American Rescue Plan Act – Summary and Key Tax Implication Overview

OVERVIEW

The American Rescue Plan Act, H.R. 1319 was passed by congress on Wednesday and signed into law on Thursday by the President. The new provision provides another round of direct payments for Americans, an extension of federal jobless benefits and billions of dollars to distribute coronavirus vaccines and provide relief for schools, states, tribal governments, and small businesses struggling during the pandemic.

The act’s distribution of funds approximately breaks down as follows:

• $350 billion for state, local and tribal governments;
• $10 billion for critical state infrastructure projects;
• $14 billion for the distribution of vaccines;
• $130 billion to primary and secondary schools;
• $30 billion for transit agencies;
• $45 billion in rental, utility and mortgage assistance;
• More than $50 billion will be distributed to small businesses, including $7 billion for the Paycheck Protection Program. The bill also provides $25 billion for relief for small and mid-sized restaurants, which have suffered significantly during the pandemic.

Additionally, it provides another round of direct payments to American taxpayers, sending checks of up to $1,400 to individuals making up to $80,000, single parents earning $120,000 or less, and couples with household incomes of no more than $160,000.

 

TAX PROVISIONS TO MONITOR

Among the act’s many provisions are several tax items. The Journal of Accountancy has provided a detailed write-up on them (Click for Full Article). For convenience, we have highlighted the main ones we believe will impact our clients the most.

 

INDIVIDUALS

Child tax credit:

• Under the legislation, most Americans would receive $3,000 a year for each child ages 6 to 17, and $3,600 for each child under 6.
• The provision in the bill would last one year and be sent via direct deposit on a “periodic” basis. It is a major expansion of the existing child tax credit, which provides $2,000 a year for children from birth through age 16.
• The more regular payments are intended to help offset costs families face day-to-day, instead of sending families one annual payment.

Earned income tax credit:

• The act introduces special rules for individuals with no children: For 2021, the applicable minimum age is decreased to 19, except for students (24) and qualified former foster youth or homeless youth (18). The maximum age is eliminated.
• The credit’s phaseout percentage is increased to 15.3%, and the phaseout amounts are increased.
• The credit would be allowed for certain separated spouses.
• The threshold for disqualifying investment income would be raised from $2,200 to $10,000.
• Temporarily, taxpayers would be allowed to use their 2019 income instead of 2021 income in figuring the credit amount.

Child and dependent care credit

• The act makes various changes to the child and dependent care credit, effective for 2021 only, including making it refundable. The credit will be worth 50% of eligible expenses, up to a limit based on income, making the credit worth up to $4,000 for one qualifying individual and up to $8,000 for two or more. Credit reduction will start at household income levels over $125,000. For households with income over $400,000, the credit can be reduced below 20%.
• The act also increases the exclusion for employer-provided dependent care assistance to $10,500 for 2021.

COBRA continuation coverage:

• The bill increases the value of the federal COBRA health insurance program from 85 percent to 100 percent.
• The credit applies to premiums and wages paid after April 1, 2021, and through Sept. 30.
• Under new Sec. 139I, continuation coverage premium assistance is not includible in the recipient’s gross income.
• Taxpayers who receive the COBRA continuation coverage premium assistance credit are not also eligible for the Sec. 35 health coverage tax credit.

 

BUSINESSES

• It expands the Employee Retention Tax Credit for start-up companies and other businesses hit by the pandemic through the end of 2021.
• The act prolongs the limitation on “excess business losses” through 2027 for noncorporate taxpayers.  This effectively limits the amount of aggregate trade or business losses (Sole Proprietorships and from Pass-through Entities) that a noncorporate taxpayer can use (through 2027) to offset other income. The annual limitation (subject to adjustments for inflation) is $250,000 ($500,000 on a joint return).  Any excess loss can be carried over to subsequent years as a Net Operating Loss.
• Provides aid for multi-employer pension plans. The act temporarily delays the designation of multiemployer pension plans as in endangered, critical, or critical and declining status and makes other changes for multiemployer plans in critical or endangered status.  As a result, the bill includes an $86 billion bailout for failing pensions.
• The act provides that targeted Economic Injury Disaster Loan (EIDL) grants received from the U.S. Small Business Administration (SBA) are not included in gross income and that this exclusion from gross income will not result in a denial of a deduction, reduction of tax attributes, or denial of basis increase.
• It supports restaurants by delivering Restaurant Revitalization Grants. Subject to certain limitations and exceptions an eligible business may receive a nontaxable grant from the SBA equal to their pandemic-related revenue loss. The pandemic-related revenue loss is the difference between their 2020 gross receipts and their 2019 gross receipts. For example, if a restaurant’s gross receipts went from $1 million in 2019 to $600,000 in 2020, then the business would be eligible for a $400,000 grant.
• The act codifies family and sick leave credits. The credits are extended to Sept. 30, 2021. These fully refundable credits against payroll taxes compensate employers and self-employed people for coronavirus-related paid sick leave and family and medical leave. The act increases the limit on the credit for paid family leave to $12,000. It is important to also note:
  • The paid leave credits will be allowed for leave that is due to a COVID-19 vaccination.
  • The number of days a self-employed individual can take into account in calculating the qualified family leave equivalent amount for self-employed individuals increases from 50 to 60.
  • The limitation on the overall number of days taken into account for paid sick leave will reset after March 31, 2021.
  • The credits are expanded to allow 501(c)(1) governmental organizations to take them.

HOW KATZABOSCH CAN HELP

If you have any questions on the American Rescue Plan or what tax strategies apply to your individual and/or organization’s situation under the new provision, please reach out to your KatzAbosch representative. We are happy to discuss your unique situation.