Key Tax Changes in the American Rescue Plan Act of 2021 & the PPP Extension Act of 2021

On March 11, 2021, President Biden signed the American Rescue Plan Act of 2021 which included extensions and expansions of many popular COVID-19 relief provisions.

Key Provisions Include:

  • Expansion and extension of the Employee Retention Credit
  • Extension of credits for Covid Paid Family & Medical Leave and Paid Sick Leave
  • A new round of economic stimulus payments to individuals.
  • Expansions of Child Tax Credits and Dependent Care Credits
  • Extension of Federal unemployment benefits
  • Additional Funding for the PPP and EIDL loan programs

Employee Retention Credit

The American Rescue Plan Act of 2021 extended the Employee Retention Credit (ERC) which was originally scheduled to end on December 31, 2020. The ERC was extended through June, 2021 in the Consolidated Appropriations Act and is now further extended through December 31, 2021. The Act also provides exceptions to the requirements for new categories of employers.

  • Extension through 2021 – The Act extends the ERC through December, 2021.
  • Recovery Startup Businesses – For qualified wages paid during 2021, employers are generally eligible if they are fully or partially shut down under government orders due to Covid or have experienced a decline in gross receipts greater than 20% as compared to the same quarter in 2019. The Act creates an exception to these rules for “Recovery Startup” businesses.
    • Recovery Start-Up businesses will be automatically eligible for the ERC in the 3rd & 4th quarters of 2021 and don’t have to meet either the gross receipts test or the government orders test.
    • This category includes businesses who started after February 15, 2020 and have average annual gross receipts of less than $1 million.
    • The credit for companies using this exception is limited to $50,000 per quarter.
    • The IRS may apply the aggregation rules under the credit to disallow the credit to new companies that share common ownership with businesses in existence before February 15, 2020.
  • Severely Financially Distressed Employers – Employers whose gross receipts in the 3rd & 4th quarters of 2021 have decreased by more than 90 percent, as compared to the comparable quarter in 2019, will be exempt from the “large employer” requirement that only allows the credit for wages paid to employees who aren’t working. For 2021, “large employers” are generally those with more than 500 employees.
  • Extended Statute of Limitations – The Act increased the time limit under which the IRS is allowed to audit and assess additional taxes for the employee retention credit from 3 years to 5 years.

FFCRA Qualified Paid Leave Credits

  • Extension through September, 2021 – Under the Families First Coronavirus Response Act (FFCRA) employers with between 50 and 500 employees were required to offer paid leave to all employees for certain COVID-19 related situations and were allowed a payroll tax credit based on the amount of leave required to be paid. This requirement lapsed at the end of 2020, but due to the extensions in the American Rescue Plan Act and the Consolidated Appropriations Act, employers who voluntarily continue to offer paid leave that would have been previously required will be eligible for the credit until 9/30/21.
  • Leave for Vaccination, testing and diagnosis – Leave to receive a vaccination for COVID-19 or recover from an illness or injury resulting from vaccination is now eligible. Leave is also eligible to seek or await the results of COVID testing or diagnosis. These additional categories are available as Emergency Paid Sick Leave (EPSL) for the employee and as a reason to take Emergency Paid Family Leave (EPFL).
  • Paid Family Leave – The maximum amount of wages that may be taken into account for paid family leave is increased from $10,000 to $12,000, however the limit per employee continues to be 12 weeks, including EPFL taken in 2020.
  • Sick Leave Replenishment – The 80-hour maximum amount sick leave allowed will reset on 4/1/21, allowing up to 80 hours to be taken until September 30, 2021, regardless of the amount of EPSL taken in prior quarters.
  • Non-Discrimination Rules – Eligibility for the credit now requires that the leave availability may not discriminate in favor of highly compensated employees, full-time employees, or based on an employee’s years of service.

Other Provisions

  • Economic Stimulus Payments – The Act provides for additional economic stimulus payments to individuals of $1,400 and an additional $1,400 per eligible dependent. These payments begin to phase out at adjusted gross income (AGI) of $75,000 for single taxpayers ($150,000 for joint filers) and are completely phased out by AGI of $80,000 for single filers and $160,000 for joint filers.
  • EIDL Program Funding – The SBA Economic Injury Disaster Loan program will receive an additional $15 billion in funding for targeted recipients.
  • PPP Loan Program – The Payroll Protection Loan Program will receive $7.25 billion in additional funding and eligibility for certain non-profit organizations is extended.
  • Unemployment Benefits – Unemployment benefits of $300 per week are extended through September 6, 2021 and up to $10,200 of unemployment benefits per taxpayer or spouse (or $20,400 combined) are exempt from tax for returns with adjusted gross income of $150,000 or less.
  • Child Tax Credits – The Child Tax Credit is temporarily increased and made fully refundable. For the 2021 tax year, a maximum credit of $3,600 will be allowed for children under six years of age and $3,000 for children age 6-17. (Previously up to $2,000 was allowed for children up to 16 years.) The 2021 credit will begin to phase out at AGI of $150,000 for taxpayers filing joint returns. ($75,000 single / $112,500 for head-of-household). The Act also requires the IRS to make advance payments of this credit in July through December, 2021 based on 2019 or 2020 tax information and an online portal through which taxpayers may provide projected 2021 information.
  • Dependent Care Credits – The credit for child and dependent care expenses is temporarily increased and made refundable for 2021 to allow maximum eligible expenses of up to $8,000 for one dependent (from $3,000) or $16,000 for two or more dependents (from $6,000) and the amount of the credit is increased from 35 percent to 50 percent of eligible expenses. The credit will begin to phase out for individuals with adjusted gross income over $125,000.
  • Excess Business Loss Rules Extended one year through 2026
  • Cobra Subsidy – The Act provides a full subsidy of COBRA health insurance premiums for workers who are unemployed due to an involuntary termination or reduction of hours through September, 2021.
  • Student Loan Forgiveness – Cancellation of debt income will be excludable from taxable income for most student loans forgiven in calendar years 2020-2025.
  • Earned Income Tax Credit (EITC) – The Act expands the eligibility requirements and amount of the EITC for taxpayers with no qualifying children, increases the limit on disqualifying investment income, and makes other taxpayer favorable changes.
  • Restaurant Revitalization Fund – The Act establishes a $25 billion fund to provide grants of up to $5 million per location ($10 million maximum) to restaurants, caterers, taverns, food trucks and similar places to cover expenses incurred due to the COVID-19 pandemic.

Please contact us with questions regarding ho this new law will impact your taxes.