Tax Credits, Incentives & Provisions for Individuals & Businesses

The $1.9 trillion American Rescue Plan Act of 2021 (ARPA) – the latest COVID-19 relief bill – has passed both houses of Congress and was signed into law by President Joseph R. Biden on March 11, 2021. As the COVID-19 pandemic and its economic impact continues, the legislation implements scores of new relief provisions. The Act includes extensions of enhanced unemployment benefits, gives increased funding for COVID-19 testing and vaccination programs, as well as aid to state and local governments and assistance to schools to help get students back into classrooms.

Most notably for individuals, ARPA provides a new round of $1,400 recovery rebate tax credits ($2,800 for married taxpayers filing jointly) plus $1,400 for each dependent for 2021. Like the first rebates enacted in 2020, these will be paid in advance to qualifying taxpayers. The Treasury Department indicates that payments may begin as early as this weekend. The law also provides for tax-free treatment of the first $10,200 of unemployment benefits received in 2020.

For businesses, ARPA expands loans available under the Paycheck Protection Program, and provides additional funding for the Shuttered Venue Operators Grant program and Targeted EIDL payments. The law also extends the employee retention tax credit and paid sick and family leave credits.

Following is a summary of the major tax provisions of ARPA. In the coming days we will inform you of further details.

Individual Relief

  • Recovery rebates – As noted, the legislation provides individuals with a $1,400 recovery rebate credit ($2,800 for married taxpayers filing jointly) plus $1,400 for each child and non-child dependent for 2021, payable in advance. The recovery rebate credit phases out ratably for taxpayers with adjusted gross income over $75,000 ($150,000 for married filing jointly, and $112,500 for head of household.). Adjusted gross income to apply the phaseout amounts will be from the 2019 income tax return unless the taxpayer has already filed a 2020 return. Similar to previous payments, these amounts are not taxable, and any excess received does not have to be returned. A provision to increase the rebate by using 2020 tax returns filed by September 1, 2021 is also included. Taxpayers who have an increase in adjusted gross income in 2020 over the phaseout threshold as compared to 2019 may want to hold off filing 2020 returns as long as possible. This will maximize the amount of stimulus payments received in the current year.
  • Child tax credit – The bill expands the Sec. 24 child tax credit, but only for 2021. The amount of the credit increases from $2,000 to $3,000 per child ($3,600 for children under the age of six) and is fully refundable. ARPA also expands eligibility to include 17-year-olds as qualifying children. Eligible taxpayers will start receiving advance payments for half of their credits beginning July 1, 2021 through the end of 2021. Taxpayers may opt out of the advance payments through an online portal the IRS will set up. The remaining half of the credit will be received when filing 2021 tax returns. The increased credit amount phases out for taxpayers with modified adjusted gross incomes over $150,000 for married taxpayers filing jointly, $112,500 for heads of household, and $75,000 for others.
  • Child and dependent care credit – Under ARPA, the child and dependent care tax credit is made refundable for 2021, and the exclusion for employer-provided dependent care assistance is increased to $10,500 for 2021. Under previous law, the credit was equal to 35 percent of qualified expenses. The new law increases the credit to 50 percent of qualified expenses.
  • Earned income credit – The bill also changes the Sec. 32 earned income credit by adding special rules for individuals with no children. The minimum age to claim the EIC is reduced for 2021 from age 25 to age 19 (except full-time students or qualified former foster youth or homeless youth). The maximum age is eliminated. Additionally, the credit’s phaseout percentage is increased from 7.65% to 15.3%, and the phaseout amounts are increased. The threshold for disqualifying investment income increases from $3,650 to $10,000. The credit is now allowed for certain separated spouses. Temporarily, taxpayers are allowed to use their 2019 income instead of 2021 income in figuring the credit amount.
  • Unemployment benefits – The ARPA extends the enhanced $300 weekly unemployment relief to September 6, 2021. The most notable change makes the first $10,200 in unemployment benefits received in 2020 exempt from tax for taxpayers with less than $150,000 in income. This is a retroactive change to 2020. It is not clear if the IRS will establish a simplified method to amend returns for those who have already filed their 2020 tax return.
  • Exclusion of Forgiven Student Loans – While the ARPA does not include full forgiveness for student loans, it does include an expanded exclusion of student loan amounts forgiven after 2020 and before 2026. Under previous law, exclusion from income was granted under certain conditions like death or disability. The expansion now allows exclusion from taxable income of discharge of student loans for any reason during this period.
  • Premium Tax Credits – ARPA makes changes to the premium tax credit by increasing the affordability percentages used in calculating the premium tax credits to make credits available for individuals with incomes above 400% of the federal poverty line and increase credits for those already qualified. No repayment of excess premium tax credits is required in 2020. Individuals receiving unemployment compensation are also eligible to receive premium tax credits in 2021.

Business Relief

  • Employee retention tax credit – ARPA extends the employee retention tax credit through the end of 2021. The employee retention credit was originally enacted in the Coronavirus Aid, Relief, and Economic Security (CARES) Act, and allows eligible employers to claim a credit for paying qualified wages to employees. In December, Congress extended the credit through June 30, 2021. The ARPA extends it through December 31, 2021. Under the bill, the employee retention credit would be allowed against the Sec. 3111(b) Medicare tax.
  • Family and sick leave credits – Tax credits for COVID-19-related family and sick leave, which were originally enacted by the Families First Coronavirus Response Act in March 2020, are extended to September 30, 2021, and the limit on the credit for paid family leave is increased from $10,000 to $12,000. Additionally, leave credits will be allowed for leave that is due to a COVID-19 vaccination after March 31, 2021. The number of days a self-employed individual can consider in calculating the qualified family leave equivalent amount for self-employed individuals increases from 50 to 60. The credits also are expanded to allow 501(c)(1) government organizations to take them.
  • Tax Treatment of EIDL grants – ARPA clarifies that amounts received as targeted EIDL advances and Restaurant Revitalization Grants will not be subject to income tax, and this exclusion from gross income will not result in a denial of a deduction, reduction of tax attributes, or denial of basis increase.
  • Retirement Plan Funding – There are several changes meant to help employers meet funding obligations for pension plans for both multi-employer and single-employer plans.
  • COBRA continuation coverage – The law provides COBRA continuation coverage premium assistance through Sept. 21, 2021. A refundable credit of 100% of COBRA premiums is available to the employer (or whoever is to receive the premiums) through credits against Medicare Tax. COBRA continuation coverage premium assistance is not includible in the recipient’s gross income.
  • 1099-K reporting – After 2021, the de minimus exception for reporting a transaction changes from $20,000 to $600 and applies to those transactions for goods and services.
  • Worldwide Allocation of Interest – ARPA repeals the one-time election available to corporate affiliated groups to determine foreign-source taxable income. This election was to be available for the first time in 2021, but the new law provides that treatment of this income will continue under the pre-2021 rules.

We will keep you informed of further provisions in the ARPA that affect individuals and businesses. In the meantime, contact your Adams Brown advisor with any questions about how this legislation may impact you or your business.