The American Rescue Plan Act (ARPA) of 2021, signed on March 11, 2021, passes and extends various relief efforts to soften COVID-19 impacts to individuals and businesses. The law can have substantial impact to businesses, especially in their capacity as an employer. This alert will focus on the following ARPA provisions:
Employee Retention Tax Credit
The highly impactful piece of the Act extends the refundable payroll employee retention credit (ERC). The Act extends the credit through the July 1, 2021 to December 2021 period and generally follows the favorable mechanics set forth by the Consolidated Appropriations Act (CAA). While the credit remains refundable, it’s now against the employer’s portion of Medicare rather than Social Security for the 2021 Q3 and Q4 calendar year periods.
We’ve been helping clients understand eligibility and assisting with preparing the calculations needed to take advantage of what can be a significant credit. In this insight, we’ve detailed the rules, mechanics, and eligibility requirements of the ERC.
Please refer to Employee Retention Credit: What You Need to Know and American Rescue Plan Act: Impact to the Employee Retention Credit for further detail.
EIDL and Other Relief Tax Treatment
The Act confirms our understanding of the tax treatment of Targeted Economic Injury Disaster Loans (EIDL) loans. Similar to Paycheck Protection Program (PPP) loan treatment, the loans aren’t subject to income tax and expenses paid from the proceeds should be fully tax deductible (e.g., double dipping is ok). Further, the Act provides that the exclusion from income doesn’t deny taxpayers a decrease in tax basis of their investment. Any relief granted under the Restaurant Revitalization Grants should be treated in the same manner.
Paid Sick and Family Leave Credits
The Families First Coronavirus Response Act (FFCRA) required employers with under 500 employees to provide paid leave to employees absent from work due to COVID-19-related reasons. These employers were allowed a payroll tax credit in the amount of leave required to be paid. The credit was extended to March 31, 2021 with the passing of the CAA. Now the credit has been extended to September 30, 2021 with modifications.
The obligation to provide paid sick and family leave doesn’t apply in 2021. Therefore, the extended benefit relates to pay employers voluntarily pay. Key modifications include:
- Eligible wages are increased to $12,000 from $10,000
- 10-day maximum paid sick leave (from April 1, 2020 through March 31, 2021) resets on April 1, 2021, allowing for 10 new days of paid sick leave
- Now covers time away from work for receiving or recovering from vaccinations
- Maximum credit per paid sick leave remains $511 per day for an employee’s own diagnosis, isolation, or quarantine
- Maximum credit per paid sick leave when an employee is caring for someone else is capped at $200
- The credit is now offsetting the employer portion of Medicare tax, not Social Security tax
- Credit may be increased for the employer’s portion of Social Security tax and Medicare tax
- Established a non-discrimination requirement where no credit is allowed where the employer discriminates in favor of highly compensated employees
Worldwide Allocation of Interest
The Act repeals the worldwide allocation of interest election available to corporations in efforts to raise tax revenue. The election would’ve been available for the first time in 2021, but the Act revokes it and therefore taxpayers should continue to follow the pre-2021 rules. In determining foreign-source taxable income of the group by allocating and apportioning interest expenses of the domestic members of a worldwide affiliated group on a worldwide basis, as if all members of the group were a single corporation.
Other Tax Relief Programs
Restaurant Revitalization Grants
The ARPA allocates approximately $28 billion of funds for direct relief to businesses in the restaurant industry, which will remain available until depleted. Businesses can’t operate more than 20 locations and can’t also have a pending application or been granted relief under the Venues Act.
A business meeting eligibility requirements can receive up to $10,000,000 in relief. Relief is limited to $5,000,000 per location. Grants should be used towards certain expenditures, such as:
- Payroll costs
- Mortgage payments
- Maintenance expenses
- Food and beverage expenses
- Covered supplier costs
- Operational expenses
- Paid sick leave
- Any other expense determined to be essential to maintaining the business
The CAA authorized grants to eligible live venue operators or promoters, theatrical producers, live performing arts organization operators, museum operators, motion picture theatre operators, or talent representatives who demonstrate a 25% reduction in revenues. The ARPA provides approximately $1.2 billion of additional funds for fiscal year 2021, which will remain available until depleted.
Potential Future Tax Implications
With the ARPA passed, our attention is starting to turn towards potential tax increases as part of President Biden’s “Build Back Better” economic plan, which could pass in another reconciliation bill this year.
We’re expecting tax increase proposals aimed at increasing tax liability to individuals earning over $400,000 and to businesses.
The Biden Administration campaigned on increasing the top income tax rates to individuals making over $400,000. In addition, we’re expecting proposals that capital gain and dividends will be taxed at top ordinary income rates for taxpayers earning more than $1,000,000. In addition, individuals may be subject to Social Security tax on income over $400,000. We’re also expecting targeted proposals relating to estates (e.g., eliminations of tax-free tax basis step-up in property).
In addition, Biden campaigned on a platform that corporations be taxed at 28%, up from the current tax rate of 21%. A minimum 15% tax on large corporations is also on the table. In addition, we’re already seeing bills revising global intangible low-taxed income (GILTI) and Base Erosion and Anti-Abuse Tax (BEAT).
We’ll continue to monitor these developments and provide further guidance and detail as it becomes available.