President Biden signs American Rescue Plan Act of 2021
$1.9 trillion relief and stimulus package includes key tax changes
TAX ALERT |
Authored by RSM US LLP
American Rescue Plan Act of 2021 becomes law
The $1.9 trillion relief and stimulus package known as The American Rescue Plan Act of 2021 was signed into law by President Joe Biden on Thursday, March 11, a day after Senate amendments were passed by the House of Representatives.
The legislation provides funding for coronavirus-related relief to millions of families, state and local governments, small businesses and exempt organizations, schools, infrastructure initiatives, public transportation entities, cybersecurity measures and more. The primary purpose of the act is relief and recovery from the public health and economic crises, and it includes several tax provisions worth discussing with those objectives in mind.
This alert provides a broad overview of the major components of coronavirus-related funding made available by the Act and tax law changes associated with the relief.
Recovery Rebates to individuals
The Act provides for a refundable tax credit of $1,400 to each eligible adult individual ($2,800 in the case of most married couples) and an additional $1,400 for each dependent as defined for tax purposes. The credits phase out in ranges of income that vary by filing status, while the highest range is $160,000 for married joint filers. The credit will be paid out in advance like the Economic Impact Payments under the CARES Act and the 2020 Tax Relief Act. The Congressional Research Service estimates that these payments—also known economic impact payments, recovery rebates or stimulus checks—will go to 145.4 million households and total approximately $380 billion.
Paycheck Protection Program (PPP) modifications
The Act appropriates an additional $7.25 billion to the Small Business Administration for purposes of carrying out the PPP. In addition, it expands the organizations and entities eligible to receive PPP loans. However, the Act does not appear to extend the March 31, 2021, program deadline.
Expansion of Paycheck Protection Program (PPP) for nonprofit organizations
The Act expands PPP eligibility in two ways for nonprofit organizations. First, all organizations described in section 501(c), except for organizations described in section 501(c)(4), are eligible to receive PPP loans if they otherwise meet the eligibility criteria. Second, certain nonprofit organizations qualify for a per-physical-location employee threshold, which permits an organization with more than one physical location to qualify for PPP provided that the employee threshold is not exceeded on a per-physical-location basis.
Per-physical-location employee threshold
Lobbying income = 15% of gross receipts
Lobbying activities = 15% of total activities
Lobbying expenses = $1,000,000
|All other 501(c)|
(other than 501(c)(4)
Additional PPP expansion
The Act also expands PPP eligibility to certain internet publishing organizations that are assigned a NAICS code of 519130, certify in good faith as an internet-only news publisher or periodical publisher, and are engaged in the collection and distribution of local or regional national news and information.
Shuttered Venue Operator Grants (SVOG)
The Act appropriates an additional $1.25 billion to the SBA to carry out the SVOG program, of which $500,000 is restricted to provide technical assistance to help applicants access the System for Award Management (SAM), a successor, or an alternative grant application system.
The Act removes the limitation that SVOG recipients are ineligible to receive PPP loans after Dec. 27, 2020. Prior to this change, potential SVOG applicants needed to decide between the two programs. As a result of this modification, any PPP funds awarded after Dec. 27, 2020, to an SVOG applicant will simply reduce the amount of SVOG grant dollars the applicant may receive.
Restaurant revitalization grants
Restaurants also finally got relief they have been asking for. The Act establishes a new grant program—the restaurant revitalization fund containing $28.6 billion in available funds. An eligible entity can receive a grant that is equal to the amount of the pandemic-related revenue loss of the entity, which is defined as the gross receipts of the eligible entity during 2020 subtracted from the gross receipts of the eligible entity in 2019. There are special rules for (1) an entity that was not in operation for the entirety of 2019, (2) an entity that opened between Jan. 1, 2020, and the date before the date of enactment of the Act, and (3) an entity that has not yet opened but has incurred eligible expenses. Grants are limited to a maximum of $10 million, with an additional limit of $5 million per physical location of the eligible entity. The provision reduces eligibility for any amounts received from a covered loan made under the 2020 or 2021 PPP.
Eligible entities include an expansive list, including restaurants, food stands, food trucks, food carts, caterers, saloons, inns, taverns, bars, lounges, brewpubs, tasting rooms, taprooms, certain breweries, wineries, distilleries or other similar places of business in which the public or patrons assemble for the primary purpose of being served food or drink. Also included are entities located in an airport terminal or one that is a Tribally-owned concern.
Excluded entities are state or local government-operated businesses; businesses that, as of March 13, 2020, owned or operated (together with any affiliated businesses) more than 20 locations, regardless of whether those locations do business under the same or multiple names; entities that have a pending application for or have received a SVOG; or publicly-traded companies.
$5 billion of the grants are to go to entities with gross receipts during 2019 of not more than $500,000, and the remainder will be awarded by the SBA in an equitable manner to eligible entities of different sizes based on annual gross receipts.
Grants can be used for payroll costs, payments of principal or interest on any mortgage obligation, rent payments, utilities, maintenance expenses, supplies, food and beverage expenses, covered supplier costs, operational expenses, paid sick leave, or any other expenses that the SBA deems essential to maintaining the eligible entity.
During the initial 21-day period for awarding grants, the SBA is to prioritize grants to small business concerns owned and controlled by women, veterans, or socially and economically disadvantaged small business concerns.
Economic Injury Disaster Loans (EIDL) and similar funding
The Act provides additional recovery funding for targeted EIDL advances in the amount of $15 billion, to remain available for targeted advances until expended. $10 billion is appropriated for entities covered under the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act) and $5 billion for certain entities covered under the EIDL advances of the CARES Act.
Exemptions from taxation and other tax provisions
As with prior COVID-19 relief packages, Congress has provided exceptions to the taxation of various recovery programs. Under the Act, Congress suspends the taxation of up to $10,200 of unemployment compensation for a taxable year beginning in 2020 if the adjusted gross income of the taxpayer for that year is less than $150,000.
Exempted from taxation under this bill are EIDL advances issued as part of the Economic Aid Act. The Act further provides that no deduction is to be denied, no tax attribute is to be reduced, and no basis increase denied due to the exemption from gross income. Similar income tax treatment is provided for the restaurant revitalization grants that will be issued as part of the Act.
Although the Act does not currently offer any student loan forgiveness, it does introduce a gross income exclusion provision. Specifically, the forgiveness of student loans from Jan. 1, 2021, through Dec. 31, 2025, generally does not result in taxable income. This exclusion applies to loans expressly provided for postsecondary educational expenses and does not apply to discharges resulting from the provision of services to the educational organization or the lender.
Employee Retention Credit
The Act extends the employee retention credit (ERC) to Dec. 31, 2021, with certain changes.
A large employer that is severely financially distressed (more than a 90% decline in gross receipts) can use the small employer “all employee wages” rule in determining the credit.
A “Recovery Startup Business” provision allows “a company that began carrying on a trade or business after Feb. 15, 2020,” that is not otherwise eligible for the ERC under the gross receipts or the governmental order test, to receive up to a $50,000 maximum credit per quarter. Two other requirements apply:
- Average annual gross receipts for such employer under section 448(c)(3) for the up to 3 year period before such quarter do not exceed $1 million.
- Only wages up to $10,000 can be counted for the quarter and it appears the $7,000 limit also still applies.
The statute of limitations period for new employee retention credits shall not expire before the date that is five years after the later of two dates: either the date on which the original return is filed, or the date on which the return is treated as filed under section 6501(b)(2) (generally April 15 of the following year for information returns filed during a given year).
Current rules apply through the June 30 period under prior legislation. The rules added in this Act apply for wages paid after June 30, 2021, and before Jan. 1, 2022.
Affordable Care Act premium tax credits
For 2021 and 2022, the premium tax credits available for health insurance purchased on the health insurance marketplace (also known as the exchange) are increased. In addition, eligibility for the credits for those two years is expanded to include individuals with household incomes exceeding 400% of the federal poverty level.
Individuals receiving unemployment benefits in 2021 can qualify for larger premium tax credits for that year.
For 2020, individuals who received advanced premium tax credits in excess of the amount to which they were entitled may not need to repay the excess credits.
Paid sick leave and paid family leave credits
The Act extends tax credits for employer-provided paid sick and family leave established under the Families First Coronavirus Response Act (FFCRA) through Sept. 30, 2021; adds vaccination-related events in the list of eligible leave reasons; and increases the wages covered by the paid family leave credit to $12,000 per worker, from $10,000. The Act also implements a five-year statute of limitations and nondiscrimination rules for the paid leave eligible for the credit.
Similarly, the Act extends tax credits for paid sick and paid family leave to eligible self-employed individuals.
These provisions are effective for April 1, 2021, to Sept. 30, 2021. Note that the mandatory paid leave has not been extended, but the tax credits are available to employers whose paid leave would have fallen under the FFCRA provisions had they still been in effect.
Changes to existing tax law
The 2017 Tax Cuts and Jobs Act enacted provisions preventing noncorporate taxpayers from deducting business losses in excess of $500,000 for joint filers ($250,000 single or married filing separately) against nonbusiness income, wage and/or investment income. The CARES Act in 2020 eliminated this provision for tax years beginning before Dec. 31, 2020. The Act extends the applicability of this provision through tax years beginning before Jan. 1, 2027.
The Act also repeals a provision allowing U.S.-affiliated groups to elect to allocate interest on a worldwide basis. section 864(f) was enacted as part of the American Jobs Creation Act of 2004 and was originally slated to become effective in 2009. Congress, however, delayed the election’s effective date three times, largely because of its cost. section 864(f) was finally scheduled to become effective in 2021, but the Act permanently repeals section 864(f) retroactively before it can ever take effect.
The section 864(f) election would have been relevant for taxpayers in computing the section 904 foreign tax credit limitation, and would likely have been particularly beneficial for taxpayers subject to residual U.S. tax on global intangible low-taxed income (GILTI) due to apportionment of interest expense to the GILTI basket. The election could have generally enhanced the ability of taxpayers to take foreign tax credits, and its repeal will have particular impact on taxpayers with significant debt in offshore subsidiaries.
The Act also expands the exclusion from gross income for employer-provided dependent care assistance from $5,000 to $10,500 (or half that amount for married filing separately) for taxable years beginning during 2021. An employer can amend its plan retroactively to the first day of the plan year as long as it adopts such an amendment by the last day of the year.
In addition, the Act expands the group of covered employees of public companies under section 162(m) to include another five highest-paid employees (seemingly whether officers or not) to the current group of the three highest paid officers and the CEO and CFO. Thus, public companies will be limited to deducting $1 million in compensation to a larger group of employees. The new group of five will be covered employees for the years they are in the highly compensated group, but the law does not include them in the forever-covered provision that applies to the other officers. This provision takes effect for tax years beginning after Dec. 31, 2026.
The Act extends through Sept. 6, 2021, most unemployment provisions originally enacted as part of the CARES Act. Included among these extensions is the unemployment reimbursement for nonprofit and government employers. In addition, from April 1, 2021, through Sept. 6, 2021, the reimbursement rate increases from 50% to 75%.
COBRA premium assistance
Individuals eligible for COBRA continuation coverage under a group health plan due to termination of employment or reduction of hours can have all of their COBRA premium costs covered for the period April 1, 2021, through Sept. 30, 2021. This premium assistance received by individuals is not subject to federal income tax. Premium assistance is not available if the individual is eligible for COBRA due to a voluntary termination of employment.
Individuals eligible for premium assistance can elect to enroll in a different health plan than the one they were enrolled in at the time of the COBRA qualifying event, if certain conditions are met.
COBRA premium assistance is also available to individuals who did not elect COBRA, or who discontinued COBRA before April 1, 2021, if otherwise eligible. In addition, individuals eligible for COBRA premium assistance but who pay COBRA premiums for the applicable periods are entitled to reimbursements for those premiums.
Notices about premium assistance must be provided to individuals, and the government is expected to issue model notices within 45 days of enactment of the Act.
The Act allows the employer maintaining the group health plan to claim a refundable payroll tax credit against its Medicare tax for the amount of the premium assistance. This credit must be coordinated with certain other credits, such as the employee retention credit and the paid sick leave and paid family leave credits. Advanced refunds of the credit and reductions in payroll tax deposits in anticipation of the credit are allowed. Special rules apply for multiemployer plans and for railroad employers.
The Act provides the Pension Benefit Guaranty Corporation with the ability to make direct cash grants (funded by the U.S. Treasury) to those multiemployer pension plans that are the most financially troubled. The Congressional Budget Office estimates the costs of these grants to be more than $85 billion.
Multiemployer pension plans will have the ability to amortize investment losses over 30 years; to delay, temporarily, any requirement to designate the plan as in either endangered, critical or critical and declining status; and plans that are already in critical and endangered status can temporarily extend their funding improvement and rehabilitation periods.
The Act also provides single-employer plan funding relief by extending the amortization periods for funding shortfalls and the pension funding stabilization percentages.
Pandemic relief funding not centered on tax
Several components of the spending package that are not centered on tax issues stand out for the amount of funding they entail and their potential effects on Americans and the economy. They include:
State and local fiscal aid: $350 billion to states, territories, Tribes, and local governments for their response to the pandemic, to offset revenue losses, strengthen economic recovery and provide premium pay for essential workers. Also, $10 billion as part of a new Critical Infrastructure Projects program to help states, territories, and Tribal governments complete capital projects directly enabling work, education, and health monitoring, including remote options, in response to the pandemic.
COVID-19 vaccines and testing: $48.3 billion for testing, contact tracing, personal protective equipment for health workers and enabling mitigation measures sure as isolation and quarantine. Also, $7.5 billion in Centers for Disease Control and Prevention funding for vaccine distribution, and $5.2 billion to the Biomedical Advanced Research and Development Authority to support advanced research, development, manufacturing, production, and the purchase of vaccines.
Health care workforce: $7.66 billion to bolster the size of the public health workforce and its COVID-19 response.
K-12 schools: $125 billion for public K-12 schools to safely reopen for in-person learning, address learning loss, and support students as they work to recover from the long-term impacts of school closures and remote education due to the pandemic.
Higher education: $39.6 billion to colleges and universities and their students. At least half of such funding must be spent on emergency financial aid grants to students, with the other half available to defray lost revenue and increased costs from declining enrollment, the transition to online learning, closures of revenue-producing services and facilities, and COVID-19 testing, vaccination, PPE and classroom retrofits.
Child care: $39 billion for child care, including nearly $24 billion for Child Care Stabilization grants and almost $15 billion for the Child Care and Development Block Grant (CCDBG) program. States must use Child Care Stabilization funds to award subgrants to qualified child care providers that are either open or temporarily closed to help support their operations during the pandemic. CCDBG funds can be used flexibly by states, including for child care subsidies.
Broadband for remote learning: $7.2 billion to the Federal Communications Commission to help schools and libraries ensure that schoolchildren can fully participate in remote learning.
Emergency Rental Assistance: $21.6 billion in Emergency Rental Assistance to augment the $25 billion provided by the Consolidated Appropriations Act in late December.
Public transportation: $30.4 billion of additional relief funding to transit agencies to prevent layoffs of transit workers and prevent severe cuts to transit services.
Small Business Capital: $10 billion for the State Small Business Credit Initiative to help states support small businesses.
Defense Production Act: $10 billion to expand domestic production of personal protective equipment, vaccines, and other medical supplies.
Information technology and cybersecurity: $2 billion to equip federal agencies with modern technology and cybersecurity tools to deliver services and benefits (e.g. vaccine development and distribution, transition to remote work) that Congress has provided to fight COVID-19.
Economic Development Administration: $3 billion to aid communities in rebuilding local economies, including $750 million for the travel, tourism, and outdoor recreation sectors.
Food supply chain: $4 billion to support the food supply chain through the purchase and distribution of food, the purchase of PPE for farmworkers and other frontline food workers, and financial support for farmers, small- and medium-sized food processing companies, farmers markets and others.
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This article was written by Patti Burquest, Alexandra Mitchell, Andy Swanson, Anne Bushman and originally appeared on 2021-03-11.
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