The American Rescue Plan Act of 2021 (ARPA), signed by President Biden on March 11, 2021, is the latest major legislation that provides economic relief and stimulus, both tax and non-tax, during the Covid-19 pandemic.
Below are brief summaries of the key aspects of the tax provisions in ARPA.
Provisions Affecting Individuals
Recovery rebate credits (stimulus checks). ARPA provides a third round of nontaxable stimulus checks directly payable to individuals. The payments are structured as refundable tax credits against 2021 taxes but will paid in 2021 (not 2022).
The maximum payments are $1,400 per eligible individual ($2,800 for married joint filers) and $1,400 for each dependent (which, unlike the first two stimulus payments, includes older children and adult dependents). The payment phases out proportionally between $75,000 and $80,000 AGI for single filers, $112,500 and $120,000 for head of household filers, and $150,000 and $160,000 for married joint filers.
Rules for identification, for payments made notwithstanding no filing of 2019 and 2020 returns, and for limitations on offsets apply. Eligibility is based on information from 2020 income tax returns (or 2019 returns, if 2020 returns haven’t been filed when the advanced credit is initially issued). For households whose payment was based on 2019 income data, and who would be eligible to receive a larger payment based on 2020 data, IRS is directed to issue a supplementary payment.
Child tax credit. For 2021
Earned income tax credit (EITC).
Child and dependent care credit. For 2021
The increased dependent care assistance program exclusion amount (see below) under Code Sec. 129 will also affect the child and dependent care credit, as the amount of expenses taken into account for the credit is reduced by the amount excludable from the taxpayer’s income under Code Sec. 129.
Dependent care assistance programs. For 2021, the amount excludible under a dependent care assistance program is increased to $10,500 (or $7,500 for a married taxpayer filing a separate return). Retroactive plan amendments are allowed to facilitate the increase.
Health care premium assistance credit. For 2021 and 2022, the credit will be available for a larger percentage of insurance premiums, and individuals whose income is greater than 400% of the poverty line will be eligible for (rather than barred from) the credit. For 2020, individuals who were provided advances of the credit under the Patient Protection and Affordable Care Act in excess of the credits to which they are entitled aren’t obligated to pay back the excess. And, notwithstanding any other rules, individuals who receive unemployment compensation during 2021 are eligible for the credit (and under rules that increase the amount of the credit).
Income exclusion for unemployment benefits. For 2020, taxpayers with modified AGI less than $150,000 can exclude from gross income $10,200 of their unemployment benefit. The exclusion is available to each spouse if a joint return is filed. For taxpayers who already filed 2020 returns and did not exclude unemployment benefits, IRS said that taxpayers shouldn’t file an amended return and that additional guidance will be provided.
Student loan forgiveness. Beginning in 2021 and continuing through 2025, the forgiveness of many types of loans for post-high school education won’t result in income inclusion for the forgiven amounts.
Provisions Affecting Businesses
Payroll tax credits. The paid sick leave and family leave credits are extended to apply to wages paid through September 30, 2021 (instead of March 31, 2021).
There are also changes to these credits, including:
Self-employment sick and family leave credits. These credits, which are creditable against the income tax, have been extended to apply to eligible days through September 30, 2021 (instead of March 31, 2021). A major change is that both credits treat as reasons for eligible leave the obtaining of or recovering from Covid-19 immunization. And, for the family leave credit, reasons for eligible leave are expanded to include all qualifying reasons for taking sick leave.
Another major change is that in determining whether the 10-day per tax year limit for the sick leave credit is complied with, only days after December 31, 2021, are taken into account (thus restarting the count and often increasing the cumulative number of eligible days). And, a major change to the family leave credit is that the maximum number of eligible days per tax year is increased from 50 to 60, again with only days after March 31, 2021 taken into account (resetting the count and often increasing the cumulative number of eligible days).
Excess business losses. In a revenue raiser, the disallowance of excess business losses is extended to run through 2026 instead of 2025.
Deduction disallowance for over $1 million employee remuneration . In another revenue raiser, for tax years beginning after calendar year 2026, the $1 million annual cap on the deductibility of remuneration paid to certain categories of employees of publicly held corporations is expanded to include as a new category the five highest compensated employees not included in other categories.
Tax treatment of certain non-tax relief. ARPA provides favorable tax consequences for targeted Economic Injury Disaster Loan (EIDL) advances made by the SBA under the Economic Aid to Hard-hit Small Businesses, Non-Profits and Venues Act. The advances aren’t included in income and the income exclusion doesn’t result in deduction disallowances, denial of basis increases or reduction of other tax attributes. The same treatment applies to SBA Restaurant Revitalization Grants.
Pension plans. ARPA relaxes some funding standards and other IRC or ERISA rules for multiple employer pension plans. For single employer plans, IRC or ERISA rules are relaxed for amortizing funding shortfalls and the pension funding stabilization percentages are changed. Also changed are the special rules that apply to community newspaper plans.
Reporting by third party settlement organizations. ARPA tightens the de minimis exception to tax reporting by third party settlement organizations (TPSOs, e.g., PayPal) by excluding from reporting only transactions that don’t exceed $600 (and eliminating the 200-transaction threshold). ARPA also clarified that TPSO reporting obligations are limited to transactions involving goods and services.
Foreign tax. In a revenue raising provision, IRC section 864(f), which provided a one-time election under which, effectively, corporate groups could allocate some interest expense from foreign to domestic corporations and reduce the effect of limits on the foreign tax credit, is repealed. The repeal is retroactive to the election’s effective date (i.e., for tax years beginning after Dec. 31, 2020).