There’s nothing like having a ton of changes come down right in the middle of tax season! As you’ve already seen, so many things have happened and changed in the last few weeks, that it is nearly impossible to stay on top of them all. As you may have heard (and as we were writing this letter), the IRS has extended the tax filing and payment deadline to May 17, 2021. Here is a “quick” overview of the pertinent details of the American Rescue Plan Act, PPP loans and forgiveness and the Employee Retention Credit. Keep in mind nearly all of this is in some sort of flux, but we will do our best to keep you abreast of changes.
American Rescue Plan Act
As the COVID-19 pandemic and its economic impacts continue, the $1.9 trillion American Rescue Plan Act of 2021 (ARPA), which was signed into law March 11, 2021, expands relief provisions originally introduced in the Coronavirus Aid, Relief and Economic Security (CARES) Act from March 2020 and introduces new measures to help both businesses and individuals. This synopsis is not all the Act contains and doesn’t go into the minutia of each portion of the Act, but it does give an overview of the benefits that impact most of our clients. Definitely reach out to us with questions on these, or other, ARPA provisions.
- Stimulus Payments: Probably the most talked about feature of ARPA, eligible individuals will receive a $1400 “recovery rebate credit” ($2800 for married taxpayers filing jointly) plus an additional $1400 for each dependent for 2021. Eligibility is defined as individuals with an adjusted gross income (AGI) of $75,000 (phases out at $80,000), married filing jointly AGI of $150,000 (phases out at $160,000) and heads of household AGI of $112,500 (phases out at $120,000). Your 2019 AGI is used to determine eligibility, unless you have already filed your 2020 return. (Impacts 2021 tax return)
- Unemployment Benefits: If you received unemployment benefits during 2020, the first $10,200 is now tax-free for those with an AGI less than $150,000 in 2020. There is no phase out for this benefit, however, in the case of a joint return, the $10,200 exclusion applies separately to each spouse. (Impacts 2020 tax return. If already filed, we can discuss filing an amended return, but the IRS has advised us to hold off on filing amended returns at this time as they are not ready to accept and process these.)
- Advanced Premium Tax Credit: If you were on the health exchange in 2020, the IRS requires you to reconcile the amount of advanced assistance (“advanced premium credit”) the government provided you with throughout the year and compare to what it should have been based on your income. For tax years beginning in 2020, individuals no longer have to repay any excess advance premium tax credit over what they actually received. (Impacts 2020 tax return. If already filed, we can discuss filing an amended return, but the IRS has advised us to hold off on filing amended returns at this time as they are not ready to accept and process these.)
- Child Tax Credit: ARPA increased the amount of the child tax credit to $3,600 per child younger than six and to $3,000 per child aged six through 17 by making it fully refundable for 2021. (Previously the cut-off was 16 years old, and this expansion to 17 is for 2021 only.) The increased credit phases out for taxpayers who make more than $150,000 for those who are married and file jointly, $112,500 for heads of household and $75,000 for single filers, reducing the expanded portion of the credit by $50 for each $1,000 of income over those limits. Eligible taxpayers will start receiving advance payments of their credits in July 2021, and payments will extend through December 2021. (Impacts 2021 tax return)
- Student Loans: ARPA changed the rule on the taxability of discharged student loans and now excludes that amount from gross income after December 31, 2020 and before January 1, 2026. This includes post-secondary educational loans that were insured by a governmental entity, private education loans, and loans secured through a charitable organization. (Impacts 2021 tax return)
- Child and Dependent Care Credit: This credit is now refundable for 2021 and worth up to $4000 for one qualifying individual and up to $8000 for two or more. The credit will be worth 50% of eligible expenses based on income and the reduction applies to households with incomes of more than $125,000 and can be reduced below 20% for households with more than $400,000 in income. Additionally, the exclusion for employer-provided dependent care assistance is increased to $10,500 for 2021. (Impacts 2021 tax return)
- COBRA Continuation Coverage: A tax credit to cover individual COBRA continuation payments in included in ARPA. The IRS may make advance payments of the credit amount to taxpayers and the refundable credit applies to premiums and wages paid after April 1, 2021 through September 30, 2021. (Impacts 2021 tax return)
What is not in the ARPA:
As this bill was making it through debate in both the House and Senate, there was discussion of changing the minimum wageand suspending the 2021 IRA required minimum distribution. Neither of these made it into the final version so there is no change here yet.
- Employee Retention Credit: ARPA extends the employee retention credit through the end of 2021 and allows the credit to be used against the Sec. 3111(b) Medicare tax. (More on this later in the article.) (Impacts 2021 tax return)
- Paycheck Protection Program (PPP): An additional $7.25 billion was allocated for additional PPP funding yet it did not extend the application period beyond March 31, 2021. Congress has recently passed an extension to May 31, 2021 so this could change any day.
- Family and Sick Leave Credits: ARPA extended the COVID-19-related family and sick leave tax credits from the CARES Act through September 30, 2021 and increased the limit on the paid family leave credit to $12,000. This additional leave now covers time away due to getting a vaccination(s) and the number of eligible days was increased from 50 to 60. This fully refundable credit against payroll taxes compensates employers and self-employed people for coronavirus-related paid sick and family and medical leave. (Impacts 2021 tax return)
- EIDL Grants: Eligible small businesses may receive targeted economic injury disaster loan advances from the Small Business Administration which will not be included in the gross income of the person who receives the amounts. (Impacts 2021 tax return)
- Restaurant Revitalization Grants: ARPA established the Restaurant Revitalization Fund with $28.6 billion for qualifying restaurants adversely impacted by the pandemic between February 15, 2020 and December 31, 2021, $5 billion of which is set aside for entities with gross receipts less than $500,000 during 2019. Grants will be capped at $5 million per physical location or $10 million per eligible entity with less than 20 locations. The SBA will award grants in the order it receives applications, prioritizing small businesses owned by women, veterans and those that are socially and economically disadvantaged during the initial 21-day period which should begin in the next few weeks. (Impacts 2021 tax return and may impact 2020)
PPP Updates and Modifications
As we mentioned earlier, ARPA allocated an additional $7.25 billion towards PPP funding, however the application period has not (yet) been extended beyond March 31, 2021. Additionally, it added first and second draw eligibility for covered nonprofit entities that employ no more than 300 employees, receive no more than 15% of receipts from lobbying activities, no more than 15% of the organization’s activities are considered lobbying, and the cost of lobbying does not exceed $1 million during 2019. It also adds internet-only news and periodical publishers with no more than 500 employees as eligible entities.
As a quick reminder, there are now two phases for which businesses can qualify. First Draw PPP Loans can be used to help fund payroll costs, including benefits, and may also be used to pay for mortgage interest, rent, utilities, worker protection costs related to COVID-19, uninsured property damage costs caused by looting or vandalism during 2020, and certain supplier costs and expenses for operations.
Second Draw PPP Loans can be used to help fund payroll costs, including benefits. Funds can also be used to pay for mortgage interest, rent, utilities, worker protection costs related to COVID-19, uninsured property damage costs caused by looting or vandalism during 2020, and certain supplier costs and expenses for operations. For most borrowers, the maximum loan amount of a Second Draw PPP Loan is 2.5x the average monthly 2019 or 2020 payroll costs up to $2 million. For borrowers in the Accommodation and Food Services sector, the maximum loan amount for a Second Draw PPP Loan is 3.5x the average monthly 2019 or 2020 payroll costs up to $2 million.
New rules for Self-Employed Individuals: Previously, PPP loans were calculated based on a Schedule C filers business profit or loss (plus payroll costs if they have any) to calculate their maximum loan amount. This meant businesses that incurred losses were unable to claim any PPP money for the business owners. The SBA issued new interim rules allowing Schedule C filers to use “gross income” rather than “net income” to calculate the potential amount of their PPP loan for themselves. This is a big change that opens the door for many businesses.
Borrowers may be eligible for PPP loan forgiveness if they meet certain criteria.
- Employee and compensation levels are maintained
- The loan proceeds are spent on payroll costs and other eligible expenses; and
- At least 60 percent of the proceeds are spent on payroll costs
Borrowers can apply for forgiveness once all loan proceeds have been used until the maturity date of the loan. If borrowers do not apply for forgiveness within 10 months after the last day of the covered period, then PPP loan payments are no longer deferred, and borrowers will begin making loan payments to their PPP lender. However, from what we are seeing, lenders are not making any decisions yet on loan forgiveness, so don’t expect an answer quickly even after you submit your paperwork.
Make note that the original requirement to deduct the amount of EIDL Advance you may have received from your PPP loan forgiveness has been eliminated.
In terms of PPP loan taxability, ordinarily, a forgiven loan qualifies as income. However, Congress chose to exempt forgiven PPP loans from federal income taxation. Some states, however, remain on track to tax them by either treating forgiven loans as taxable income, denying the deduction for expenses paid for using forgiven loans, or both. Quite a few states have not yet ruled on this, though Connecticut has said it plans to follow the federal model and exempt the amount forgiven.
Employee Retention Credit Updates
As a reminder, originally businesses were eligible for the ERC if they had to either partially or full stop operations due to a COVID-19-related government order during a calendar quarter or had gross receipts less than 50% for a calendar quarter when compared to the same quarter in 2019. If these criteria were met, the CARES Act provided a refundable tax credit against the employer portion of employment taxes equal to 50% of wages paid to employees (maxing out at $10,000) between March 13 and December 31, 2020.
ARPA extended the ERC until December 31, 2021 and allows eligible businesses to take a credit of up to $5,000 per employee (for 2020) and $7,000 per employee per quarter (for 2021) against certain payroll taxes at a 70% rate of credit, allowing for up to $10,000 in qualified wages for any calendar quarter. Businesses qualify for an ERC in 2021 if they were subject to a full or partial shut-down or experienced a decline in gross receipts of 20% when compared to the same calendar quarter in 2019.
Keep in mind that ERCs are not mutually exclusive with PPP loans, so you can qualify for, and receive, both. If you have questions about whether you qualify for ERCs, reach out to us.
All we can say is be patient. Even lawmakers with the best of intentions don’t always think through the immediate and long-term implications of one tax law change, let alone a pile of them all at once. We’ll see how it all shakes out, and definitely contact us with any questions, concerns or confusion and we’ll do our best to help.