On March 11, 2021, President Biden signed a landmark $1.9 trillion stimulus package. The American Rescue Plan Act of 2021 (Act) contains more than 600 pages of stimulus perks, but readers short on time can peruse a 16-page title-by-title summary of the legislation here. As stated by the Biden administration, the Act provides “the tools and support critical to meet the moment and tackle the urgent public health and economic crises the Nation faces as a result of COVID-19.”
This article highlights and summarizes some of the tax-related provisions of the Act. If you want to read more, take a look at the 34-page summary prepared by the Congressional Research Service.
The employee retention credit (ERC) is a fully refundable tax credit for certain wages paid to employees up to a maximum of $10,000 in wages per employee in 2020, and up to $10,000 of wages per employee in each of the first two calendar quarters in 2021. Under pre-Act law, the maximum ERC per employee in 2020 is $5,000 (50% of $10,000), and the maximum ERC per employee in 2021 is $14,000 (70% of $10,000 plus 70% of $10,000). Section 9651 of the Act extended the 2021 ERC through the end of 2021 so that employers can now claim a maximum ERC of $28,000 per employee in 2021 (up to $7,000 per quarter).
Employers still need to qualify for the 2021 ERC in each calendar quarter by having either (i) a full or partial shutdown of their business or (ii) a decline in gross receipts of more than 20% versus the same quarter in 2019. And all other requirements of the ERC continue to apply, e.g., no double dipping with the wages used for PPP loan forgiveness and certain other tax credits.
The Act’s change to the ERC is tremendous news for employers who are suffering from the pandemic, and we’ve seen clients realize ERCs benefits well in excess of $1 million. This is an unexpected windfall for affected employers, though the benefit will be subject to taxation in 2021 through expense disallowance. You can read more about the timing of expense disallowance here.
The Act also creates an entirely new category of businesses that are eligible to receive the ERC. Recovery startup businesses that began operations after February 15, 2020, and generally have annual gross receipts that do not exceed $1 million, can now claim the ERC even though they do not otherwise meet the eligibility tests described above, i.e., the full-or-partial-shutdown test or decline-in-gross-receipts test. The ERC for these businesses is capped at $50,000 per quarter for all employees and the regular ERC rules apply to calculate the amount of the credit.
The Act provides relief for “severely financially distressed employers,” which are defined as employers who experienced a quarterly reduction in gross receipts of more than 90% compared to the same quarter in 2019. Such employers may treat all wages paid to employees as qualified wages, regardless of the number of FTEs in 2019. Thus, severely financially distressed employers who had more than 500 FTEs in 2019 generally can claim the 2021 ERC for all the wages of their employees, not just the wages relating to paid time off.
Taxpayers should keep in mind that claiming the ERC is not different from claiming other credits and deductions – they need to be diligent in determining eligibility and in calculating the amount of the credit. This is especially true with the ERC because the Act extends the typical 3-year statute of limitation to 5 years in the case of the ERC. This means the IRS has 5 years to audit taxpayers on the ERC (absent fraud or a gross omission).
The Act extends and expands the qualified paid sick and family leave tax credits that were created in the Families First Coronavirus Response Act of 2020 (FFCRA). Specifically, it provides payroll tax credits for small and midsize employers who voluntarily provide paid leave through the end of September 2021, and it expands eligibility to state and local governments that provide this benefit.
The Act also modifies the rules for wages paid between April 1, 2021 and September 30, 2021. Previously, employees were limited to 10 days of sick leave from April 1, 2020 through March 31, 2021. The Act restarts the 10-day period on April 1, 2020, allowing for an additional 10 days of qualified sick leave from April 1, 2021 through September 30, 2021. It also increases the amount of eligible wages from $10,000 per employee to $12,000 per employee. Last, the Act expands the type of qualifying leave to include leave relating to recovery from a vaccination.
The IRS has 69 frequently asked questions on its website relating to these FFCRA credits, though they will need to be updated to account for the changes made by the Act.
The Act provides for the tax-free treatment of targeted economic injury disaster loan (EIDL) advances and restaurant revitalization grants (described below), and it clarifies that expense disallowance will not apply to these grants. Thus, these grants are completely tax-free.
The Act provides $28.6 billion in direct relief for the restaurant industry through the creation of restaurant revitalization grants. These grants are available to restaurants, food trucks, bars, caterers, taprooms, and other similar places of business, but not to publicly-traded companies that have more than 20 locations or to businesses that obtained a shuttered venue operator grant. The grant generally may be used for payroll costs, mortgage payments, rent, utilities, maintenance expenses, operational expenses, paid sick leave, and supplies.
The 2017 Tax Cuts and Jobs Act introduced a new and temporary limitation on the ability of non-corporate taxpayers to deduct excess business losses. The limitation allows for the use of business losses in a taxable year only up to $250,000, and $500,000 for joint filers, and any disallowed loss can be carried forward to the following tax year. This limitation was set to expire in 2025, but section 9041 of the Act extends the application of this provision one year so that it will now expire in 2026. Note, however, that the CARES Act suspended this rule for tax years 2018 through 2020 and this suspension is not affected by the Act.
Section 9042 of the Act excludes from gross income the first $10,200 of unemployment compensation received in 2020 for households whose adjusted gross income (AGI) is less than $150,000. This applies to single filers and to joint filers, though in the case of joint filers the exclusion applies to each spouse separately.