Congress Passes American Rescue Plan
March 11, 2021
On March 10, after several revisions in the Senate, the U.S. House of Representatives passed the American Rescue Plan Act of 2021. President Biden is expected to sign the bill later this week, providing another significant round of COVID relief to the American people and businesses. These relief provisions impact a wide range of taxpayers, so it is important to review and pay attention to the details of the new bill. It is also important to keep in mind that these provisions impact a variety of tax years, from 2020 to 2021, and even beyond.
Individual Considerations
Although most of the focus on the provisions that impact individuals has been on stimulus payments, these payments are just one of several key areas for individuals to be paying attention to.
Recovery Rebate Credit
Similar to the past two rounds of rebate credits, this bill provides for new recovery rebate credits that will be paid out to taxpayers in the near future through economic impact payments. While the first two payments were 2020 tax credits (even though the second round generally was not paid until 2021), this is a 2021 tax credit. This means that, while individuals who are currently eligible will receive it in the near future, it will not be reconciled on your tax return until you file for 2021. Eligibility will generally be based on the taxpayer’s 2019 return, although it will be based on their 2020 return if it has already been filed and processed with the IRS.
This round of payments is $1,400 per qualifying individual, including both taxpayers and dependents. New to this round of stimulus, college-age dependents and other qualifying relatives who are claimed as dependents will be eligible for the credit. The income limit where the credit begins to phase out remains the same as the first two stimulus payments, being $75,000 for single individuals, $150,000 for married couples, and $112,500 for heads of household. However, these credits will phase out more quickly, after only $5,000 of additional income for single taxpayers and $10,000 for married taxpayers. That means that a single individual making over $80,000 or a couple making more than $160,000 will not qualify for any amount of the payment. Again, keep in mind that this will generally be based off of your 2019 tax return, unless you have already filed your 2020 return at this point.
Unemployment Benefits
Under this new bill, taxpayers who make less than $150,000 in 2020 will be able to exclude up to $10,200 in unemployment benefits from taxable income for the 2020 tax year. This is to help prevent surprise tax bills generated due the unemployment received. Keep in mind that this impacts 2020, so you should be paying attention to this if you received unemployment this past year to make sure that the tax treatment is correct.
As well, unemployment is continuing to get a Federal boost, with an additional $300 per week continuing through September 6, 2021. Self-employed individuals who would generally not qualify for unemployment will continue to be eligible through the end of this period.
Child Tax Credit
For 2021 income tax returns, the Child Tax Credit will be increased from $2,000 per child to $3,000 for most children and $3,600 for children under six years old. In addition, 17-year old children will now be eligible for the credit.
The increase of this credit over the existing credit will phase out starting at $150,000 for married couples, and $112,500 for those filing head of household. However, the existing eligibility for the smaller child tax credit will remain the same.
In addition, this bill calls for the estimated Child Tax Credit amounts to be estimated by the IRS and paid out early, between July and December 2021. This is something that taxpayers will have the option to opt out of, but guidance on how that will work is forthcoming from the IRS.
Other Credits
The thresholds surrounding the Earned Income Credit have been loosened to allow more individuals to take advantage of the credit. As well, the Child and Dependent Care Credit has some additional flexibility and expanded credit options, though these provisions exist only for the 2021 tax year.
Rules surrounding the Premium Tax Credit have also been updated. Part of that is increased eligibility, where those who make more than 400% of the federal poverty line are not fully excluded from the credit, and part of this limit is how much of the advance credit needs to be paid back. These rules generally apply through the 2022 tax year.
Business Considerations
Employee Retention Credit
While the Consolidated Appropriations Act of 2021 included a continuation of the Employee Retention Credit (ERC) into 2021, this only applied to the first and second quarters of the year. Now, the American Rescue Plan Act has extended the ERC through the end of 2021. Keep in mind that the rules for this credit are different from the ERC for 2020, as up to $10,000 of wages per employee per quarter can be used for this credit. With the credit being 70% of the wages paid, the credit could equal as much as $28,000 per employee. As well, businesses only have to have a revenue decline of 20% or more when comparing the quarter in 2021 to the same quarter in 2019 (or using the immediately preceding quarter to compare to that same quarter in 2019) to be eligible, which is a significantly less hurdle than the 50% revenue decline that was a part of the ERC for 2020.
At this time, the IRS still has not issued guidance on the 2021 ERC, so be watching for more information on the mechanics and any nuances surrounding it.
Restaurant Revitalization Grant
Few industries have been as hard hit by the pandemic as entertainment-related industries. This includes restaurants and bars who had to shut their doors to patrons and limit the number of customers they could serve through much of 2020. This Revitalization Grant, administered by the SBA, is designed to try and help with this.
This grant, which is based off of the revenue decline a qualifying restaurant had between 2019 and 2020, can be used to pay for a variety of operating expenses, including payroll, rent, utilities, interest, and food costs, spanning from February 15, 2020 through December 31, 2021. Any amount of the grant not used on eligible expenses would need to be returned. The grant is also reduced by the amount of any PPP loans the business receives in 2020 or 2021, and the grant is only available to restaurants that own and operate fewer than 20 locations. This grant will be treated as non-taxable income, with the related expenses being fully deductible, so the treatment will be similar to the that of PPP loans.
At this time, we don’t know when applications will open or what the process will look like from the SBA, but we hope that this is something that they move on relatively quickly.
Paycheck Protection Program (PPP) Loans for Non-Profit Entities
While there is not another round of PPP loans in this bill, one key area to note is that nearly all non-profits entities will now be qualified for PPP loans, save for entities that primarily participate in lobbying. Many entities that were previously excluded should now be able to apply. At this time, the deadline of March 31 has not yet been extended, so these newly eligible entities should look at applying as soon as possible.
While these considerations are the highlights of the Act, it is important to remember that this is another large bill from Congress. Therefore, we can certainly expect additional updates and information in the coming weeks and months on these and other important aspects of the legislation. HBE will continue to keep you updated on new guidance and developments as more information becomes available.
This communication and any applicable contents pertaining to COVID-19 employer relief provisions is based on our professional judgment given the facts provided to us and the COVID-19 employer relief provisions guidance as of the date of the communication. Subsequent developments changing the facts provided to us, or differences in the final guidance and regulations once they are issued, may affect the advice provided. These effects may be material.
