On Thursday March 11, 2021, President Biden signed the American Rescue Plan Act (ARPA) into law. This law contains another round of $1,400 stimulus checks for qualifying individuals. However, as with most of the other recent major legislation changes, there are many provisions in the law that affect both businesses and individuals. Some provisions are retroactive to 2020 and will delay the filing of 2020 income tax returns. Others may not take effect until 2021 and 2022.
At this point, we Are NOT anticipating having a Zoom meeting discussing this Act in particular. If you have any questions, please feel free to contact us directly.
Will Tax Season Be Extended?
Before we provide the highlights of this new law, we would like to give our thoughts regarding the question on everyone’s mind: “Will the IRS extend tax season again this year?” As of today, they have not. The IRS Commissioner has been on record on several occasions stating they have no plans to do so. However, he did acknowledge prior to the passage of ARPA, that printing and distributing another round of stimulus payments, may necessitate extending the deadline.
The AICPA, along with members of Congress and other organizations have been pushing for an extended due date. The most popular dates are June 15 and July 15, which is consistent with the prior year due date. As you can imagine, the IRS is under tremendous pressure to either extend the deadline or waive any penalties on taxes that would have been due April 15. The IRS still has to process millions of 2019 returns; write guidance and regulations immediately on the law passed December 27, 2020, that is currently in effect; process another round of stimulus payments; and write guidance and regulations on this new ARPA immediately for the parts that are retroactive or currently in effect.
However, the biggest difficulty may be for the IRS to code their computer systems and issue guidance to tax software vendors on how to report the 2020 tax law changes that have just passed. This alone will take weeks, not days.
All of this is in addition to their normal workload during filing season.
Lastly, they are still working remotely to some extent. We have already seen some states starting to extend their deadlines, ahead of any change by the IRS. Taking all of this into account, it seems certain that something will have to be extended or addressed, so stay tuned.
Highlights of the ARPA
Since we do not anticipate presenting a Zoom meeting, following are the highlights of the ARPA that could affect several areas common to businesses and individuals. We have organized each element as best we could so you can identify the topics that may interest you.
Recovery Rebates (Stimulus Payments) to Individuals
The ARPA includes provisions for individuals to receive a $1,400 payment ($2,800 for eligible individuals fining a joint tax return), and a $1,400 payment for each dependent:
- College students, disabled adult children, and adult parents will qualify for the $1,400 payment
- Payments will be made to the taxpayer, not the dependent
- Phase out for the payments begins at $150,000 of adjusted gross income for a joint return ($75,000 for single) and is completely phased out at $160,000 of adjusted gross income for a joint return ($80,000 for single).
Enhanced Child Tax Credits
The ARPA includes provisions for enhanced child tax credits for 2021, making the Child Tax Credit (CTC) fully refundable for 2021 and increasing the amount to $3,000 per child ($3,600 for children under age 6). These amounts are subject to income limits and phaseouts. The ARPA also directed the IRS to make advanced payments equal to 50% of the anticipated credit based on the taxpayer’s 2019 and 2020 return.
- Advanced monthly payments to taxpayers will begin after July 1, 2021
- The IRS is also responsible for creating an online portal to allow the taxpayers the option of opting out and reporting changes in dependents, income, and other relevant information.
Premium Tax Credit for Marketplace Insurance
The new legislation will:
- Change the affordability percentages used for 2021 and 2022.
- For 2020, the excess advance premium credit will not have to be repaid
- For 2021, the credits available are increased for those earning over 133% of the federal poverty line.
Employee Retention Credit
The new legislation:
- Extends the ERC from June 30, 2021 until December 31, 2021. The legislation would continue the ERC rate of credit at 70% for this extended period. It also continues to allow for up to $10,000 in qualified wages for any calendar quarter.
- Limits the ERC to $50,000 per calendar quarter of an eligible employer that is a “recovery startup business.” A “recovery startup business” is one that: (1) began operations after February 15, 2020 whose average annual gross receipts for a 3-taxable-year period ending with the taxable year which precedes such quarter does not exceed $1,000,000, and (2) experiences a full or partial suspension of operations due to a governmental order or experiences a significant gross receipts decline.
- Allows the credit to be claimed against Medicare (1.45%, Hospital Insurance – HI) taxes only. Since the employer/employee tax rate for Medicare is 1.45%, it could take longer to immediately claim the credit under the ARPA for the third and fourth quarters of 2021. Instead of just withholding the taxes immediately, it could be more likely that more employers would need to file Form 7200 (Advance Payment of Employer Credits Due to COVID-19).
- Continues the year-over-year gross receipts decline requirement at 20%.
- Qualified wages paid by an employer taken account as payroll costs under (1) Second Draw PPP loans; (2) shuttered venues assistance and (3) restaurant revitalization grants are not eligible for the ERC.
Unemployment Provisions – Individuals
The new legislation:
- Extends the Federal pandemic unemployment compensation payment of $300 per week through September 6, 2021.
- Does not extend the 50% credit for reimbursing employers
- Makes the first $10,200 ($20,400 for a married couple) of 2020 unemployment tax exempt for households earning under $150,000
- There is no phaseout, so at $150,001 – All the unemployment benefits become taxable.
Paycheck Protection Program Modifications
There have been several changes to the PPP program in the past few weeks prior to the passage of ARPA. Recent changes include:
- Allowing schedule C filers to use gross income in their calculation of loan proceeds vs. net income
- Businesses with a North American Industry Classification System (NAICS) code beginning with “72” to use a 3.5 multiple of average monthly payroll instead of a 2.5 multiple to figure their loan proceeds. NAICS codes of 72 are companies in the accommodation and food service sectors, including lodging.
Due to the number of changes, there has been a lot of pressure to extend the application deadline. The current deadline is March 31. However, the Fed has already committed to supporting PPP loans through June, and it is practically certain the SBA will extend the application deadline to May 31.
The new ARPA legislation:
- Allocates an additional $7.25 billion towards PPP funding.
- Adds “additional covered nonprofit entity” as an eligible nonprofit eligible for First Draw and Second Draw PPP loans.
Paid Sick and Family Leave Credits under Families First
Changes under the ARPA apply to amounts paid with respect to calendar quarters beginning after March 31, 2021. ARPA, 2021:
- Extends the FFCRA paid sick time and paid family leave credits from March 31, 2021 through September 30, 2021.
- Provides that paid sick and paid family leave credits may each be increased by the employer’s share of Social Security tax (6.2%) and employer’s share of Medicare tax (1.45%) on qualified leave wages.
- Allows for the credits for paid sick and family leave to be structured as a refundable payroll tax credit against Medicare tax only (1.45%), beginning after March 31, 2021.
- Increases the amount of wages for which an employer may claim the paid family leave credit in a year from $10,000 to $12,000 per employee.
- Expands the paid family leave credit to allow employers to claim the credit for leave provided for the reasons included under the previous employer mandate for paid sick time. For the self-employed, the number of days for which self-employed individuals can claim the paid family leave credit is increased from 50 to 60 days.
- Permits the paid sick and family leave credit to be claimed by employers who provide paid time off for employees to obtain the COVID-19 vaccination or recover from an illness related to the immunization.
Other Relief-Related Provisions
Restaurant revitalization grants. The ARPA appropriates $28,600,000,000 for fiscal year 2021 to struggling restaurants to be administered by the SBA. The money will be available until expended. Eligible entities include restaurants, or other specified food businesses, and includes businesses operating in an airport terminal. It does not include a state or local government operated business, or a company that as of March 13, 2020 operates in more than 20 locations, whether the locations do businesses under the same name. It also does not include any business that has a pending application for, or has received, a grant under the Economic Aid to Hard-Hit Small Businesses, Non-Profits, and Venues Act. The amount given to any business who fulfills the eligibility and certification requirements is $10,000,000 and limited to $5,000,000 per physical location of the business. Grants may be used for: (1) payroll costs; (2) mortgage payments; (3) rent; (4) utilities; (5) maintenance expenses; (6) supplies; (7) food and beverage expenses; (8) covered supplier costs; (9) operational expenses; (10) paid sick leave; and (11) any other expense determined to be essential to maintaining the business.
Shuttered venue operators. CAA, 2021 authorized grants to eligible live venue operators or promoters, theatrical producers, live performing arts organization operators, museum operators, motion picture theatre operators, or talent representatives who demonstrate a 25% reduction in revenues. The ARPA appropriates $1,250,000,000, for fiscal year 2021, to help carry out these grants. The money will be available until expended. Governmental entities do not qualify.
Other Benefits and Related Provisions
Dependent Care Assistance. The amount of taxable wage exclusion for dependent care benefits is increased from $5,000 to $10,500 for married couples filing jointly. The amount of excludable wages for married couples filing separately is $5,250. This increase applies to any taxable year beginning after December 31, 2020, and before January 1, 2022, effective December 31, 2020.
COBRA. Under the ARPA, Assistance Eligible Individuals (AEIs) may receive an 85% subsidy for COBRA premiums paid during any period of COBRA coverage during the period beginning on April 1, 2021 (the first day of the first month beginning after enactment) and ending on September 30, 2021.
- Refundable tax credit. Employers will be allowed a quarterly tax credit against the Medicare payroll tax equal to the premium amounts not paid by AEIs. If the credit amount exceeds the quarterly Medicare payroll tax, the excess will be treated as an overpayment refundable under Code Sec. 6402(a) and Code 6413(b). The quarterly credit may be paid in advance according to forms and instructions to be provided by the Department of Labor.
Many other provisions include excluded income from Student Loan Discharges, expansion of the EITC for taxpayers with no qualifying children, COBRA premium subsidy, targeted EIDL loans, and others which we are not able to cover in this update.
As we become aware of changes, we will pass them on to keep you informed. If you have any questions about this new information and how it pertains to your situation, please contact us.