vice President Harris would cast the tie-breaking vote. Congressional leaders would like to move this legislation toward final passage by the middle of March. So, onto the political drama in the Senate. We will keep you posted.
Please contact your Sikich advisor with any questions.