Overview of Key Provisions Affecting Individuals and Businesses
A $1.9 trillion COVID-19 relief package was signed into law by President Biden on Thursday, March 11, 2021. The American Rescue Plan Act of 2021 (ARP), as amended by the U.S. Senate, follows the nearly $4 trillion in COVID relief enacted in 2020. The ARP includes provisions designed to accelerate activities to combat the virus and distribute vaccines, fund various programs and provide economic support to a variety of stakeholders including individuals, small businesses, state and local governments, and certain industries and communities impacted by the pandemic.
Small Business Relief Provisions
For businesses, the ARP funds and expands several governmental relief programs including the Paycheck Protection Program (PPP), Economic Injury Disaster Loan (EIDL) grants, the Employee Retention Credit (ERC), credits for sick and family leave, and the Shuttered Venue Operator Grant Program (SVOG). The ARP also creates a Restaurant Revitalization Fund grant program for small and mid-sized restaurants and provides funds for the State Small Business Credit Initiative (SSBCI) for state governments to create programs utilizing private capital for low-interest loans and investments to support entrepreneurs.
PPP provisions: The ARP provides an additional $7.25 billion for the Small Business Administration (SBA) PPP program and expands eligibility for nonprofit entities and community locations of larger nonprofits. The ARP creates an “additional covered nonprofit entity” category expanding PPP eligibility to all nonprofit entities (other than 501(c)(3), 501(c)(4), 501(c)(6) and 501(c)(19) organizations) provided (1) the nonprofit entity does not receive more than 15% of receipts from lobbying activities, (2) the lobbying activities do not consist of more than 15% of the organization’s activities, (3) the cost of lobbying did not exceed $1 million and (4) the entity did employ more than 300 employees. The ARP permits PPP eligibility for larger nonprofits such as 501(c)(3) and veterans’ organizations that employ less than 500 employees per physical location, 501(c)(6) organizations, destination marketing organizations and “additional covered nonprofit entities” employing 300 or fewer employees. Payroll costs will include COBRA premium assistance and the deadline of March 31, 2021, to apply for a PPP loan has not changed.
EIDL grants: The ARP appropriates $15 billion to the SBA to provide $10,000 EIDL grants to small businesses. Qualifying businesses include those with less than 300 employees that experienced at least a 30% reduction in gross receipts during an eight-week period between March 2, 2020, and December 31, 2021. However, $5 billion of the EIDL grants are earmarked for businesses that lost at least 50% of revenue and had fewer than 10 employees. The ARP provides for a phased approach to EIDL distributions beginning with businesses that did not receive the full amount requested in previous applications. These targeted EIDL grants are also excluded from income and will not result in denial of a deduction, reduction of tax attributes or basis increase denial.
ERC tax credit: The ARP extends the availability of the ERC from the current June 30, 2021, to December 31, 2021. The ARP also increases the availability and value of the ERC to employers who are “severely financially distressed” or experienced a severe decline in gross receipts (more than a 90% reduction in gross receipts due to COVID-19 compared to the same period in 2019) and allows all wages to be taken into account, including wages paid to employees providing no services. The ERC is further expanded to include start-up businesses that began a trade or business after February 15, 2020, and reported annual gross receipts of less than $1 million. The credit for these start-up businesses is limited to $50,000 per quarter, per employer.
SVOG program: The ARP provides an additional $1.25 billion for the SVOG grant program and allows eligible applicants to access both the SVOG and PPP loans. The Consolidated Appropriations Act that was enacted at the end of 2020 prohibited eligible businesses from receiving both an SVOG grant and a PPP loan. Eligible entities may now apply for both an SVOG grant and a PPP loan, but the SVOG grant must be reduced by the amount of the approved PPP loan.
Restaurant Revitalization Fund: The ARP appropriates $28.6 billion to a new Restaurant Revitalization Fund. This grant program provides a maximum amount to eligible restaurants of $10 million per eligible entity and any affiliated business ($5 million for each physical location). The funds may be used to offset pandemic-related costs including payroll, rent or mortgage obligations, utilities, maintenance expenses (including construction to accommodate outdoor seating), food and beverage expenses, operations, paid sick leave, covered supplier costs and any other expenses determined to be necessary. Eligible businesses include, but are not limited to, restaurants, food stands, caterers, bars, tasting rooms, taprooms, and other similar place of business in which patrons assemble for the primary purpose of being served food or drink. Ineligible establishments include state or local government operated businesses, those that are owned or operated in 20 or more locations, those that have a pending application or have received an SVOG grant or publicly traded businesses. Funds will be available during the first 21 days to businesses owned or controlled by women, veterans, or economically disadvantaged small business concerns. Five billion dollars has been set aside for establishments with less than $500,000 in gross receipts for 2019. The program expires December 31, 2021. Similar to the targeted EIDL grants, the grants are excluded from income and will not result in denial of a deduction, reduction of tax attributes or basis increase denial.
Sick and family leave tax credits: The Families First Coronavirus Response Act provided refundable payroll tax credits to employers providing sick and medical leave pay to employees. Subject to certain restrictions, the ARP extends the availability of paid sick and family leave payroll tax credits from March 31, 2021, to September 30, 2021, increases the eligible wages per employee from $10,000 to $12,000, expands the types of leave to include time off to receive a vaccine, and increases the calculation of days for the self-employed to 60 days.
Excess business loss limitation: Prior to the CARES Act, non-corporate taxpayers were only permitted to deduct a maximum $250,000 of excess business losses ($500,000 for joint returns). The CARES Act retroactively suspended the rule, allowing noncorporate taxpayers to fully deduct excess business losses occurring in 2018, 2019 and 2020. For the tax years beginning after December 31, 2020, and ending December 31, 2025, the limitation on deducting excess business losses has been restored. The ARP extends the limitation on these excess business losses for an additional year through 2026.
Corporate interest allocations: The ARP repeals the election under Section 864(f) allowing members of a worldwide affiliated group of corporations to allocate and apportion their combined interest expense among their members.
Individual Relief Provisions
For qualifying individuals, the ARP contains provisions relating to recovery rebates, unemployment benefits, child tax credits, earned income tax credits, child and dependent care credits, COBRA continuation coverage and student loan tax exclusions. The ARP also provides funds for various other assistance programs relating to healthcare, rental and housing, water and utilities, education, agriculture and nutrition.
Recovery rebates: The ARP provides a $1,400 recovery rebate credit (or economic impact payment) per qualifying individual. For married taxpayers filing jointly, the credit amount is $2,800 and $1,400 for each dependent including relatives claimed as dependents. The phase-out for married taxpayers filing jointly begins at adjusted gross income (AGI) of $150,000 and is phased out at $160,000. For heads of households, the phase-out begins at $112,500 and ends at $120,000. For single taxpayers, the phase-out range is AGI $75,000 to $80,000. The payments are direct payments in the form of an advance payment of the recovery rebate credit.
Unemployment benefits: The ARP extends CARES Act unemployment compensation to September 6, 2021, and the additional $300 weekly Federal Pandemic Unemployment Compensation (reduced from the $400 House version), and allows self-employed, gig workers, freelancers and others not otherwise eligible to qualify for unemployment insurance. The ARP also now provides that for households making less than $150,000, the first $10,200 in benefits is not subject to tax for 2020.
Child tax credit: The ARP provides for a temporary and fully refundable child tax credit for 2021 and increases the credit amount from $2,000 to $3,000 per child ages 6 to 17, and $3,600 for children under the age of 6. The ARP directs the Treasury Department to estimate credit amounts and issue monthly advance payments of the credit to taxpayers on a monthly basis beginning July 1, 2021. The phase-out for the increased child tax credit amount is $150,000 for married taxpayers filing jointly, $112,500 for heads of household and $75,000 for separate filers.
Child and dependent care credit: For 2021, the ARP increases the amount of child and dependent care expenses eligible for the credit to $8,000 for one qualifying individual and $16,000 for two or more qualifying individuals. The credit percentage is also increased from 35% to 50% thus making the maximum credit up to $4,000 for a qualifying individual and up to $8,000 for two or more individuals. The credit is reduced for households with income over $125,000. The ARP also increases the employer exclusion for employer-provided dependent care from $5,000 to $10,500.
COBRA continuation coverage: The ARP provides for a refundable credit against the Medicare tax to individuals eligible for COBRA continuation coverage from the date of enactment to September 30, 2021. The credit applies to premiums and wages paid after April 1, 2021, to September 30, 2021, and COBRA premium assistance recipients are not eligible for the health coverage tax credit.
Student loan tax exclusion: The ARP excludes from gross income any student loan discharged after December 31, 2020, and before January 1, 2026.
Earned income tax credit: The ARP makes several changes to the earned income tax credit regarding minimum age, increased phaseout percentages and investment income amounts and a temporary ability to use 2019 income for purposes of computing the credit in 2021.
- Mark Baran, Principal, MARKS PANETH
Compliments of Marks Paneth – a member of the EACCNY.