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Tax Provisions of the American Rescue Plan Act

March 15, 2021
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On March 11, 2021, President Biden signed into law the American Rescue Plan Act (ARPA). This article addresses the income tax provisions that are important now.

PARTIAL EXCLUSION FOR UNEMPLOYMENT INCOME RECEIVED IN 2020

Under current law, gross income includes unemployment compensation received by an individual. The ARPA provides for a limited exclusion from income for any tax year beginning in 2020. The exclusion is $10,200, but it is subject to certain adjusted gross income (AGI) limitations.

Any taxpayer can exclude up to $10,200 of unemployment compensation for any tax year beginning in 2020; but, only if their AGI is less than $150,000. This threshold is a cliff, there is no phase-out based on AGI. Therefore, if an individual’s AGI is $150,000 or more, all of the individual’s unemployment compensation would be included in gross income.

Further, the AGI threshold applies across the board to the array of possible filers such as joint, head of household, or single: there is no distinction as typically is the case.

However, the exclusion applies to each taxpayer. Therefore, in the case of a joint return, the $10,200 exclusion applies separately to each spouse. AGI is determined after various enumerated exclusions and deductions. Also, it is determined without regard to the inclusion of unemployment compensation in gross income.

As just announced on March 13,2021, for those who received unemployment benefits last year and have already filed their 2020 income tax return, the IRS emphasizes they should not file an amended return at this time, until the IRS issues additional guidance.

2021 RECOVERY REBATES TO INDIVIDUALS

Another round of stimulus checks are provided by ARPA. The new law provides for a $1,400 refundable tax credit to eligible individuals ($2,800 for joint filers). In addition, ARPA provides for an additional refundable tax credit of $1,400 for each dependent (including a qualifying child and qualifying relative).

An eligible individual does not include a nonresident alien, or an individual who is a dependent of another taxpayer for the tax year (whether or not actually claimed as such). An estate or a trust is not eligible for the credit.

There is a ratable phase-out of the credits for AGI in between the limitation threshold and the complete phase-out threshold. Once the AGI exceeds the complete phase-out threshold the credit is zero.

The AGI limitation thresholds and complete phase-out thresholds are as follows:

  • Joint return - Over $150,000 to over $160,000
  • Head of Household - Over $112,500 to over $120,000; and
  • All other taxpayers – Over $75,000 to over $80,000

The credit will be paid out in advance like the two previous stimulus payments. For this purpose, the IRS will utilize the most recent amount of adjusted gross income in its system, be it 2020 or 2019. If an individual is entitled to a larger payment as based actual 2021 income, the difference can be claimed as a credit on the individual’s 2021 tax return. But, one need not pay back any of the advance payment received if actual 2021 income results in a lesser credit. An individual who has higher AGI in 2020 than in 2019, may want to hold off filing their 2020 return, so they can receive the higher credit based upon their 2019 AGI. Also, an individual, who only became an eligible individual in 2021 (such as a child who is no longer a dependent of their parents), will be able to take a credit when filing their 2021 returns. 

The IRS will attempt to refund the overpayment as rapidly as possible. They will try to make the payments electronically. No interest will be paid on any overpayment. 

EMPLOYER TAX RELIEF
EMPLOYEE RETENTION CREDIT (ERC) EXTENDED THROUGH 2021

The ERC was scheduled to expire on June 30, 2021; it has now been extended through December 2021. The credit percentage remains at 70% of the qualified wages with respect to each employee of an eligible employer for the calendar quarter. The amount of qualified wages shall not exceed $10,000, resulting in a maximum credit of $28,000 per employee for 2021.

In the case of a recovery start up business, the credit for any calendar quarter shall not exceed $50,000. A recovery start up business means any employer:

  • That began business after February 15, 2020, and
  • Has average annual gross receipts less than $1,000,000. Aggregation rules apply in such determination.

An eligible employer includes those whose operations are fully or partially suspended due to orders from an appropriate government authority as a result of COVID-19. This requires a subjective analysis that extends beyond the scope of this article. Also, an eligible employer includes organizations that can establish that gross receipts for a calendar quarter are less than 80% of the gross receipts of the employer for the same calendar quarter in 2019.

The credit is limited to employment taxes on the wages paid with respect to all employees of the eligible employer for such calendar quarter. However, any excess credit shall be treated as an overpayment that shall be refunded. The credit is increased by the proportionate share of an employer’s health costs related to the qualified wages.

Employers with more than 500 full-time employees are limited to taking the credit essentially for paid time off to employees not providing services. ARPA relaxes this rule as applicable to severely financially distressed employers. The ERC applies to all wages paid to employees up to the applicable $10,000 per employee, per quarter limit. The term severely financially distressed employer is determined by substituting 10% for 80% regarding the above stated gross receipts test regarding an eligible employer. The wages that were paid from the proceeds of a PPP loan cannot be also taken into account for the ERC. 

The credit can be taken against the employer portion of the Medicare tax.

PAYROLL CREDITS FOR PAID SICK AND FAMILY LEAVE

Payroll credits initially established by the Families First Coronavirus Response Act are extended beginning April 1, 2021 through September 30, 2021. Eligible wages are increased to $12,000 from $10,000. The obligation to provide paid sick and family leave is no longer mandatory in 2021. Instead, employers may voluntarily pay for these types of leave. The overall limitation in number of days (10 days) taken into account is reset for the extended credits. After March 31, 2021 a new 10 day period is available.

ARPA establishes nondiscrimination requirements regarding highly compensated employees, full-time employees, or employees as based upon tenure with the employer.

Penalties for failure to deposit employment taxes are to be waived if due to anticipation of the credit. Eligible leave is expanded to time taken to seek or await COVID-19 diagnostic testing or receive or recover from a COVID-19 vaccine. The credit allowed is increased by the amount of FICA taxes imposed on qualified sick or family leave wages for which the credit is allowed. However, the credit increase cannot produce a double benefit.

The credit is further expanded to pension contributions related to the qualifying sick or family leave wages. ARPA also provides that employers cannot “double dip” by taking credit for payroll costs that have been subject to PPP loan forgiveness.

OTHER INCOME TAX PROVISIONS

There are other significant ARPA income tax provisions affecting 2021 and subsequent tax years:

  • The exclusion for employer-provided dependent care assistance is increased from $5,000 to $10,500 (from $2,500 to $5,250 for married separate filers).
  • A public corporation’s compensation deduction for salary paid to a covered employee is limited to $1 million. For tax years that begin after December 31, 2026, ARPA expands the definition of a covered employee to the eight other highest-paid employees rather than the three other highest-paid employees, as under current law.
  • Under ARPA, for tax year 2021, the child tax credit is temporarily expanded as to amount and eligibility. Significantly, the current $2,000 per qualifying child credit is expanded to $3,000 per child ($3,600 for children under the age of 6).
  • ARPA excludes certain discharges of student loans from gross income. This is effective for student loans made after December 31, 2020 and before January 1, 2026.
  • The election to allocate interest expense of members of a worldwide affiliated group on a worldwide basis is repealed effective for taxable years beginning after December 31, 2020.
  • The limitation on excess business losses for individuals is extended for another year (through 2026).