On March 6, 2021, the Senate approved another round of COVID-19 stimulus funding titled the American Rescue Plan Act of 2021 (ARPA). This $1.9 trillion bill was originally drafted and passed by the House of Representatives in February, but due to Senate procedural rules and amendments offered by senators, several changes were made to ARPA from the version passed by the House. The differences between the House and Senate versions will now need to be reconciled, and the House is expected to vote on the updated version later this week. The president and Congress aspire to enact the legislation by March 14, which is when federal unemployment benefits are set to expire.
The legislation includes a variety of items, including aid for vaccinations and testing, state and local governments, schools, rental assistance, agriculture, and the airline industry. The ARPA also includes several tax-related provisions and additional business relief. Here’s what individuals and businesses should expect from the ARPA:
Individuals
- Direct Payments – This round of recovery rebate checks is expected to be $1,400 for an individual, $2,800 for joint filers, and $1,400 for each qualifying dependent. The payments are subject to an extremely quick phaseout for individuals with adjusted gross income (AGI) between $75,000 and $80,000 ($150,000 and $160,000 for married couples). Unlike prior rounds, eligible qualifying dependents include full-time students under the age of 24 and adult dependents.
Although the payment amounts are higher than previous rounds of recovery rebates, the phaseout thresholds are narrower, limiting the number of potential recipients. For those who have filed their 2020 tax returns, the recovery rebate checks will be based on 2020 AGI. If a taxpayer hasn’t filed their 2020 tax return, the IRS will use 2019 data. As such, taxpayers at or near the phaseout thresholds should consider the timing of their 2020 tax return filing. The payment will be reconciled on an individual’s 2021 income tax return, so if an individual is eligible for a payment based on 2020 AGI but didn’t receive a check due to 2019 AGI exceeding the threshold, they can claim it as a credit on the 2021 return. In addition, if a taxpayer did receive a check based on 2019 AGI but wouldn’t have qualified based on 2020 AGI, the excess amount received wouldn’t need to be paid back.
- Unemployment Benefits – The Senate version of the ARPA extends the $300 weekly federal unemployment funding set to expire on March 14 through September 6, 2021. In addition, a Senate amendment proposes to make the first $10,200 of 2020 unemployment benefits not subject to federal income tax. As a result, taxpayers who received unemployment income and already filed their 2020 taxes may need to amend their 2020 tax returns accordingly. The bill proposes to limit this benefit to households with AGI of less than $150,000 (for both single and married taxpayers).
- Changes to Tax Credits – The bill proposes to make several changes for 2021 to the earned income tax credit, the child tax credit, and the dependent care credit by increasing the credit percentages and phaseout thresholds. For example, the child tax credit maximum would be raised to $3,600 for each child younger than 6 and $3,000 for other qualifying children, and the credit would be made fully refundable for 2021. The ARPA also instructs the IRS to establish a program to make advances to taxpayers eligible for the child tax credit in the form of periodic payments during the calendar year.
- 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, the Senate version of the ARPA added an amendment to extend the sunset date of the excess business loss limitation through December 31, 2026. Accordingly, absent further legislative changes, this limitation will apply to tax years 2021 through 2026.
- Student Loans – The proposed bill language also excludes from taxable income any student loans discharged in 2021 through 2025.
Businesses
- Employee Retention Credit (ERC) – The expanded ERC provisions under the 2021 Consolidated Appropriations Act (CAA), set to expire on July 1, would be made available through December 31, 2021, for eligible employers. In addition, startup businesses established after February 15, 2020, with annual gross receipts of up to $1 million and that otherwise do not meet the ERC eligibility tests would now be eligible for the ERC. The startup ERC is capped at $50,000 per quarter, per employer, and the credit would be computed under the regular ERC rules. The revised ERC rules also include a new provision for “severely financially distressed employers,” which is defined as an employer that experienced a gross receipts reduction of more than 90 percent as compared to the same quarter in 2019. If an employer meets this definition, it may treat all wages paid to employees as qualified wages, regardless of the number of full-time employees. Finally, the ARPA includes a provision to extend the normal three-year statute of limitations to five years for the IRS to make an assessment of any amount attributable to the ERC. The amendments to the ERC made by the ARPA are effective for calendar quarters after June 30, 2021.
- 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 continue to be 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). As a reminder, under the last COVID-19 stimulus bill, the FFCRA employer mandate to provide paid sick and expanded family leave due to COVID-19 reasons wasn’t extended into 2021, but if an employer is otherwise eligible and chooses to voluntarily provide such leave in 2021, the tax credits continue to be available.
- Executive Compensation – Internal Revenue Code Section 162(m) generally prohibits publicly traded employers from taking a deduction for executive compensation in excess of $1 million. Currently, this limitation applies to the CEO, CFO, and the next three highest compensated officers, but beginning in 2027, the ARPA would expand the application of this limitation by five employees, e.g., a publicly traded company’s eight highest compensated employees other than the CEO and CFO.
- Restaurant Grants – The ARPA establishes a $25 billion Restaurant Revitalization Fund for 2021 to be administered by the U.S. Small Business Administration (SBA). Of this funding, $5 billion is allocated to restaurants whose gross receipts in 2019 were less than $500,000, and the first 21 days of the program prioritizes small businesses owned by women, veterans, or socially and economically disadvantaged individuals. Eligible entities include restaurants, food trucks, bars, caterers, taprooms, and other similar places of business in which the public or patrons assemble for the primary purpose of being served food or drinks. However, publicly traded companies, state or local government-operated businesses, entities (together with their affiliates) that have more than 20 locations, and entities that applied for a shuttered venue operator grant don’t qualify. Grant amounts will be limited to a restaurant’s pandemic-related revenue loss (measured as the difference in gross receipts in 2020 compared to 2019) up to $10 million and limited to $5 million per physical location. Note, if the grant is made based on estimated amounts for a loss in 2020 and the actual revenue loss is less than the grant amount, or the restaurant doesn’t use all the grant proceeds before the last day of the covered period (December 31, 2021, or a later date as determined by the SBA), the restaurant must return the extra grant amount to the U.S. Department of the Treasury. Grant proceeds may be used to cover payroll costs, mortgage payments, rent, utilities, maintenance expenses, operational expenses, paid sick leave, and supplies. Any funds an entity receives from the restaurant revitalization fund won’t be treated as taxable income, and expenditures paid with grant funds will still be deductible.
- SBA Loan Programs – This bill provides an additional $7 billion in Paycheck Protection Program (PPP) funding and expands eligibility for PPP loans to a wider sphere of nonprofit entities and internet publishing organizations. Importantly, eligible nonprofit organizations would now qualify for a PPP loan as long as they employ not more than 500 employees per physical location (300 per physical location for Second Draw loans) and meet all other criteria. The ARPA also provides for an additional $15 billion in funding for targeted Economic Injury Disaster Loan (EIDL) advances. One-third of this EIDL funding is earmarked for businesses that suffered a revenue loss of greater than 50 percent and employ fewer than 10 people.
- Shuttered Venue Operators Grants – The ARPA provides an additional $1.25 billion to the shuttered venue operators grant program. It also removes the requirements under the CAA that prohibited an entity from both receiving a PPP loan after December 27, 2020, and being eligible for a shuttered venue operators grant. Instead, the amount of the grant should be reduced by the PPP loan amount received after December 27, 2020. Given that the current PPP application deadline is March 31, 2021, and the shuttered venue program isn’t yet accepting applications, organizations that may qualify for both will want to act quickly to consider whether to apply for a PPP loan.
Although the ARPA continues to make its way through Congress, we expect it will be signed into law soon. Please contact your BKD tax advisor to see how the ARPA could affect you or your business.
