President Biden signed the American Rescue Plan Act (the Act) on March 11, 2021, providing $1.9 trillion in COVID-19 relief funds. Provisions within the legislation target individuals and businesses most impacted by the pandemic by rejuvenating programs such as the Paycheck Protection Program (PPP) and expanding benefits such as tax credits and advance payment of recovery rebates. This article highlights portions of the legislation grouped by whether they impact individuals or businesses.
Provisions Impacting Individuals
2020 tax changes: Two changes under the Act apply retroactively to 2020. First, the Act makes up to $10,200 of unemployment compensation non-taxable. Second, for 2020 only, if an individual received an advance premium tax credit when purchasing health insurance through a public exchange, any of the advance that exceeds the individual’s actual credit is not added to the individual’s tax. If you have already filed your 2020 tax return and either of these provisions will help you, you can amend your return using Form 1040X.
Recovery rebates: For individuals, the greatest economic impact of the Act comes in the form of advance payment of recovery rebates. Many taxpayers received similar rebates during 2020. However, this round comes with a significant increase in the amount taxpayers will receive. The rebate provides a $1,400 credit per individual ($2,800 for married taxpayers filing jointly) plus $1,400 for each dependent in 2021.
The rebate credit phases out for taxpayers with adjusted gross income (AGI) over $75,000 ($150,000 for married filing jointly). The IRS will use the 2019 AGI to determine eligibility unless the taxpayer already filed a 2020 return.
Child tax credit: For 2021 only, the Act increases the child tax credit from $2,000 to $3,000 and makes the credit fully refundable. The credit for a child under age six is $3,600. The credit increase is phased out for single filers with AGI over $75,000 and for joint filers with AGI over $150,000. The Act also increases the maximum age for a child to qualify for the credit from 16 to 17.
From July 2021 through December 2021, the IRS will make advance payments of the child tax credit to taxpayers it determines are eligible. The IRS will determine eligibility using a taxpayer’s 2019 or 2020 tax return. The advance payments will be based on half of taxpayers’ estimated credit, and taxpayers will claim any remaining credit on their 2021 tax returns.
Dependent care credit: Another one-year benefit for working taxpayers with dependents is a significant increase in the dependent care credit. The Act increases both the amount of dependent care expenses that qualify for the credit and the credit percentage so that the maximum credit amount is increased to $4,000 for one dependent or $8,000 for more than one dependent. The Act also makes the dependent care credit fully refundable. Employees whose employer maintains a dependent care plan may contribute up to $10,500 to the plan tax-free.
Earned income credit: For individuals without qualifying children, the Act increases eligibility for the earned income credit by eliminating the maximum age and reducing the minimum age to 19. The Act also reduced phaseouts for the credit and increased the amount of investment income that an individual can receive and qualify for the credit.
Unemployment: Many who have lost jobs due to the pandemic can breathe easier as the Act extends and expands expiring unemployment insurance benefits through Labor Day of 2021. The government will provide unemployment benefit recipients an additional $300 per week.
COBRA: Individuals eligible for COBRA continuation coverage between the enactment of the American Rescue Plan and September 21, 2021, can receive COBRA continuation coverage premium assistance and a refundable tax credit against the Medicare tax, which the IRS may provide as an advance payment to taxpayers. The credit applies to premiums and wages paid after April 1, 2021.
Continuation coverage premium assistance cannot be included in the recipient’s gross income, and those who receive the credit may not claim the health coverage tax credit.
Provisions Impacting Businesses
PPP loans: The ever-popular Paycheck Protection Program (PPP) received an additional $7.25 billion for forgivable loans. The provision expands eligibility to online news and periodical publishers and makes all non-profit organizations with fewer than 300 employees that do not engage in significant lobbying activity eligible for the program.
Employee retention credits: Businesses who pay qualified wages to employees can now claim the employee retention credit through the end of 2021.
Families First Employer Relief Act tax credits: The American Rescue Plan Act extends Families First employer tax credits through September 30, 2021. The Act expands eligible reasons for sick leave and emergency FMLA leave. Eligible leave days now include time for employees to receive the COVID-19 vaccination and/or recover from vaccination side effects or injuries and leave days to seek or await qualified COVID-19 testing results.
New non-discrimination rules in the Act disallow the tax credits for any employer who favors highly compensated, full-time, or tenured employees.
In addition, the Act removes the two-week waiting period for emergency FMLA leave and allows employers to receive credit for up to $12,000. Also, the limit on the overall number of days taken for paid sick leave resets after March 31, 2021.
Targeted EIDL advance grants: The SBA provides Targeted EIDL advance grants to businesses with 300 or fewer employees located in low-income communities that have suffered an economic loss of more than 30%. The Act extends and expands the program, providing an additional $15 billion in funds. The SBA has advised that it will contact eligible grant recipients by email to provide application instructions. While there are no proactive steps that a business can take to apply for a grant, the SBA noted that businesses that may qualify should be sure that their 2019 income tax returns have been filed.
Restaurant Revitalization Fund (RRF): The RRF seeks to restore businesses in the food services sector, an industry that suffered greatly because of government mandated shutdowns. The Act provides $25 billion toward direct grants to businesses where customers gather for the primary purpose of purchasing food or drink.
The Act provides grants up to $10 million per entity or $5 million per physical location with a 20-location limit. The pandemic-related revenue loss determines the grant amount. Companies subtract 2020 revenue from 2019 revenue to calculate the loss.
Applications from restaurants owned and operated or controlled by women, veterans, or socially and economically disadvantaged individuals will receive priority during the first 21 days of the grants. The plan also reserves $5 billion to distribute to eligible applicants with 2019 gross receipts of $500,000 or less.
As with previous legislation intended to relieve the economic impacts of COVID-19, businesses and individuals should stay aware of the options that become available to them through the American Rescue Plan Act and determine how to proceed. Our team can provide advice and answer any questions you may have. Contact us today to discuss your next steps.
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Our firm provides the information in this article for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal or other competent advisors. Before making any decision or taking any action, you should consult a professional advisor who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this blog are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability and fitness for a particular purpose.