The American Rescue Plan Act of 2021 (ARPA), which was signed by President Joe Biden on March 11, 2021, includes tax provisions that impact businesses. The following is a summary of many of these provisions.
Employee Retention Credits
The Employee Retention Credit (ERC) provisions, which were set to expire on June 30, 2021, have been modified and extended by ARPA through December 31, 2021. Eligible businesses may now claim an ERC payroll tax credit of up to $7,000 per employee per quarter or $28,000 per employee for the entire year. This extension doubles the benefit of the former 2021 ERC rules.
Companies eligible for the ERC must experience either partially or fully suspended operations due to restrictions imposed by the government, or a significant decline in gross receipts. For 2020, a “significant decline” in gross receipts occurs if an employer’s gross receipts for a given quarter are less than 50% of its gross receipts for the same calendar quarter in 2019. However, for 2021, an eligible quarter requires a decline in gross receipts of more than 20% as compared to the same applicable quarter in 2019.
The ARPA also creates a new provision for “recovery start-up businesses” (RSB) that began carrying on a trade or business after February 15, 2020. An RSB meets the ERC eligibility test even if it does not meet the ERC requirement of either suspended operations or a significant decline in gross receipts. The ERC is limited to $50,000 per quarter for RSBs.
Paid Sick and Family Leave Credit
The paid sick and paid family leave credits for employers under the Families First Coronavirus Response Act, which were set to expire on March 31, 2021, are extended to September 30, 2021. ARPA also increases the amount of wages for which an employer may claim the family leave credit from $10,000 to $12,000 per employee per year.
Restaurant Revitalization Grants
Under ARPA eligible restaurants, food trucks and similar businesses may receive restaurant revitalization grants from the Small Business Administration (SBA). Amounts received as restaurant revitalization grants are not included in the gross income of the person who receives the grants. Also, no deduction or loss of basis increase (for depreciation purposes) is denied by reason of the gross income exclusion.
Targeted Economic Injury Disaster Loan Advances
Under ARPA, eligible small businesses may receive targeted economic injury disaster loan (EIDL) advances from the SBA. Amounts received as targeted EIDL advances are not included in the gross income of the recipient. Also, no deduction or basis increase (for depreciation purposes) is denied by reason of the gross income exclusion.
COBRA Premium Subsidy
Under ARPA certain “assistance-eligible individuals” (AEIs) may receive a 100% subsidy for COBRA medical insurance premiums for coverage during the period beginning on April 1, 2021, and ending on September 30, 2021. An AEI is a COBRA qualified beneficiary, such as a former employee, covered spouse or covered dependent, that is eligible and elects COBRA coverage due to a qualifying event of involuntary termination or reduction of hours. The subsidy will not be included in the income of the AEI.
The extended COBRA election period, notice requirements and other rules are discussed in our recent publication “COBRA Subsidies and Other Important Benefit Provisions in the American Rescue Plan Act.”
Increase In the Exclusion for Employer-Provided Dependent Care Assistance
An eligible employee’s gross income generally doesn’t include amounts paid by employer for dependent care assistance provided to the employee under a qualified dependent care assistance program (DCAP). A DCAP can be maintained under a cafeteria plan as a DCAP flexible spending arrangement.
Under prior law, the amount that could be excluded from an employee’s gross income was not more than $5,000 per year, or $2,500 for a married individual filing a separate return, subject to certain limitations.
For 2021 only, the exclusion for employer-provided dependent care assistance is increased from $5,000 to $10,500 for an individual or a married couple filing jointly, and from $2,500 to $5,250 for a married employee filing separately.
Repeal of Election To Allocate Interest Expense on Worldwide Basis
The election under IRC Sec. 864(f) to allocate interest expense on a worldwide basis is repealed by ARPA effective for taxable years beginning after December 31, 2020. This provision, and the expansion of limitations on the deduction of excess employee compensation of publicly held corporations described below, are apparently included in ARPA for the purpose of increasing tax revenues to comply with the stringent budget rules mandated by the budget reconciliation process applied to the ARPA.
Expansion of Rule on Deduction of Compensation of Publicly Held Corporation Employees
A publicly held corporation’s compensation deduction is limited to $1 million per year for compensation paid to certain “covered employees.” Under prior law, “covered employees” only includes the corporation’s principal executive officer, principal financial officer, the three other highest-paid employees and anyone who was in one of those categories for any preceding tax year that begins after December 31, 2016.
For years that begin after December 31, 2026, the above rule is changed so that “covered employees” include the eight other highest-paid employees rather than the three other highest-paid employees. However, the rule regarding employees who were in one of the covered employee categories in prior years does not apply to employees who are covered employees only because of the new rule.
If you are unclear about how your organization should respond to any of these provisions, or if you like to hear how Warner is helping other companies address these tax law changes, please contact Sean Cook, Jay Kennedy or a member of Warner’s Tax Law Practice Group. Our tax lawyers welcome your questions about these or any other tax law issues.