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The American Rescue Plan Act of 2021 passed the Senate over the weekend and is expected to hit the President’s desk this week for signature.

We’ve all been hearing about various aspects of this proposed legislation for weeks (if not months) and it looks like the final pieces are coming in for a landing.

This bill here in March 2021 has a similar price tag as the bill from March 2020 – $1.9 trillion for the American Rescue Plan compared with $2.2 trillion for the CARES Act. Of particular interest in this new plan is the allocation of money geared toward state and local governments, COVID-19 vaccine distribution and individual benefits while the plan last year went largely toward small businesses and individuals to help weather the impact of the pandemic.

While there are a number of things to communicate regarding this new tax bill, we have also been seeing new information and application to provisions that were are a part of the CARES Act so be sure to hang in there to the end.

American Rescue Plan Act

This plan addresses some key areas of importance that will no doubt have some application to almost every one of us – let’s go:

UNEMPLOYMENT BENEFITS

There are two key items in this area of significance:

  • Federal unemployment compensation of $300 per week is extended until September 6, 2021 (this previously was set to expire on March 31, 2021).
  • For those who received unemployment compensation in 2020, the first $10,200 is tax-free on your 2020 tax returns for those earning less than $150,000 (no word on 2021 payments, but as it is stated now, only the 2020 year is tax-free).
STIMULUS CHECKS

A third round of direct payments to taxpayers is slated for $1,400 per person. This includes taxpayers and each dependent. The income thresholds remain the same at $75,000 for a single taxpayer and $150,000 for a married couple filing jointly. However, the phase out of these payments are much tighter and cap at income levels of $80,000 and $160,000 respectively. This is a shorter phase out range than with the previous stimulus payments which were extended to $100,000 and $200,000. This is resulting in about 12 million taxpayers not being eligible.

The IRS will use the most recent year on record to base the determination of eligibility. For most people, this will be the 2019 tax year or in a few cases, the 2020 year. If no returns have been filed for 2019, expect that your stimulus payment will not be sent. Similar to the Recovery Rebate tax credit for 2020, any eligible payment not received in 2021 can be claimed as a refundable tax credit as part of your 2021 tax filing.

Eligible taxpayers can expect to begin receiving these stimulus payments as early as this month.

CHILD AND DEPENDENT CARE TAX CREDITS

The new tax bill significantly enhances the child and dependent care credits:

Child tax credit is increased to $3,000 per child (and $3,600 for children under age 6). There are three big changes beyond the additional $1,000 (or $1,600 for younger children) per child:

  1. This increased amount is only for taxpayers with income up to $75,000 single or $150,000 married filing joint (the phase outs are $85,000 and $170,000), and
  2. Dependent children up to age 17 now qualify for the child tax credit, and
  3. Half of this child tax credit money is eligible to be advanced to families over the next six months, beginning as early as July 2021, and the remaining half would be claimed on your tax returns for 2021.

Keep in mind that the existing child tax credit of $2,000 per child is still applicable for taxpayers in the $150,000 – $400,000 income range.

Dependent care credit could be worth up to $4,000 per child or $8,000 for two or more children.

The credit allows for up to 50% of your dependent care expenses to be claimed as a refundable tax credit for taxpayers earning up to $125,000. There is a fair amount of nuance in this area and these enhanced tax credits are only effective for the 2021 year.

A final piece to enhancements in the dependent care area is with dependent care flexible spending accounts. For 2021 only, you can set aside up to $10,500 in a dependent care account instead of the normal $5,000. However, your employer must allow for the change and make the necessary withholding adjustments in your paycheck. This provision makes the most sense for taxpayers earning more than the $125,000 income limit for the other dependent care credit enhancements.

HEALTH INSURANCE

Purchasing COBRA insurance from your previous employer if you lost your job will be 100% offset by a tax credit for premiums paid from April 1 through September 30, 2021. However, if you qualify for coverage from a new employer before September or if you left your job voluntarily, you are not eligible for this credit.

BUSINESS CHANGES

A Restaurant Revitalization Fund with up to $28.6 billion in funding is specifically geared toward restaurants and bars and will provide up to $10 million in grants (limited to $5 million per location) to cover payroll, rent, and utilities.

The increase in the federal minimum wage to $15 per hour (which passed the House) was removed from this Senate passed version.


Cares Act Updates

PAYCHECK PROTECTION PROGRAM (PPP UPDATES)

PPP Round 2 is available and still receiving applications through March 31, 2021 for eligible small businesses. Here’s a summary to see if your business qualifies:

Small business with less than 300 employees (this includes S or C Corporations, partnerships, sole proprietors, and non-profits)

  • Applicants must have been in business on February 15, 2020
  • Experienced hardship that created current economic uncertainty (this is measured solely by a test of a reduction in revenues by at least 25% for any quarter in 2020 compared with the same quarter in 2019)
  • The amount of your loan will be equal to your average monthly payroll costs for 2019 or 2020 times 2.5 (the same criteria as PPP Round 1). However, food and beverage industries are able to apply a 3.5 times factor to determine the amount of their loan.
PPP ROUND ONE LOAN FORGIVENESS

Most banks have reopened their online portals for accepting PPP Round 1 loan forgiveness applications. For those who have not submitted for loan forgiveness yet, don’t be alarmed. It is estimated that currently over 60% of PPP borrowers have not yet submitted their loan forgiveness applications. There have been several updates on PPP and we have communicated them here and here and here.

The latest changes from late December 2020 clarified the loan forgiveness process and filing requirements for borrowers with the following loan amounts:

  • Loans less than $150,000 require a Form 3508S application and certification of the amounts spent toward eligible PPP expenses. The Small Business Administration (”SBA”) is not requiring these borrowers to submit all the supporting documents (nor should your bank).
  • Loans between $150,000 to $2 million require a Form 3508EZ if you did not reduce wages below 25% or reduce headcount.
  • Loans greater than $2M will likely use Form 3508 and be subject to an audit from the SBA.
EMPLOYEE RETENTION TAX CREDITS (ERTC)

The latest darling in the business tax planning piece to the original CARES Act is the ERTC which has gone through a number of modifications that expands its applicability for small businesses. Initially, this program could not be used if a business also received a PPP loan and this program originally expired the end of 2020.

As part of the bill passed in December 2020, the rules and applicability of this program has made this a viable option for many businesses willing to do the planning around qualification and the accounting for maximizing these program benefits. First, is a change allowing for businesses who received a PPP loan to also be eligible for the ERTC. Second, businesses cannot use the same wages included for PPP loan forgiveness toward the ERTC however, careful planning and good accounting can allow you to still benefit without double dipping wages. Last, this program created different rules that apply to the 2020 tax year and the 2021 tax year. Let’s try to break these down and see if your business is eligible:

2020 Tax Year

  • Business with less than 100 employees.
  • Business experienced a 50% or more reduction in revenues during Q2, Q3, or Q4 2020 compared with the same quarter of 2019, and/or
  • Business was partially or fully suspended by an appropriate governmental authority

How is the credit calculated and processed?

The business is able to claim a federal payroll tax credit up to 50% of employee wages up to $10,000 per employee per quarter. This means that a business can qualify for up to $5,000 in payroll tax credits. At this point, all applicable payroll tax returns have been filed, but the IRS is allowing for amended payroll tax returns for Q2, Q3 and Q4 2020 to be filed to claim the credits.

2021 Tax Year

  • Business with less than 500 employees.
  • Business experienced a 20% or more reduction in revenues during Q1 or Q2 2021 compared with the same quarter of 2019 or the immediately preceding quarter, and/or
  • Business was partially or fully suspended by an appropriate governmental authority

How is the credit calculated and processed?

The business is able to claim a federal payroll tax credit up to 70% of employee wages up to $10,000 per employee per quarter. This means that a business can qualify for up to $7,000 in payroll tax credits. If you otherwise meet the eligibility requirements based on employee count and the required drop in revenues or suspension of business operations, small businesses can claim this credit as part of their quarterly payroll tax filings for Q1 and/or Q2 2021.

For any business qualifying under the partial shutdown provided, the eligible wages are limited to this period of full or partial suspension of business operations.

This program has a short window but for those that qualify, it will provide a significant benefit in the form of refunded payroll taxes on employee wages. However, please note that this program is not applicable for any kind of owner wages.


Conclusion

Many of us are looking forward to glimpses of spring on the horizon, increased vaccine distribution and herd immunity, and the reintroduction of regular rhythms and interactions with others. Please know that we are doing our very best to look out for your best interest in your tax and financial matters.

I think one very real misconception of accountants is that we chose this industry because we like the same, mundane thing over and over. Well, I will argue that accountants are some of the most resilient, hard-working, change agents out there. The amount and acceleration of changes just in the past year have pushed accountants everywhere to study, think on the fly and apply new rulings in a variety of situations. I, for one, am incredibly proud of the care and work our team has taken in looking out for your best interests. You too can be proud and rest assured that we are doing our very best for you!

As always, if you have any questions, please contact us and we’ll be happy to assist.