The American Rescue Plan Act of 2021 (ARPA) was signed into law by the President on March 11, 2021. The $1.9 trillion price tag is indicative of the ongoing emphasis on providing relief to businesses, individuals, and state and local governments most impacted by COVID-19. Following are highlights of noteworthy ARPA provisions for businesses and individuals.
Business Provisions
Extended Employee Retention Credit
The employee retention credit is calculated as percentage of qualified wages and certain healthcare costs – 50% of 2020 qualified wages and 70% of 2021 qualified wages. Previously effective through June 30, 2021, ARPA extends the availability of the credit through December 31, 2021. The maximum credit per employee is $5,000 in 2020 and $28,000 in 2021 ($7,000 per quarter). The credit is generally available to employers with a full or partial business shutdown and those that suffered a decline in gross receipts. Here’s more information about the Employee Retention Credit.
Paid Sick and Family Leave Credits
ARPA extends and expands the 2020 Families First Coronavirus Relief Act (FFCRA) payroll tax credit for paid sick time and paid family leave. The credit is extended from March 31, 2021, through September 30, 2021. The credit is equal to 100% of qualified sick leave wages paid to employees. ARPA increases the credit to include the employer’s share of FICA tax (6.2%) and Medicare tax (1.45%) on the qualified wages. The credit is applied first against certain payroll taxes, but any excess is refundable.
The expanded credit, which takes effect for quarters after March 31, 2021, is available for employees who need time off from work in order to get the COVID-19 vaccine or to recover from illness or side effects from the vaccine. It is also available for employees who need time off from work to seek or wait for the results of COVID-19 tests or medical diagnoses.
Unlike the original program, the first 10 days of paid sick and family leave is no longer unpaid. Under the original program, the maximum credit was $10,000. ARPA adds two weeks (ten days) of emergency paid sick leave available beginning April 1, 2021, through September 30, 2021, and increases the maximum credit to $12,000.
The credit remains optional for employers with less than 500 employees. Any employer that voluntarily participates will continue to receive the dollar-for-dollar tax credits available through September 30, 2021.
Restaurants Revitalization Fund
Eligible restaurants, food trucks, bars, caterers, and similar businesses may qualify for tax-free grants from the Restaurant Revitalization Fund. Deductions of associated expenses are still allowed. The funds may be used for most business-related expenses. Publicly traded companies, government-operated businesses, and restaurants with over 20 locations are ineligible.
The SBA began accepting applications for this grant on May 3, 2021. The maximum grant is determined based on the pandemic-related revenue decline of the restaurant.
Continuation of COBRA Health Coverage
ARPA allows employers to claim a payroll tax credit between March 11, 2021 (the date of enactment) and September 30, 2021, for COBRA premiums that would normally be collected from the employee. This credit is available for individuals who are eligible for continuation coverage under COBRA (Consolidated Omnibus Budget Reconciliation Act of 1985) and who elect COBRA coverage.
Excess Business Losses
Under the Tax Cuts and Jobs Act (TCJA), individuals could only deduct a maximum of $250,000 ($500,000 for joint returns) of excess business losses. This limitation was suspended in the 2020 CARES Act which allows individuals to now deduct excess business losses arising in 2018, 2019, and 2020. The excess business loss limitation will again become effective for tax years beginning after December 31, 2020. The limitation formerly applied through 2025, but ARPA extends it one additional year through December 31, 2026.
Arizona Conformity
On April 14, 2021, Arizona fully conformed to Internal Revenue Code provisions enacted in 2020 and through March 11, 2021, in response to the COVID-19 pandemic. This includes all federal provisions in the 2020 CARES Act, the 2021 Consolidated Appropriations Act (CAA) enacted in December 2020, and the 2021 American Rescue Plan Act (ARPA) enacted on March 11, 2021.
Individual Provisions
Child Tax Credit
For 2021, APRA increases the amount of this credit for low to moderate income taxpayers. The credit is increased to $3,600 per child under 6 and to $3,000 per child ages 6 to 17. The credit is fully refundable and is available to taxpayers with no earned income. The pre-2021 maximum credit was $2,000 per child of which only $1,400 was refundable.
ARPA accelerates the phase-out of the increased credit based on Adjusted Gross Income. ARPA also adds an advance payment to be paid monthly from July 1, 2021, to December 31, 2021, of 50% of the estimated 2021 child tax credit. Eligibility for the advance payment will be determined based on the 2020 income tax return. If the 2020 return has not been filed, the 2019 return will be used to determine the advance payment amount. The balance of the credit will then be claimed on the 2021 tax return.
The IRS will establish an online portal which will allow taxpayers to elect not to receive the advance payment and to provide information relevant to a modification of the annual advance amount.
Child and Dependent Care Credit
For 2021 only, ARPA expands the child and dependent care and makes it refundable.
Qualifying expenses increase to $8,000 for one qualifying child (up from $3,000) and to $16,000 for two or more qualifying children (up from $6,000). The maximum credit is 50% of the qualifying expenses (35% in prior years). The 2021 maximum credit is $4,000 (50% of $8,000) for one qualifying child and $8,000 (50% of $16,000) for two or more qualifying children. The maximum credit prior to these changes was $2,100 (35% of $6,000).
The 2021 credit phases out based on Adjusted Gross Income (AGI). The 50% credit rate applies to taxpayers with AGI up to $125,000. The credit rate phases down to 20% as AGI reaches $185,000. From AGI of $185,000 to $400,000, the credit rate is 20%. The credit fully phases out when AGI exceeds $438,000.
The credit can reach taxpayers with relatively high levels of income, but now that the credit is refundable when it exceeds taxes, it particularly benefits lower income taxpayers.
Individual Recovery Rebates
ARPA provides a third round of recovery rebates (stimulus payments) with rules slightly different than the first two rounds of rebates. The base rebate this time around is $1,400 per individual ($2,800 for a joint return) plus $1,400 for each dependent claimed by the taxpayer (including older children and adult dependents).
The rebate begins to phase out for taxpayers with AGI of $150,000 for a joint return, $112,500 for heads of households, and $75,000 for other taxpayers. The rebate is fully phased out for taxpayers with AGI of $160,000 for a joint return, $120,000 for heads of households, and $80,000 for other taxpayers.
This rebate is an advance payment for 2021 that will be reconciled on the taxpayer’s 2021 tax return. The first two rounds of rebates were advance payments for 2020 that were reconciled on the taxpayer’s 2020 tax return. The 2021 advance payment will be issued based on information in the taxpayer’s 2020 return (if filed) or the taxpayer’s 2019 return if 2020 has not been filed yet.
Unemployment Income
For tax years beginning in 2020, up to $10,200 of unemployment compensation may be excluded from taxable income for taxpayers with AGI of less than $150,000. For joint returns, each spouse can exclude up to $10,200 of unemployment income. The $150,000 AGI cut-off does not increase for joint returns. In addition, the $150,000 is a hard cut-off, meaning the unemployment benefits are fully taxable for those with AGI above $149,999 while none of the unemployment benefits are taxable for those with AGI less than $150,000.
For qualifying 2020 returns that were filed before the law change and reported the unemployment income as taxable, the IRS has asked taxpayers not to file amended returns to claim the refund. The IRS has stated it will automatically refund money to those who have already filed their 2020 tax return reporting the unemployment compensation as taxable. In calculating the refund, the IRS will recompute any credits and deductions claimed on the original return. However, if the reduction of income now qualifies a taxpayer for a new credit not claimed on the original return, like the Earned Income Tax Credit (EITC), those taxpayers will need to file an amended tax return.
ACA Premium Tax Credit
For 2021 and 2022, ARPA expands the existing Affordable Care Act (ACA) premium tax credit. The upper income limit for eligibility is eliminated and the amount of the premium tax credit is increased by reducing the amount that individuals must contribute for Exchange coverage.
For 2020, ARPA suspends the requirement for taxpayers with income in excess of 400% of the federal poverty level to repay excess advance payments of the premium tax credit. As with the automatic refunds on unemployment benefits, the IRS has stated taxpayers do not need to file an amended return to claim a refund of an already repaid advance premium tax credit. The IRS has stated it will reimburse taxpayers who have already repaid this on their 2020 tax return.
For 2021, ARPA also expands eligibility for the credit to include those receiving unemployment compensation.
Arizona Conformity
On April 14, 2021, Arizona fully conformed to Internal Revenue Code provisions enacted in 2020 and through March 11, 2021, in response to the COVID-19 pandemic. This includes all federal provisions in the 2020 CARES Act, the 2021 Consolidated Appropriations Act (CAA) enacted in December 2020, and the 2021 American Rescue Plan Act (ARPA) enacted on March 11, 2021.
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