Larger stimulus payments and extended unemployment compensation are the provisions getting the most press in the new $1.9 trillion COVID-19 relief legislation, the American Rescue Plan Act of 2021, but the 663-page bill has other provisions of note, including several tax increases. The bill also authorizes additional funding for the PPP program (see related coverage) and EIDL advances, and extends tax benefits in earlier COVID relief bills, the sick and family leave credit and the employee retention credit. Tax-related changes and other key provisions are described below.
Employee Retention Credit
The employee retention credit is extended from June 30, 2021, through December 31, 2021. After June 30, 2021, the credit is only allowable against the Medicare hospital insurance tax. The bill also expands the credit to cover newly formed businesses, allowing a credit of up to $50,000 per calendar quarter for recovery startup businesses, defined as businesses established after February 15, 2020, with average annual gross receipts that do not exceed $1 million.
Sick and Family Leave Credit
The sick and family leave credit is extended from March 31, 2021, to September 30, 2021. Allowable wages for the credit are increased from $10,000 to $12,000 per year, per employee. Self-employed individuals can claim the credit for 60 days, up from 50 days. Eligible leave time includes the time it takes to receive or recover from the COVID vaccine.
EIDL Advances and Tax Treatment
Additional funding is provided for advances of Targeted Economic Injury Disaster Loans (EIDLs). The bill also makes clear that these EIDL loan grants are excluded from taxation.
The legislation expands the $1 million limitation on the deduction of executive compensation by public companies to include the top 5 highest-paid employees in addition to the top executives already covered. This change goes into effect in taxable years after 2026.
Excess Business Losses
The limitation on excess business losses for taxpayers who hold interests in passthroughs is extended by one year, through 2026. The CAREs Act delayed the effective date of the limitation until 2021. (For 2021, inflation-adjusted limits are $262,000 for single taxpayers and $524,000 for joint filers.)
Interest Allocation by Multinationals
A $22 billion revenue raiser in the bill is the repeal of the ability of U.S. affiliated multinational groups to allocate interest expense on a worldwide basis. The election was scheduled to go into effect in 2021. The election, which had been delayed several times, could have resulted in higher foreign tax credits.
Credit Card Transaction Reporting
The Act revises the third-party network reporting rules to require reporting of transactions above $600 in gross sales on a Form 1099-K. Current law only requires the filing of 1099-Ks when there is a transaction greater than $20,000 and a minimum of 200 transactions completed over the course of one year. The reporting would not be required for transactions that are not for goods or services. The U.S. Chamber of Commerce opposed this provision, but it was nonetheless included in the final version.
Credit for COBRA Continuation Coverage
The Act includes premium assistance for COBRA continued healthcare coverage for employees who are eligible for COBRA between April 1, 2021, and September 30, 2021. The subsidy is in the form of a refundable employer credit against the Medicare payroll tax.
The IRS will again be distributing stimulus payments (“recovery rebates”) but this time the income cut-off will be lower. The $1,400 payments will begin to phase out for single taxpayers at AGI of $75,000 with no credit available if AGI is over $80,000. For taxpayers filing jointly, the phaseout begins at AGI of $150,000 with no credit available if AGI is over $160,000. Payments also are allowed for each dependent of the taxpayer, including qualifying children and qualifying relatives.
Exclusion for Dependent Care Assistance
The exclusion for employer-provided dependent care assistance is increased from $5,000 to $10,500 but only for 2021.
Child Tax Credit
The Act makes several changes to the child tax credit. First, the age of qualifying children is increased to include children who are 17, which is good news for families with older children. The previous cut-off was for children who had not reached age 17. The credit amount is increased to $3,000 ($3,600 for children under 6) with income phaseouts starting at $75,000 for singles and $150,000 for joint filers. Note that taxpayers who are over these income limits can continue to claim the existing $2,000 credit. The existing income phaseout levels are $400,000 for joint filers and $200,000 for other filers.
Child and Dependent Care Credit
The Act expands the child and dependent care tax credit in 2021 and makes it fully refundable. The maximum amount of expenses eligible for the credit is doubled to $8,000 of expenses for one qualifying child and $16,000 of expenses for two or more qualifying children, and the credit percentage is raised to 50% of eligible expenses. Thus, the credit allowed is up to $4,000 for one child and $8,000 for two or more children. The income phase-out starts at $125,000. The 20% credit rate is reduced for incomes over $400,000, fully phasing out for those with income over $440,000.
Restaurant Revitalization Grants
The bill authorizes $25 billion in grants to restaurants, bars, and food trucks with a limit of $10 million per entity and a $5 million limit per physical location. Publicly-traded entities and entities with over 20 locations are not eligible for the grants. A portion of the funds are set aside for smaller businesses, those with less than $500,000 of annual gross revenue.
The grants will not be taxable to the recipients and will not result in denial of deductions, reduction of tax attributes, or denial of increases in basis because of the income exclusion. For partnerships or S corporations that receive a grant, any amount excluded from income is treated as tax-exempt income.
Taxation of Unemployment Payments: The extra $300 a week in federal unemployment benefits is extended through September 6, 2021, and the first $10,200 in benefits will be tax-free for 2020 for households making less than $150,000 per year.
Students Loans: President Biden extended student loan deferral by executive order through September 2021. The new Act makes clear that gross income does not include any amount of loans discharged after December 31, 2020, and before January 1, 2026.
Pensions: The legislation includes funding to support struggling multi-employer and single-employer pension plans and contains other relief provisions designed to stabilize the plans.
The new stimulus Act contains provisions that benefit not only lower-income taxpayers but also more affluent taxpayers. On the other hand, the effect of the legislation’s tax increases needs to be considered. Contact your Frazier & Deeter tax adviser to see how the new Act may impact your and your business interests.