Tax Implications of the American Rescue Plan COVID Relief Bill

On March 11, 2021, President Biden signed the American Rescue Plan Act of 2021 (the “ARPA”) into law to provide financial relief to individuals and businesses that are struggling due to Covid-19. The ARPA includes a number of tax provisions that may have implications for taxpayers in 2020 and beyond. This legislation should be reviewed together with our previous client alerts on the Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136) (the “CARES Act”), the Families First Coronavirus Response Act and The Consolidated Appropriations Act, 2021. The ARPA focuses on individual relief and primarily non-tax relief for businesses.

This Client Alert discusses the tax implications of the ARPA for various taxpayers.

Businesses: The key business tax aspects of the ARPA are summarized below.

• Reporting Third-Party Network Transactions: The ARPA will reduce the reporting threshold for third-party settlement organizations from $20,000 and 200 transactions per payee to $600 per payee without any minimum number of transactions required. This provision will be applicable for calendar quarters beginning after December 31, 2021. The ARPA also clarifies that reporting is not required on transactions that are not issued for goods or services made after the date of enactment.
• Expand the IRC 162(m) Limitation: Under IRC 162(m), a public company is generally prohibited from deducting annual compensation in excess of $1M for its CEO, CFO and next three highest paid officers. The ARPA would expand this limitation to include a public corporation’s next five highest paid employees in addition to those currently covered by the limitation. It is important to note that this provision would not become effective until tax years beginning after December 31, 2026.
• Repeal the Worldwide Interest Allocation Election: IRC 864(f), which first went into effect for the 2021 tax year, allows affiliated groups to elect to allocate interest on a worldwide basis. The use of this worldwide allocation would have allowed a company to apportion excess interest expenses of its foreign subsidiaries to its domestic income, which would effectively increase the foreign tax credit limitation. The ARPA will repeal this election for US affiliated groups to allocate interest expense on a worldwide basis, effective for tax years beginning in 2021. The repeal of this election will result in the continuation of the pre-2021 policy for allocating interest expense.

Employers: The key tax aspects of the ARPA for employers are summarized below.

• Sick and Family Leave Credit: The ARPA will extend the sick and family leave originally enacted by the Families First Coronavirus Response Act until September 30, 2021 and increase the limit on the credit for paid family leave to $12,000 per employee in the aggregate.
• Employee Retention Tax Credit: The ARPA will extend the employee retention tax credit through December 31, 2021. It will also modify the credit such that, beginning after June 30, 2021, the credit will be structured as a refundable payroll tax credit against the Medicare tax imposed under IRC 3111(b). The ARPA will also change the eligibility criteria for this credit by allowing Severely Financially Distressed Employers with more than 500 employees to include all wages paid to employees as qualifying wages, not just those wages paid to employees that are not providing services. A Severely Financially Distressed Employer is a company whose gross receipts for the calendar quarter are less than 10% of its gross receipts from the same calendar quarter in 2019. For those businesses which were not in existence in 2019 but that want to claim the credit, they must use their average number of 2020 employees to determine the wages which would qualify for this credit. These new employers will utilize their 2020 receipts for purposes of the gross receipts test. For additional guidance on this credit, please see our prior alert.
• Dependent Care Assistance: The ARPA will increase the maximum limit for a dependent care assistance program from $5,000 to $10,500 for 2021 only.

Individuals: The key individual tax aspects of the ARPA are summarized below.

• Direct Stimulus Payments: The ARPA will authorize a third round of Covid-19 stimulus payments, up to $1,400 per eligible individual. These payments will be treated as tax credits and therefore will not be includable in the recipient’s 2021 taxable income. The stimulus will begin to phase-out for single taxpayers with adjusted gross income (AGI) between $75,000 and $80,000, heads of household filers with AGI between $112,500 and $120,000, and joint filers without children with AGI between $150,000 and $160,000. No stimulus will be offered for any taxpayers with AGI greater than the phase-out limits.
• 2020 Tax Exclusion for Unemployment Insurance Payments: Taxpayers with AGI less than $150,000 that received unemployment insurance benefits in 2020, will qualify for an exemption from taxable gross income up to $10,200 of those payments.
• Student Loan Tax-Free Relief: The ARPA will exclude federal student loan debt that is forgiven in 2021 through 2025 from gross income. However, the ARPA itself does not actually provide for any student loan forgiveness, which will likely be addressed in future legislation or an executive order.
• Child Tax Credit Expansion: The ARPA will make the Child Tax Credit refundable and increase it in 2021 to $3,000 per child ($3,600 per child under age 6) for eligible families. Taxpayers eligible for the full credit would include single filers with AGIs below $75,000, heads of household filers with AGI below $112,500, and joint filers with AGI below $150,000. The increased per-child credit amount would be reduced by $50 for every $1,000 of modified AGI exceeding the above listed amounts. The ARPA would also expand eligibility to include 17-year-old children.