Signed into law on March 11, 2021, the American Rescue Plan Act of 2021 (ARPA) will amount to an estimated $1.9T, spanning a wide range of relief from $350B set aside for state and local government support, $90B to various transportation and infrastructure programs, $170B for schools to update their capabilities for the pandemic environment, and nearly $85B for various coronavirus testing, contact tracing, and vaccination efforts. Here are some notable tax related provisions included in the ARPA:
Individual Related Provisions:
Recovery Rebate Credit Provides individuals with a $1,400 recovery rebate credit ($2,800 for married taxpayers filing jointly) plus $1,400 for each dependent for 2021. As with the two recovery rebates enacted in 2020, the IRS will make advance payments. The recovery rebate credit phases out for taxpayers with adjusted gross income (AGI) over $150,000 for married taxpayers filing jointly, $112,500 for heads of household, and $75,000 for others. The credit is completely phased out (reduced to zero) for taxpayers with AGI of over $160,000 for married taxpayers filing jointly, $120,000 for heads of household, and $80,000 for others.
Unemployment Benefits Retroactively makes the first $10,200 in unemployment benefits tax-free in 2020 for households making less than $150,000 per year. The same $150,000 limit applies to returns filed jointly, as head of household, or with single status. However, in the case of a joint return, the $10,200 exclusion applies separately to each spouse.
Also extends many of the unemployment programs that were set to expire on March 14, 2021 and continues the additional $300/week in federal unemployment benefits through September 6 2021.
Child Tax Credits For tax year 2021, expands the child tax credit to $3,000 (from $2,000) for each child aged 6 to 17. Children 5 and younger would be eligible for $3,600. The increased credit amount phases out for taxpayers with income over $150,000 for married taxpayers filing jointly, $112,500 for heads of household, and $75,000 for others.
The IRS is directed to estimate taxpayers’ child tax credit amounts and pay monthly in advance one-twelfth of the annual estimated amount. Payments will run from July through December 2021. The IRS must set up an online portal to allow taxpayers to opt out of advance payments or provide information that would be relevant to modifying the amount.
Child and Dependent Care Tax Credits For tax year 2021, increases the child and dependent care tax credit which currently covers up to 35% (quickly phased down to a 20% floor) of care expenses up to $3,000 for one dependent or $6,000 for two or more dependents. The provision would make the credit refundable, increases the maximum allowable expenses to $8,000 for one dependent and $16,000 for two or more, and allows the credit to cover up to 50% of expenses (subject to partial or even complete phase out at varying AGI levels).
Business Related Provisions:
Paycheck Protection Program (PPP) Allocates an additional $7.25B towards PPP funding, and makes more not-for-profits eligible for the PPP by creating a new category called “additional covered nonprofit entity,” which are not-for-profits listed in Sec. 501(c) of the Internal Revenue Code other than 501(c)(3), 501(c)(4), 501(c)(6), or 501(c)(19) organizations. The application period has not been extended and remains March 31, 2021.
Employee Retention Credits (ERC) Extends the ERC from June 30, 2021 until December 31, 2021 and continues the ERC rate of credit at 70% for this extended period of time. It also continues to allow for up to $10,000 in qualified wages for any calendar quarter. Taking into account the CAA extension and the ARPA extension, this means an employer could potentially have up to $40,000 in qualified wages per employee through 2021.
Paid Sick and Family Leave Tax Credits Extends the tax credits for employer-provided paid sick and family leave established under the Families First Coronavirus Response Act (FFCRA) through September 30, 2021. The provision would also increase the wages covered by the paid family leave credit to $12,000 per employee (from $10,000) and cover as many as 60 days of paid family leave for self-employed individuals (from 50). The limitation on the overall number of days taken into account for paid sick leave will reset after March 31, 2021.
Targeted Economic Injury Disaster Loan Advances Eligible small businesses may receive targeted economic injury disaster loan (EIDL) advances from the Small Business Administration. Eligibility for the program include businesses that have 300 or fewer employees, are located in federally identified low-income communities and can demonstrate a reduction in revenue of more than 30% during an 8- week period beginning on March 2, 2020 or later.
Restaurant Revitalization Grants Restaurants and similar businesses in the food and beverage industry may be eligible to receive a restaurant revitalization grant from the Small Business Administration. The amount an eligible business can receive is equal to their pandemic-related revenue loss. The pandemic-related revenue loss is the difference between their 2020 gross receipts and their 2019 gross receipts.
Employer-Provided Dependent Care Assistance An eligible employee’s gross income generally doesn’t include amounts paid or incurred by an employer for dependent care assistance provided to the employee under a qualified dependent care assistance program (DCAP).
For tax year 2021, the exclusion for employer-provided dependent care assistance is increased to $10,500 (from $5,000), and to $5,250 (from $2,500) in the case of a separate return filed by a married individual.
COBRA Premium Subsidy Assistance-eligible individuals (AEIs) may receive a 100% subsidy for COBRA premiums for any period of COBRA coverage during the period beginning on April 1, 2021 and ending on September 30, 2021. An AEI is a COBRA qualified beneficiary (i.e., employee, former employee, covered spouse, or covered dependent) who, with respect to a period of coverage during the period beginning on April 1, 2021, and ending on September 30, 2021, is eligible for and elects COBRA coverage due to a qualifying event of involuntary termination of employment or reduction of hours.