The American Rescue Plan Act of 2021 (ARPA), signed by President Biden on March 11, 2021, is the latest major legislation that provides economic relief and stimulus, both tax and non-tax, during the Covid-19 pandemic. Below are brief summaries of the key aspects of the business tax provisions in ARPA.
Payroll tax credits
The paid sick leave and family leave credits are extended to apply to wages paid through September 30, 2021 (instead of March 31, 2021). There are also changes to these credits, including:
- One major change is that during the two-quarter extension period, the credits are applied against the employer Medicare portion of payroll taxes instead of the OASDI (Social Security) portion. The Medicare taxes taken into account are those for all employees, not just employees to whom qualifying leave wages are paid. But the credits continue to be refundable (and, thus, allowed in excess of the Medicare taxes) and advance refundable (they can be applied against any employment taxes, including income tax withholdings, for the quarter in which eligible leave wages are being paid, with any remaining credit refundable at the end of the quarter).
- An additional major change is that the allowable credit can be increased by both the amount of the OASDI taxes paid and Medicare taxes paid with respect to eligible leave wages, instead of just the Medicare taxes.
- Rules are provided that coordinate the leave credits with second draw Payroll Protection Program loans and certain government grants.
- The no-double benefit rule, which disallows claiming both
1. Either of the above credits and
2. The income tax credit for family or medical leave is expanded to include similar coordination with certain other income and payroll tax credits.
- An employer is ineligible for the leave credits if, in providing paid leave, the employer discriminates in favor of highly compensated or full-time employees or on the basis of employment tenure.
- IRS is allowed an extended limitation-on-assessment period for deficiencies due to claiming either of the leave credits.
- ARPA allows employers who voluntarily provide 80 hours of emergency paid sick leave and 12 weeks of emergency family leave beginning after March 31, 2021 to claim the leave credits, thereby resetting the leave bank regardless of whether the employee used leave previously or has exhausted leave.
- The employee retention credit is extended to apply to wages paid before January 1, 2022 (instead of July 1, 2021). The result is that as a general rule (but see below), there is allowed a maximum per employee credit for 2021 of $28,000 ($10,000 of wages taken into account per quarter multiplied by the credit rate of 70%).
- Also, there are modifications to this credit. A major change is that for the last two calendar quarters of 2021 there is allowed a maximum $50,000 credit per quarter to certain small start-up businesses (and under relaxed eligibility rules). This change makes a limited credit available to some businesses that couldn’t qualify for the credit at all because they can’t meet either the full/partial suspension or 20% drop-in-gross-receipts requirements. And, during those two quarters certain distressed businesses will be able to treat all wages as eligible (up to the $10,000 per quarter limit), enabling employers with more than 500 employees, who can ordinarily treat only wages paid to laid-off workers as eligible, to treat any wages as eligible.
- Another of the major changes is that the change to applying the credit to Medicare taxes (discussed above for the paid sick and family leave credits) also applies (along with the continuing refundability and, for employers with no more than 500 employees, advance refundability of the credit).
- Under related rules, the relieved amounts aren’t included in the income of the individuals and there is imposed by the Internal Revenue Code a penalty on individuals that fail to report the end of their eligibility.
Self-employment sick and family leave credits
These credits, which are creditable against the income tax, have been extended to apply to eligible days through September 30, 2021 (instead of March 31, 2021). A major change is that both credits treat as reasons for eligible leave the obtaining of or recovering from Covid-19 immunization. And, for the family leave credit, reasons for eligible leave are expanded to include all qualifying reasons for taking sick leave.
Another major change is that in determining whether the 10-day per tax year limit for the sick leave credit is complied with, only days after December 31, 2021, are taken into account (thus restarting the count and often increasing the cumulative number of eligible days). And, a major change to the family leave credit is that the maximum number of eligible days per tax year is increased from 50 to 60, again with only days after March 31, 2021 taken into account (resetting the count and often increasing the cumulative number of eligible days).
Excess business losses
In a revenue raiser, the disallowance of excess business losses is extended to run through 2026 instead of 2025.
Deduction disallowance for over $1 million employee remuneration
In another revenue raiser, for tax years beginning after calendar year 2026, the $1 million annual cap on the deductibility of remuneration paid to certain categories of employees of publicly-held corporations is expanded to include as a new category the five highest compensated employees not included in other categories.
Tax treatment of certain non-tax relief
ARPA provides favorable tax consequences for targeted Economic Injury Disaster Loan (EIDL) advances made by the SBA under the Economic Aid to Hard-hit Small Businesses, Non-Profits and Venues Act. The advances aren’t included in income and the income exclusion doesn’t result in deduction disallowances, denial of basis increases or reduction of other tax attributes. The same treatment applies to SBA Restaurant Revitalization Grants.
ARPA relaxes some funding standards and other IRC or ERISA rules for multiple employer pension plans. For single employer plans, IRC or ERISA rules are relaxed for amortizing funding shortfalls and the pension funding stabilization percentages are changed. Also changed are the special rules that apply to community newspaper plans.
Reporting by third party settlement organizations
ARPA tightens the de minimis exception to tax reporting by third party settlement organizations (TPSOs, e.g., PayPal) by excluding from reporting only transactions that don’t exceed $600 (and eliminating the 200-transaction threshold). ARPA also clarified that TPSO reporting obligations are limited to transactions involving goods and services.
In a revenue raising provision, IRC section 864(f), which provided a one-time election under which, effectively, corporate groups could allocate some interest expense from foreign to domestic corporations and reduce the effect of limits on the foreign tax credit, is repealed. The repeal is retroactive to the election’s effective date (i.e., for tax years beginning after Dec. 31, 2020).
Interested in how this directly affects your business? Contact us to be connected with an experienced CPA who can create an action plan that takes advantage of the business tax provisions of ARPA that pertain to your unique circumstances.
Check out our blog post “Individual Tax Provisions of ARPA” to learn more about how this new legislation affects individuals.