On March 10th Congress passed the $1.9 trillion coronavirus relief known as The American Rescue Plan Act of 2021 (“the Act”), by a 220-211 vote after the passage of the Act on March 6th by the Senate. The Act was swiftly signed by the President, providing long-discussed relief provisions, with many tax law changes included. Details of some key provisions within the Act are discussed below.
Individual Recovery Rebate/Credit
The Act includes a third round of stimulus payments that will total $1,400 per eligible individual taxpayer. In order to qualify for the full amount, a single filer must have an Adjusted Gross Income (“AGI”) of $75,000 or lower, with the threshold increasing to $112,500 for heads of household, and $150,000 for couples married filing jointly. The payments will phase out completely when the AGI reaches $80,000 for single filers, $120,000 for heads of households, and $160,000 for couples married filing jointly. Payments will follow the same methodology as the prior two rounds of stimulus checks, with payments deposited directly into a taxpayers’ bank accounts if the Internal Revenue Service (“IRS”) has their direct deposit information on file, or mailed to the address the IRS has on file.
College students and other eligible dependents are eligible for this third stimulus, with payments paid directly to the parents.
The stimulus payment eligibility factors will be based on the most recent year’s tax information on record, meaning if your 2020 returns have already been filed the IRS will base eligibility on 2020, if you have not filed eligibility will be based on your 2019 information.
As was the case with the previous stimulus payments, if an eligible taxpayer is entitled to an amount larger than he or she receives, a credit for the excess will be available on the taxpayer’s 2021 individual income tax return, due on April 15, 2022. Amounts received that are higher than the allowable credit calculated on the 2021 individual income tax return will not have to be repaid.
Also included in the Act is an extension of the additional $300 per week in unemployment benefits, through September 6, 2021, and an exclusion from tax of up to $10,200 in unemployment compensation received during the 2020 tax year. This exclusion is limited to individuals with an AGI of less than $150,000. Taxpayers who qualify for this exclusion but have already filed their individual income tax returns may amend their returns in order to claim the exclusion and receive a refund of any taxes already paid.
Earned Income Tax Credit
The Act modifies the earned income tax credit (EITC), and increases the amount of the credit for the 2021 tax year. For filers without children, the credit is increased from $543 to $1,502, and the income limit at which the full credit can be claimed is increased to $9,820. The threshold for the phaseout of the credit for non-joint filers is also increased to $11,610, up from $8,880. The minimum age for filers without children claiming the EITC is reduced to 19 from 25 (except in the case of full-time students).
Taxpayers will be allowed to use their 2019 earned income amount instead of their 2021 earned income earned income amount if it is greater than 2021.
Other changes made that are permanent include eliminating the disallowance of the EITC due to lack of identification requirements; increasing disqualifying investment income to $10,000, adjusted for inflation after 2021; and adjusting the definition of “married” so that separated individuals who meet certain requirements can avoid filing jointly with an ex-spouse in order to claim the EITC.
Child and Dependent Tax Credits and Other Benefits
Another key provision in the Act is the modification of the Child and Dependent Care tax credit for qualifying taxpayers who have children under the age of 13 or other qualifying dependents. The Act modifies this credit so that it is fully refundable for tax years beginning in 2021, which could provide qualifying families with an additional tax refund. The maximum credit is up to $4,000 per qualifying individual, or $8,000 for two or more for tax years beginning in 2021. Taxpayers calculate the credit by taking up to 50% of the value of eligible expenses, subject to a phaseout to the extent the taxpayer’s AGI exceeds $125,000.
The Act also increases the Child Tax Credit for 2021 to $3,000 (up from $2,000) per eligible child and raises the age limit of qualifying children to 17. Married couples who have modified AGI up to $150,000, heads of the household up to $112,500, and single filers up to $75,000, would receive the full value of the credit. The credit then phases out as income increases. The Act makes this credit fully refundable.
In addition to these changes, the Act allows for an increase in the amount that can be set aside in a dependent care flexible spending account. The amount is increased from $5,000 to $10,500 for the 2021 year only. Note that employers have the discretion to allow this change, and therefore withholdings cannot be modified without employer consent. More guidance on this is expected in the near future.
Student Loan Forgiveness
The Act does not forgive any student loan debt, but it does pave the way for potential future forgiveness. The Act modifies the Internal Revenue Code to specify that any student loan forgiveness between December 31, 2020 and January 1, 2026 will not be taxable and amounts forgiven will not be included in the computation of a taxpayer’s AGI.
Employee Retention Credit
The Act codifies the Employee Retention Credit (“ERC”) and extends the ERC through December 31, 2021. The ERC was originally enacted under the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act passed in March of 2020, and extended through the Consolidated Appropriations Act (“CAA”) passed in December of 2020. Eligible employers are entitled to a credit in an amount equal to 70% of the first $10,000 wages per employee for each qualifying quarter in 2021. This means that an employer could potentially have up to $40,000 in qualifying wages, per employee, during tax year 2021.
Families First Coronavirus Response Act (“FFCRA”)
The FFCRA was established to establish mandatory obligations for employers to provide emergency paid sick and family leave. The FFCRA expired on December 31, 2020 but was temporarily extended through the CAA permitting employers to implement policies that would provide paid leave as a qualifying requirement of eligibility for a credit against payroll tax. This modification was set to be available until March 31, 2021. The current Act extends the tax credits for sick and family leave to September 30, 2021. The Act also adds additional reasons that employees qualify for paid sick leave and family leave including vaccine appointments and complications that may arise due to receiving the vaccine. Additionally, the Act resets the 80-hour per employee limit after March 31, 2020, and increases the limit on the credit for paid family leave to $12,000. Federal workers are now eligible for up to 15 weeks of paid leave for COVID-19-related absences for themselves and their families under the Act. Self-employed individuals are also permitted an increase from 50 days to 60 days of qualifying family leave absences.
Paycheck Protection Program
The Act further modifies the Paycheck Protection Program to include additional eligible organizations. Specifically, the following types of businesses are now eligible for PPP loans:
- Certain 501(c) organizations with up to 500 employees per location.
- Certain nonprofit organizations with no more than 300 employees and either less than 15% of receipts or activities resulting from lobbying or whose cost of lobbying activities did not exceed $1 million in the tax year before February 15, 2020.
- Certain internet publishing organizations with a NAICS code of 519130, who have not more than 500 employees, and who will use the loans to support expenses related to supporting local or regional news.
The Act also adds $7.25 billion of funding for the PPP program but does not extend the period in which loans can be approved, which currently ends March 31, 2021.
Restaurant Revitalization Grants
Certain businesses, including restaurants, food stands, food trucks, food carts, caterers, saloons, inns, taverns, bars, lounges, brewpubs, tasting rooms, taprooms, licensed alcohol production facilities where visitors may taste, sample, or purchase products, or other similar businesses may now be eligible for a Restaurant Revitalization Grant. These businesses must have no more than 20 locations and cannot apply for a Shuttered Venue Operator Grant.
Grants, up to $10 million per business and up to $5 million per physical location will be calculated based on the difference in gross receipts between 2019 and 2020. Any relief received under the Paycheck Protection Program will be used in the gross receipts calculation, thus reducing the amount of the grant. Grant funds can be used for payroll costs (except those payroll costs used to obtain an Employee Retention Credit), mortgage payments, rent, utilities, and certain maintenance, supplies, food and beverage, supplier, or other operational expenses. Applicants must certify that economic uncertainty makes the grant request necessary to support the ongoing operations of the eligible entity.
Shuttered Venue Operator Grants
While the Shuttered Venue Operator Grant program, introduced in the Economic Aid Act portion of the Consolidated Appropriations Act, 2021, has not opened for applications, guidance continues to evolve. Earlier this month, additional frequently asked questions and guidance, were released by SBA.
Now, the American Rescue Plan Act of 2021 expands the Shuttered Venue Operator Grant program to eligible businesses who apply for or receive a Paycheck Protection Program loan. The amount of the Shuttered Venue Operator Grant will be reduced by the amount of the Paycheck Protection Program loan.
These are just some of the provisions included in the American Rescue Plan Act of 2021. HBK will continue to bring you in-depth analysis as additional information becomes available. If you have any questions please contact your HBK Advisor.