More New Law
The $1.9 billion American Rescue Plan Act of 2021 (ARPA), was signed into law on March 11, 2021. The new individual stimulus funds were distributed mid-March. This latest major legislation provides additional economic relief and stimulus, both tax and non-tax, to reduce the pandemic’s impact on our country. At the end of March, a $2 trillion infrastructure plan was announced. That plan would raise the corporate income tax rate to 28% from the current 21%. Higher taxes are in the future. But for now, let us look at what was recently enacted. We present brief summaries of the key aspects of the new tax provisions in the ARPA legislation.
Individuals Impacts
ARPA provided a third round of nontaxable stimulus checks directly payable to individuals. The maximum payments are $1,400 per eligible individual ($2,800 for married joint filers) and $1,400 for each dependent (which, unlike the first two stimulus payments, includes older children and adult dependents). The payment phases out proportionally between $75,000 and $80,000 AGI for single filers, $112,500 and $120,000 for head of household filers, and $150,000 and $160,000 for married joint filers. The IRS has been directed to issue a supplementary payment to households whose payment was based on 2019 income data, and who would be eligible to receive a larger payment based on 2020 data. Tax planning might be in order if you are over or within the phase-out bracket for 2020.
For 2021 the child tax credit is increased to $3,000 per child ($3,600 for children under six years of age), but the increase is subject to modified AGI phase-out rules. Qualifying children now include 17-year-olds. It is refundable, and the IRS will make periodic advance payments totaling 50% of its estimate of the credit in the last half of 2021.
The “child and dependent care credit” is refundable for 2021. The amount of qualifying expenses taken into account for the credit is increased from $3,000 to $8,000 if there's one qualifying care recipient and from $6,000 to $16,000 if there are two or more. The maximum percentage of qualifying expenses for which credit is allowed is increased to 50% from 35%; and the phase-down rules, based on AGI, are changed. Note, the amount excludible from income under a dependent care assistance program under Code Sec. 129, was increased to $10,500 (or $7,500 for a married taxpayer filing a separate return). This exclusion will affect the child and dependent care credit. The amount of expenses taken into account for the credit is reduced by any amount excludable from the taxpayer's income under Code Sec. 129. Retroactive plan amendments are allowed to facilitate the increase in the exclusion. However, if the care expenditures do not exceed the credit limits, the credit might be more beneficial than the income exclusion because the credit is refundable this year.
The earned income tax credit (EITC) is also increased in 2021 for taxpayers with no qualifying children. The age restrictions and identification requirements for the qualifying child are also relaxed. Taxpayers may use the greater of their 2019 or 2021 earned income in calculating the credit for 2021 and in 2021, the amount of investment income that a taxpayer can have and still earn the credit was increased. After 2020 there is a broadening of the existing exception to the credit's joint filing requirement under which separated married people eligible to file jointly are allowed the credit even if they don't file jointly.
For 2021 and 2022, the health care premium assistance credit will be available for a larger percentage of insurance premiums. Individuals whose income is greater than 400% of the poverty line will no longer be barred from the credit. For 2020, individuals who were provided advances of the credit under the Patient Protection and Affordable Care Act in excess of the credits to which they are entitled aren't obligated to pay back the excess. And, notwithstanding any other rules, individuals who receive unemployment compensation during 2021 are eligible for the credit
Unemployment benefits up to $10,200 can be exclude from gross income for 2020 if the taxpayers has modified AGI less than $150,000. The exclusion is available to each spouse if a joint return is filed. For taxpayers who already filed 2020 returns and did not exclude unemployment benefits, IRS said that taxpayers shouldn't file an amended return and that additional guidance will be provided.
Beginning in 2021 and continuing through 2025, the forgiveness of many types of loans for post-high school education won't result in income inclusion for the forgiven amounts.
Businesses Impacts
Benefits
The paid sick leave and family leave credits are extended to apply to wages paid through September 30, 2021 (instead of March 31, 2021) with a number of changes to the credit calculations. During the two-quarter extension period the credits are applied against the employer Medicare portion of payroll taxes instead of the OASDI (Social Security) portion. The Medicare taxes taken into account are those for all employees, not just employees to whom qualifying leave wages are paid. The credits continue to be refundable. Once the Medicare tax is covered, the remaining leave credit can be applied against any employment taxes, including income tax withholdings, for the quarter in which eligible leave wages are being paid. Any remaining credits will be refundable at the end of the quarter. The allowable credit can be increased by both the amount of the OASDI taxes paid and Medicare taxes paid with respect to eligible leave wages, instead of just the Medicare taxes.
The no-double-benefit rule, which disallows claiming both leave credits and certain other income and payroll tax credits was expanded. Rules are also provided that coordinate the leave credits with second draw Payroll Protection Program loans and certain government grants. An employer is ineligible for the leave credits if, in providing paid leave, the employer discriminates in favor of highly compensated or full-time employees or on the basis of employment tenure. ARPA reset the leave bank at March 31, 2021. It allows employers who voluntarily provide 80 hours of emergency paid sick leave and 12 weeks of emergency family leave beginning after March 31, 2021 to claim the leave credits regardless of whether the employee used leave previously or has exhausted leave. The bad news is the IRS is allowed an extended limitation-on-assessment period for deficiencies due to claiming either of the leave credits.
The employee retention credit is extended to apply to wages paid before January 1, 2022 (instead of July 1, 2021). As a general rule there is a maximum per employee credit for 2021 of $28,000 ($10,000 of wages taken into account per quarter multiplied by the credit rate of 70%). However, for the last two calendar quarters of 2021 there is allowed a maximum $50,000 credit per quarter to certain small start-up businesses under relaxed eligibility rules. This change allows a limited credit to some businesses that couldn't qualify for the credit at all because they can't meet either the full/partial suspension or 20% drop-in-gross-receipts requirements. In addition, during those two quarters certain distressed businesses will be able to treat all wages as eligible (up to the $10,000 per employee per quarter limit), enabling employers with more than 500 employees, who can ordinarily treat only wages paid to laid-off workers as eligible, to treat any wages as eligible. The application of the credit is the same as for the leave credits as aforementioned. Under related rules, the relieved amounts aren't included in the income of the individuals and there is imposed by the Internal Revenue Code a penalty on individuals that fail to report the end of their eligibility.
“Self-employment” sick and family leave credits, which are creditable against the income tax, have likewise been extended to apply to eligible days through September 30, 2021 (instead of March 31, 2021). Both credits treat as reasons for eligible leave the obtaining of or recovering from Covid-19 immunization. And, for the family leave credit, reasons for eligible leave are expanded to include all qualifying reasons for taking sick leave. In determining whether the 10-day per tax year limit for the sick leave credit is complied with, only days after March 31, 2021, are taken into account thus restarting the count which may increase the cumulative number of eligible days in 2021. Likewise, the family leave credit maximum number of eligible days per tax year is increased from 50 to 60, again with only days after March 31, 2021 taken into account.
ARPA provides favorable tax consequences for targeted Economic Injury Disaster Loan (EIDL) advances made by the SBA under the Economic Aid to Hard-hit Small Businesses, Non-Profits and Venues Act. It clarifies that the advances aren't included in income and the income exclusion doesn't result in deduction disallowances, denial of basis increases or reduction of other tax attributes. The same treatment applies to SBA Restaurant Revitalization Grants.
ARPA relaxes some funding standards and other IRC or ERISA rules for multiple employer pension plans. For single employer plans, IRC or ERISA rules are relaxed for amortizing funding shortfalls and the pension funding stabilization percentages are changed. Also changed are the special rules that apply to community newspaper plans.
Revenue Raisers
The disallowance of excess business losses is extended to run another year through 2026 instead of 2025. In addition, for tax years beginning after calendar year 2026, the $1 million annual cap on the deductibility of remuneration paid to certain categories of employees of publicly held corporations is expanded to include as a new category the five highest compensated employees not included in other categories.
ARPA tightens the de minimis exception to tax reporting by third party settlement organizations (TPSOs, e.g., PayPal) by excluding from reporting only transactions that don't exceed $600 (and eliminating the 200-transaction threshold). ARPA also clarified that TPSO reporting obligations are limited to transactions involving goods and services.
Summary
The ARPA legislation did provide additional short-term stimulus but is also an indication of higher taxes forthcoming with the included revenue raisers. Families with children are the big benefactors of ARPA. Businesses received payroll credit incentives to help relieve the pandemic’s economic impact. The stimulus business credits are complex. Time should be taken to analyze the impact of these provisions. Be ready for more new tax laws in 2021 and future years to pay for the stimulus and the other agendas of the new administration.