On March 11, 2021, President Biden signed the American Rescue Plan Act of 2021 (ARPA). This $1.9 trillion stimulus package contains extensions to unemployment, stimulus payments and provisions for small businesses. It also provides some funding for vaccine distribution, virus testing, hospitals, state and local governments and schools and an array of other Democratic Party priorities. These provisions should be interpreted in conjunction with those of the CARES Act and Families First Act of 2021.
Here is an overview of some of the key components of the law:
Enhanced unemployment benefits were scheduled to expire on March 14, 2021, but were extended through September 6, 2021. The final bill maintains payments at $300 per week.
The first $10,200 in unemployment benefits in 2020 are tax-free for workers making less than $150,000 per year.
The ARPA includes another round of economic impact payments up to $1,400 per individual and dependent, including college students. Benefits phase out for individuals earning over $75,000 and married couples earning over $150,000. Adjusted gross income from 2019 will determine eligibility unless a 2020 return has already been filed. These payments will be treated as tax credits and should not be included in the recipient’s 2021 taxable income.
Child Tax Credit
The act expands the child tax credit and allows taxpayers to receive the credit before filing a return. The credit is now fully refundable for 2021 and makes children of age 17 eligible.
The act increases the credit to $3,000 per child ($3,600 for children under six). The increased credit amount phases out for taxpayers with incomes over $150,000 for married taxpayers filing jointly, $112,500 for heads of household, and $75,000 for others.
Student Loan Tax-Free Relief
Federal student loan debt that is forgiven in 2021 through 2025 will be excluded from gross income. However, the ARPA itself does not provide for any student loan forgiveness, which is likely to be addressed in future legislation or an executive order.
Employee Retention Credit
The Employee Retention Credit from the CARES Act of 2020 was extended through the end of 2021. This is a refundable credit against employment taxes paid by employers experiencing government-mandated shutdowns or significant reductions in gross receipts.
Beginning after June 30, 2021, the credit is a refundable payroll tax credit against the Medicare tax imposed under IRC 3111(b). The ARPA will also change the eligibility requirements for this credit, allowing “Severely Financially Distressed Employers” with more than 500 employees to include all wages paid to employees as qualifying wages, not just those wages paid to employees that are not providing services.
A “Severely Financially Distressed Employer” is a company whose gross receipts for a calendar quarter are less than 10% of its gross receipts from the same calendar quarter in 2019. Businesses that were not in existence in 2019 that would like to claim the credit, must use their average number of 2020 employees to determine the wages that would qualify for this credit. These new employers will utilize their 2020 receipts for purposes of the gross receipts test.
Dependent Care Assistance
The ARPA will increase the maximum limit for a dependent care assistance program from $5,000 to $10,500 for 2021.
Paycheck Protection Program (PPP) Changes
The Paycheck Protection Program has been expanded to include other not-for-profit organizations and creates a category of “additional covered nonprofit entity.” Total allocated funding is estimated at $7.25 billion.
Recent changes to the PPP program unlocked funding for self-employed and gig workers. The deadline to apply for the PPP program is still March 31, 2021.
Restaurant Revitalization Fund
This $28.6 billion fund provides grants to restaurants, bars, caterers, breweries and tasting rooms. Grants can top $5 million for individual restaurants and $10 million for restaurant groups under 20 locations.
Grants are based on a comparison of 2019 gross receipts to 2020 gross receipts to assess revenue decreases due to the pandemic. The funds can only be used to pay eligible expenses related to the business’s operations through the end of 2021.
Who is Eligible?
Eligible businesses include restaurants, food stands, food trucks, food carts, caterers, saloons, inns, taverns, bars, lounges, brewpubs, tasting rooms, taprooms, licensed facilities, or the location of an alcoholic beverage producer where the public may taste, sample, or purchase products, or similar businesses where people assemble for the primary purpose of being served food or drink. This also includes the same types of establishments located in an airport terminal or that are Tribally-owned.
How are Restaurant Grants Determined?
Grant amounts will be equal to, the amount of pandemic-related revenue loss of the business during 2019. If the business wasn’t in operation for the entirety of 2019, the total would be the difference between 12 times the average monthly gross receipts of 2019 and the average monthly gross receipts for 2020. If the business wasn’t in operation until 2020, the grant amount can be equal to the amount of “eligible expenses” (see below) incurred by the business minus any gross receipts received. If not yet in operation as of the application date, but the business has incurred eligible expenses, the grant would amount to those expenses.
During the covered period, grant funds may be used for the following expenses incurred as a direct result of, or during the pandemic:
- Payroll costs
- Payments of principal or interest on any mortgage obligation (not to be used for prepayment of principal on a mortgage obligation)
- Rent payments, including rent under a lease agreement (not any prepayment of rent)
- Maintenance expenses that could include construction to accommodate outdoor seating, walls, floors, deck surfaces, furniture, fixtures, and equipment
- Supplies, including protective equipment and cleaning materials
- Food and beverage expenses that are within the scope of normal business practice before the covered period
- Operational expenses
- Paid sick leave
- Any other expenses that the SBA Administrator determines to be essential to maintaining the eligible business
If an eligible business receives a grant and fails to use all grant funds or permanently ceases operations on or before the last day of the covered period (December 31, 2021), any funds not used will be returned to the Treasury.
Emergency Injury Disaster Loans (EIDL)
A $15 billion grant is going towards Emergency Injury Disaster Loans, a low-interest loan program of the Small Business Administration. Some funds would go to severely impacted businesses with less than ten workers.
Th ARPA is the sixth coronavirus relief bill enacted by the federal government. The first two in March 2020 provided funding for virus testing, small business loans, expanded unemployment and paid sick leave and tax credits. The $2.2 trillion CARES Act authorized the first round of $1,200 stimulus checks, enhanced federal unemployment insurance and established the PPP for small businesses. Then a $484 billion bill replenished the PPP after initial funding was exhausted in two weeks. The fifth relief bill was worth $900 billion and renewed several key Cares Act benefits, including the PPP and emergency unemployment programs for self-employed and gig workers.
Other Business Provisions:
Repeal of the Worldwide Interest Allocation Election
IRC 864(f), which became effective for 2021, allowed affiliated groups to elect to allocate interest on a worldwide basis. The ARPA will repeal this election for US affiliated groups for 2021, in effect resulting in the continuation of the pre-2021 policy for allocating interest expense.
Expand the IRC 162(m) Limitation
Under IRC 162(m), a public company is generally prohibited from deducting annual compensation in excess of $1million for its CEO, CFO and the next three highest paid officers. The ARPA expands the limitation to include the next five highest paid employees, effective after December 31, 2026.
Reporting Third-Party Network Transactions
The ARPA will reduce the reporting threshold for third-party settlement organizations from $20,000 and 200 transactions per payee to $600 per payee without any minimum, number of transactions, commencing for quarters beginning after December 31, 2021 (on-line shopping/sales platforms).
Extension of Excess Business Losses Limitation
One of the changes made under tax reform was to limit the amount of business losses a noncorporate taxpayer can deduct in a tax year to $250,000 ($500,000 for joint filers). Any disallowed loss would then be carried forward as a net operating loss to the following tax year. This limitation was set to apply to tax years 2018 through 2025. Under the Coronavirus Aid, Relief, and Economic Security Act, the excess business loss limitation was suspended for the 2018 through 2020 tax years. While this suspension still applies, an amendment was added to extend the date of the excess business loss limitation through December 31, 2026. Therefore, this limitation will apply to tax years 2021 through 2026.
Families First Coronavirus Response Act (FFCRA) Paid Leave Credits
The paid sick and expanded Family and Medical Leave Act credits made available under the FFCRA are available to eligible employers through September 30, 2021. However, the ARPA makes several changes to the credits for wages paid between April 1, 2021, and September 30, 2021, including increasing eligible wages to $12,000 per employee (up from $10,000 in 2020), expanding types of leave to include vaccination, and covering as many as 60 days of paid family leave for self-employed individuals (instead of 50 days under previous law). Under the last COVID-19 stimulus bill, the FFCRA employer mandate to provide paid sick and expanded family leave due to COVID-19 wasn’t extended into 2021, but if an employer was otherwise eligible and chose to voluntarily provide such leave in 2021, the tax credits continued to be available.
COBRA Continuation Coverage
If you are eligible for and elect COBRA due to involuntary termination of employment or reduction of hours, and your coverage period includes any portion of April 1 through September 30, 2021, you may be eligible for subsidized coverage. The ARPA provides a subsidy of your COBRA premiums for whatever portion of the six-month period you are eligible for and have elected COBRA coverage.
This subsidy is not means-tested. You can qualify regardless of your income level, but the subsidy will end when you become eligible to participate in a group health plan of a new employer (or if your hours are increased and you become eligible under your current employer’s plan).
- Due to the very short timeframe between passage of the ARPA and the subsidy period, there will be extensive paperwork required between insurance companies, employers and eligible former employees.
- If you think you are eligible for the subsidy but do not get confirmation from the insurance company that your premium subsidy is effective, we encourage you to pay the premium in a timely manner to reduce the risk of losing your coverage.
- You are required to notify the group health plan if you cease to be eligible for the subsidy due to eligible coverage under another group plan or Medicare before the end of the subsidy period. Failure to notify the plan can result in penalties of $250 or more.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act and its follow-up legislation excluded many benefit programs from income, including:
- Paycheck Protection Program loan forgiveness
- Treasury Program Management Authority payments under Section 1109(d)(2)(D) of the CARES Act
- Economic Injury Loan Disaster (EIDL) grants
- Loan payments under Section 1112(c) of the CARES Act
- Grants under Section 324 of the Economic Aid to Hard Hit Small Businesses, Non-profits and Venues Act
No deduction is reduced because of the income exclusion for any of these provisions, and the ARPA now extends this income exclusion and deduction treatment to cover Economic Injury Loan Disaster (EIDL) advances and restaurant revitalization grants.
Much of the debate surrounding the $1.9 trillion Act surrounds the non-pandemic related expenditures. Please refer to the below allocation of expenditures provided by the Tax Foundation for the allocation of the $1.9 Trillion Act: