$1.9 Trillion America Rescue Plan Contains Wide-Reaching Tax Changes

March 16, 2021 | Kristine A. Tidgren

President Biden signed the American Rescue Plan Act of 2021 (ARPA), H.R. 1319, into law on March 11, 2021. The $1.9 trillion package includes money for states and localities, schools, socially disadvantaged farmers, public health, small business relief, and much more. The law also includes a number of tax provisions, most intended to assist struggling taxpayers, but a few intended to raise revenue.  This post summarizes key tax provisions within the ARPA. A few key provisions impact 2020 returns, some of which have already been filed. Many more impact 2021 decisions taxpayers are making now. A separate post will detail non-tax ARPA provisions related to agriculture and small business relief.

This massive new stimulus package raises more questions about future tax increases. On March 15, 2021, Bloomberg reported that President Biden plans to increase taxes on corporations and “wealthy” individuals in the next spending package. The reporting was based upon comments made by an aide to the President. No details of the proposals have been released, but we will continue to provide updates as more information is gathered. Campaign proposals were wide-ranging, but lacking in detail.

Partial Exclusion from Income for 2020 Unemployment Benefits

Suspension of Tax on Portion of Unemployment Compensation, Section 9042

The ARPA amends IRC § 85 by adding a new section temporarily excluding some unemployment compensation from gross income. Specifically, for the 2020 tax year only, the law excludes from gross income up to $10,200 of unemployment compensation for taxpayers with adjusted gross income below $150,000. The AGI limit applies, regardless of whether the return is for a single taxpayer, head of household, or taxpayers who are married filing jointly. The $150,000 AGI limit is a cliff. If AGI is $150,000 or more, there is no unemployment income exclusion. If both spouses received unemployment compensation and file a joint return (with AGI below $150,000), each spouse will receive a separate $10,200 exclusion for their respective unemployment payments. Although originallly requiring a different calculation, IRS now agrees that for purposes of the < $150,000 AGI test, unemployment compensation is excluded from AGI.

Note: IRS has instructed taxpayers how to report the income exclusion on a webpage updated March 24. On that same page, IRS says, "If you have already filed your 2020 Form 1040 or 1040-SR, you should not file an amended return at this time. The IRS will issue additional guidance as soon as possible." Those who have already filed their 2020 returns will not have to amend. Iowa provided its instructions on March 29.

Healthcare: Generous Premium Tax Credit Modifications for 2020, 2021, and 2022

The ARPA makes significant changes to the Affordable Care Act’s premium tax credit (PTC) with the goal of making healthcare more affordable for 2020, 2021, and 2022. These changes will result in significant savings to many taxpayers purchasing healthcare on the Marketplace. Some taxpayers who filed 2020 returns may need to amend to take advantage of the new law. Others may wish to now sign up for the first time, and others will need to update current Marketplace coverage to take full advantage of the new provisions. The Marketplace should be ready to accommodate the new PTCs beginning April 1. A special enrollment period is available through May 15.

Expanding the Premium Tax Credit for 2021 and 2022, Section 9661

For 2021 and 2022 only, the ARPA removes the ceiling and allows many more taxpayers, regardless of income, to qualify for a premium tax credit. The Affordable Care Act created the refundable premium tax credit (PTC) for those taxpayers purchasing insurance on the ACA Marketplace with household income between 100 percent and 400 percent of the federal poverty limit. To qualify for Marketplace coverage, the taxpayer may not be eligible for affordable employer-sponsored health plans or other qualifying coverage.

The PTC is generally equal to the premium for the second lowest cost silver plan available through the Marketplace that applies to the members of a coverage family, minus a certain percentage of household income. The taxpayer is expected to contribute this percentage as a premium each year. The PTC comprises the rest of the premium amount. The PTC can be claimed when a taxpayer files a return, or it can be paid, in advance, to make premium payments on behalf of the taxpayer throughout the year.  Under pre-2021 law, no premium tax credit was allowed where household income was 400 percent or higher.

Under the ARPA, for tax years beginning in 2021 and 2022, the applicable percentages of household income (which determines the amount of the required premium) have been lowered for all income levels, and taxpayers with income of 400 percent of the FPL or higher are now eligible for the PTC (if they otherwise qualify). The applicable percentage for these taxpayers is 8.5 percent, which means they are required to pay no more than 8.5 percent of their household income on the healthcare premium. If the premium is equal to or less than 8.5 percent of income, they will not receive a PTC. For premiums in excess of 8.5 percent of household income, taxpayers receive the difference between the cost of the premium for the second lowest cost silver plan and the applicable percentage of household income as a PTC. The following table depicts the applicable premium percentages for 2021 and 2022 alone.

Note: This is a very generous new benefit for nearly anyone with Marketplace coverage, but especially for some without access to other insurance whose income is 400 percent or more of the FPL. These taxpayers have been subject to a “subsidy cliff,” meaning that they were required to pay the full premium for any Marketplace coverage they received. One dollar of extra income has meant thousands of dollars of additional premiums. The ARPA removes this cliff for 2021 and 2022, restricting the required premium for these taxpayers to 8.5 percent of household income. The rest is paid through an advance PTC or recovered through the PTC when the tax return is filed. On its website, the Centers for Medicaid and Medicare Services explains that the increased premium tax credits based on the lower income contribution percentage, along with expanding tax credit access to consumers with household incomes above 400%, will be available through HealthCare.gov starting on April 1.

This means that new consumers and current enrollees who submit an application and select a plan on or after April 1 will receive the increased premium tax credits for 2021 Marketplace coverage. Current enrollees, including those who recently enrolled through the 2021 Special Enrollment Period, can update their applications and enrollments in order to get new eligibility results starting April 1. They will need to reselect their current plan in order for the changes to take effect to reduce their premiums  (by increasing the APTC) for the remainder of the year. 

Temporary Elimination of the APTC Repayment for 2020, Section 9662

As noted above, the ACA allows PTCs to be paid by the government, in advance, directly to the Marketplace insurer, to reduce the cost that the insured must pay out of pocket for healthcare.  The amount of this advance premium tax credit (APTC) is based upon the taxpayer’s estimate of household income for the year. At the end of the tax year, the taxpayer for whom the APTC was paid must reconcile that amount by comparing it to the PTC for which the taxpayer was eligible, based upon that year’s actual household income. If the APTC exceeds the actual PTC, the taxpayer must generally repay the difference as an additional tax, subject to income limits. Taxpayers with income at or above 400 percent of the FPL must generally repay the entire APTC. This requirement has caused many unsuspecting taxpayers to face significant tax bills because of a small amount of unexpected income. 

For tax year 2020 alone, the ARPA eliminates the requirement to repay an excess APTC. In other words, if a taxpayer’s APTC exceeds the actual PTC, no additional tax is imposed, regardless of household income.

Note: This provisions will save some taxpayers thousands of dollars of additional tax. On its website, IRS has urged taxpayers to wait to file amended returns until further guidance issues: Taxpayers who filed a 2020 tax return and reported an excess advance premium tax credit repayment on Line 29 of Form 8962, Premium Tax Credit, should not file an amended tax return only to get a refund of this amount.

Increased PTC for Individuals receiving Unemployment Compensation during 2021, Section 9663

The ARPA provides that any taxpayer who has received, or has been approved to receive, unemployment compensation for any week beginning during 2021, will be eligible for the PTC. These taxpayers will calculate the PTC as though income does not exceed 133 percent of the FPL.

Note: This means that Marketplace-eligible taxpayers receiving unemployment benefits at any time in 2021 will have a full subsidy if they choose the second-lowest priced silver plan. Normal rules, however, still apply with respect to eligibility. This means that taxpayers for whom affordable employer-based health insurance is available are excluded from eligibility for a PTC. The ARPA does not fix the “family glitch,” which bases the affordability calculation on the cost of self-only premiums, not the premium for the entire family.

Note: CMS has suggested that the increased PTC will not be available for the unemployed to claim through an APTC until summer, providing these instructions to those receiving unemployment benefits:

You should apply and select a plan by the end of March in order to enroll in coverage starting April 1.  After April 1, you can come back in to update your application and confirm your current plan with the updated tax credits. Later this year, you may be able to receive another increase in the premium tax credits available to you. HealthCare.gov will have more information available in the summer once these additional savings are available for consumers who have received unemployment compensation during 2021.  At that time, you can come back to HealthCare.gov to update your application and current plan with more tax credits to reduce your premiums for the remainder of the year. 

100 Percent COBRA Subsidy through September 30, 2021

Preserving Health benefits for Workers, Section 9501

This provision provides premium assistance for continuation of employer-based healthcare coverage for individuals and their families after employment has been involuntarily terminated. Under the new law, from April 1 through September 30, 2021, a COBRA-eligible individual (except for those who voluntarily terminated their employment or those whose employment was terminated for “gross misconduct”) will be treated as having paid any premiums required to remain on a COBRA health plan. This “premium assistance” is equal to 100 percent of the required premium and is fully excluded from the gross income of the individual. Any premiums the individual has paid for this coverage must be reimbursed no later than 60 days after the date the individual elects the continuation coverage eligible for the assistance. To fund the coverage, the person to whom the continuation coverage premiums must usually be paid (employer, plan, or insurer) is allowed a refundable payroll tax credit to cover the cost of the premiums.

To allow individuals to fully benefit from these provisions, the law provides special notice requirements, enrollments options, and a special COBRA election period.

Note: Further guidance should be coming out soon on this provision to accommodate the April 1 start date.

Economic Impact Payments, Round Three

2021 Recovery Rebates for Individuals, Part, 1, Section 9601

The law authorizes “2021 rebate” payments to eligible taxpayers, in the amount of $1,400 per taxpayer ($2,800 in the case of a joint return), plus $1,400 per dependent. Notice that dependents for the purpose of 2021 rebate payments are defined by IRC § 152, which means that the rebate will be paid for any legal dependent, and not just for children under the age of 17.

As with the two prior rounds of rebate payments (also called “economic impact payments”), the rebate is an advance payment of a refundable credit allowed to eligible taxpayers, but this time for tax year 2021. The payment will be reconciled on the 2021 return.

Eligibility

“Eligible individuals” include “any individual” except for:

  • Nonresident alien individuals
  • Individuals who are dependents of another taxpayer
  • An estate or trust

For a taxpayer to receive a rebate credit for themselves or a dependent, the social security number of that person must be reported on the return. An adoption taxpayer identification number may also be used. If at least one spouse is a member of the U.S. Armed Forces, no reduction is made to the $2,800 payment if one spouse has a valid social security number.

The amount of the allowable rebate payment is reduced or phased out (but not below zero) once a taxpayer’s adjusted gross income exceeds $150,000 for joint return filers, $112,500 for those filing head of household, or $75,000 for other taxpayers. The reduction for the 2021 credit is much more accelerated than that for the 2020 credits. Joint filers are completely ineligible for the credit once their AGI exceeds $160,000, head of household filers are phased out above $120,000 of AGI, and single taxpayers lose the credit with more than $80,000 of AGI.

Advance Refund Payments

As with last year’s economic impact payments, the Treasury Department will immediately determine the “advance refund amount” to which the individual is entitled to be paid, based upon the amount that would have been allowed as a recovery rebate credit to that individual in 2019 had the credit been part of the 2019 law. The individual is treated as having made an overpayment in the amount of the calculated recovery rebate credit. The law specifically instructs that no recovery rebate credit is to be calculated for a taxpayer or dependent who died before January 1, 2021. The law does clarify that the death of a spouse does not prevent the surviving spouse from receiving $1,400 in their own right.

For taxpayers who have already filed their 2020 returns, Treasury will use the 2020 data, instead of 2019 data, when calculating the advance refund. For those who have not filed a return for 2019 or 2020, the law authorizes the Treasury to calculate the advance refund “on the basis of information available to the Secretary.”

New for this year, taxpayers whose payment is calculated with 2019 data, but who file their 2020 returns before the “additional payment determination date” will receive an additional payment if the 2020 data affords them a greater payment. This additional determination date is the earlier of:

  • 90 days after the 2020 calendar year filing deadline or
  • September 1, 2021

The law states that for this purpose, the date of “filing” is defined as when the IRS processes the return. The law instructs the Treasury Department to disburse the advance refunds “as rapidly as possible.” The law states that no refund will be made or allowed after December 31, 2021. After such time, the eligible individual may claim the credit on their 2021 tax return. As it was with the first two rounds of economic impact payments, the Treasury is instructed to provide notice to the taxpayer of the amount paid “as soon as practicable” after the payment is made.

Note: IRS has announced that payments began issuing March 12. The IRS website contains the latest information regarding these payments, including updated “Get My Payment” access.

Reconciling the Advance Refund Payment and the Recovery Rebate Credit

The law provides that when filing the 2021 return, the amount of the recovery rebate credit to which a taxpayer is entitled will be reduced (but not below zero) by the aggregate payments made to the taxpayers during the taxable year. If a taxpayer is entitled to a credit that is larger than the payment received, the additional credit may be claimed on the 2021 return. If taxpayers receive a larger payment than the credit to which they are entitled on the 2021 return, the taxpayer will not be required to pay back the difference.

Expanded Child Tax Credit for 2021

Child Tax Credit – Increased Benefits for 2021, Part 2, Section 9611

Background

For tax years beginning in 2021 only, the ARPA makes the child tax credit much more generous. The Tax Cuts and Jobs Act raised the child tax credit from $1,000 to $2,000 per qualifying child for tax years 2018 through 2025. It also significantly expanded the phase-out threshold for credit eligibility. Since 2018, the credit has begun to phase-out where modified adjusted gross income exceeds $400,000 for MFJ and $200,000 for other taxpayers. The credit has been refundable at $1,400.

Temporary Increase for 2021

The ARPA, for 2021 only, expands the definition of qualifying child to include children under 18, instead of children under 17. For 2021, the ARPA also expands the child tax credit to $3,000 per child and $3,600 for children under six for taxpayers within certain income thresholds. This increase ($1,000 per child and $1,600 for children under six) begins to phase out where modified AGI exceeds $150,000 for MFJ, $112.500 for head of household, and $75,000 for singles. The phase-out reduces the increase by $50 for each $1,000 by which the modified AGI exceeds the threshold amount. The $2,000 portion of the credit continues to phase out using the thresholds of $400,000 for MFJ and $200,000 for other taxpayers.

Refundability

For 2021, the entire child tax credit is refundable for taxpayers with a principal place of residence in the U.S. for more than one-half of the year or for residents of Puerto Rico. The ARPA also eliminate the “earned income” for low-income households, meaning that they are eligible for the entire credit, regardless of income.

Advance Payment of Credit

In an effort to get additional money in the hands of taxpayers directly, the law instructs the Secretary of the Treasury to establish a new program for making periodic payments to eligible taxpayers that equal the “annual advance amount” for the year. This advance amount is equal to one-half of the taxpayers’ 2021 child tax credits. The advance payments, which are generally to be made in “equal amounts,” are to be electronically deposited from July through December of 2021. Eligibility will be calculated based upon the latest tax return that has been filed. For most taxpayers, this will be the 2020 return.

Online Portal

An online portal is to be developed to allow taxpayers to opt out of the periodic payments, report a change in the number of qualifying children, report a significant change in the taxpayer’s income, or report a change in marital status. 

Note: The opt out may be desired for taxpayers who do not wish to risk a repayment obligation discussed in the next paragraph.

Reconciliation and Possible Repayment

In January of 2022, the Secretary is to provide taxpayers with a report of the advance payments they received. The law provides that taxpayers must then reconcile their advance payments with their eligible credits on their 2021 return. The credit will be reduced, but not below zero, by the payments received throughout the year. If, however, the amount of advance payments exceeds the eligible credit, taxpayers with income above a certain income threshold must generally repay the excess as a tax. This repayment requirement is reduced or eliminated entirely according to a complex “safe harbor” formula for taxpayers whose income does not exceed 200 percent of the following applicable income thresholds:

  • $60,000 for joint returns or surviving spouses
  • $50,000 for heads of household
  • $40,000 for single taxpayers

Special rules apply to taxpayers in American possessions.

Note: Treasury will be issuing regulations to explain the details of this complex new program for 2021. Stay tuned!

Earned Income Tax Credit Expansion and Enhancement for 2021

The ARPA makes a number of changes to the earned income tax credit as well for tax year 2021. It also includes several permanent changes to the law, as noted below.

Strengthening the Credit for Those with No Qualifying Child, Section 9621

For taxpayers without a qualifying child, eligibility for the earned income tax credit (EITC) has, prior to 2021, been restricted to those who are at least 25 years old and those who are younger than 65. For tax year 2021 only, the ARPA expands eligibility for the EITC for these individuals by lowering the qualification age generally to 19. For a specified student, this age is 24, and for a qualified former foster youth or a qualified homeless youth, the minimum age is 18. The new law removes the upper age limit altogether for 2021.

In addition to qualifying more people, the law also increases the benefit available to these individuals in 2021 by raising the maximum credit from $543 to around $1,502. This is because the credit and phase-out percentage is increased from 7.65 percent to 15.3 percent, and the “earned income amount” is increased from $7,100 to $9,820. The income cap is also raised for these taxpayers.

Taxpayer Eligible for Childless EIC if Qualifying Children Fail to meet Identification Requirements, Section 9622

Beginning with tax year 2021, the ARPA allows taxpayers who cannot produce a social security number for otherwise qualifying children to nonetheless qualify for the EITC as a taxpayer with no qualifying children. Prior law prevented these taxpayers from qualifying at all. This is a permanent change.

Credit Allowed for Certain Separated Spouses, Section 9623

Beginning with tax year 2021, the ARPA makes it easier for separated spouses to claim the EITC without filing a joint return. This is a permanent change.

More Generous Disqualified Investment Income Test, Section 9624

Before tax year 2021, taxpayers with $3,650 of investment income were disqualified from receiving the EITC. The new law increases that amount to $10,000, beginning with tax year 2021. This is a permanent change, and the amount will be adjusted for inflation in future years.   

Application of Earned Income Tax Credit in Possession of the US, Section 9625

The ARPA allows taxpayers from Puerto Rico, Virgin Islands, Guam, American Samoa, and the Commonwealth of the Northern Mariana Islands to qualify for the EITC.

Temporary Special Rule for Determining Earned Income Based Upon 2019, Section 9626

The new law states that if earned income of the taxpayer in 2021 is less than the earned income of the taxpayer for 2019, the credit may be calculated using 2019 income instead of 2021 income. This provision applies only to tax year 2021.

Dependent Care Assistance Expansion in 2021

Refundability and Enhancement of Child and Dependent Care Credit, Section 9631

The ARPA significantly expands the child and dependent care credit for 2021 by:

  • Making the credit refundable to those who reside in the United States for more than one-half of the year.
  • Increasing the expenses taken into account from $3,000 to $8,000 for those with one qualifying dependent and from $6,000 to $16,000 for those with more than one qualifying dependent.
  • Increasing the credit percentage from 35 percent to 50 percent.
  • The credit begins to reduce at $125,000 AGI, but is not fully phased out until AGI exceeds $440,000.

Note: This means that for 2021, the dependent care credit, which is fully refundable, can be as high as $8,000 for taxpayers with more than one qualifying individual. Before the ARPA, the maximum credit was $2,100.

Increased Income Exclusion for Employer-Provided Dependent Care Assistance, Section 9632

The ARPA provides that for tax year 2021, taxpayers can exclude up to $10,500 ($5,250 for married filing separate) in employer-provided dependent care assistance from income. This is intended to ensure that unused amounts carried over from 2020 under a flexible spending account are not taxable in 2021.

Extension and Modification of Paid Family and Sick Leave Credits for 2021

Payroll Credits, Section 9641, Self-Employed Sick Leave Credit, Section 9642, and Self-Employed Family Leave Credit, Section 9643

2020 FFCRA Credits - Background

The Families First Coronavirus Response Act (FFCRA), H.R.6201, was signed into law in March of 2020. This temporary expansion of the Family and Medical Leave Act, required most private employers with fewer than 500 employees to provide emergency paid sick leave and emergency paid family and medical leave to their employees for coronavirus-related absences from April 1, 2020, through December 31, 2020. The FFCRA created a corresponding refundable paid sick leave credit and paid family leave credit for these employers. The credit includes the health insurance costs paid during the leave period by the employer.  Self-employed individuals were offered equivalent tax credits.

Specifically, under the FFCRA employers could receive sick leave credits for up to 80 hours or two weeks of qualifying sick leave per employee. The amount of the sick leave credits was dependent upon the reason for the leave. The sick leave credits were in an amount up to 100 percent of pay, capped at $511 per day, if an employee was unable to work or telework because of the following reasons:

  • The employee was subject to a Federal, State, or local quarantine or isolation order related to COVID-19;
  • The employee was advised by a health care provider to self-quarantine due to concerns related to COVID-19; or
  • The employee was experiencing symptoms of COVID-19 and seeking a medical diagnosis

The sick leave credits were in an amount up to 2/3 regular pay, capped at $200 per day, if an employee was unable to work or telework because of the following reasons:

  • The employee was caring for an individual who is subject to a Federal, State, or local quarantine or isolation order related to COVID-19, or was advised by a health care provider to self-quarantine due to concerns related to COVID-19;
  • The employee was caring for a child of such employee if the school or place of care of the child has been closed, or the child care provider of such child was unavailable due to COVID-19 precautions; or
  • The employee was experiencing any other substantially similar condition specified by the Secretary of Health and Human Services in consultation with the Secretary of the Treasury and the Secretary of Labor;

The family leave credits were in an amount, up to 2/3 of regular pay, capped at $200 per day, for up to 10 weeks or $10,000, if an employee was unable to work or telework because of the following reasons:

  • A need for leave to care for a child of such employee if the child’s school or place of care has been closed (including the closure of a summer camp, summer enrichment program, or other summer program), or
  • because the child care provider of the child is unavailable, for reasons related to COVID-19. 

For both the family leave and sick leave credits, qualified healthcare expenses were included in the credit in addition to the credit amount for the wages. The first 10 days of family leave was not eligible for a credit; however, the sick leave credit could be provided for this leave. An additional 10 weeks of family leave credit was then available. In other words, up to 12 weeks of credits were available per employee through the FFCRA.

Self-employed taxpayers were provided with similar credits, calculated based upon the number of days the taxpayer was unable to work because of a qualifying reason, multiplied by “average daily self-employment income” or “net earnings from self-employment for the taxable year, or prior taxable year, divided by 260.” The daily credit amount was capped in the same way as the credit provided to employers: $511/day for the first three qualifying sick leave reasons, and 2/3 of ADSE income, up to $200/day for all other reasons.  The self-employed taxpayer was eligible for up to 10 days of sick leave and 50 days of family leave.

CAA Extension

The Consolidated Appropriations Act, 2021, extended the FFCRA leave credits through March 31, 2021. It did not, however, extend the requirement that employers provide this leave or provide credits for additional days of leave beyond the original limits.

ARPA Enhancements and Extension

The ARPA extends the availability of the payroll tax credits further, through September 30, 2021. It also provides some additional credit amounts. The law extends the eligibility of self-employed taxpayers to take advantage of a similar credit on their 2021 return. As with the CAA, the ARPA does not re-impose employee leave mandates upon employers. Specifically, the ARPA updates the FFCRA in the following way:

  • Creates IRC §§ 3131 (sick leave credit), 3132 (family leave credit), and 3133 (credits increased by employer’s share of social security and Medicare tax) to newly codify the FFCRA credits.
  • Extends the availability of the paid family and sick leave credits for the period from April 1 through September 30, 2021.
    • Increases qualified wages eligible for paid family leave per employee from $10,000 to $12,000. This increases the maximum family leave credit to compensate 12 weeks of family leave. The credit is now available for the first two weeks of paid family leave.
    • Expands the eligibility of the the paid family leave credit to include reasons allowed for paid sick leave in 2020 (see above list of reasons).
    • Resets the accumulated sick leave for each employee to allow another 10 days of qualified paid sick leave for leave occurring between April 1 and September 30, 2021.
    • Includes receiving a vaccination and recovering from an illness resulting from the vaccination as qualified reasons for family and sick leave.
  • Allows self-employed taxpayers a family leave credit for a maximum of 60 days between January 1, 2021, and September 30, 2021, and a sick leave credit of 10 days for tax year 2021.
    • The self-employed taxpayer can elect to use the prior year’s net earnings if it would result in a higher tax credit.

Employee Retention Credit Extension for 2021

Extension and Modification of the Employee Retention Credit, Part 6, Section 9651

CARES Act Provision

Section 2301 of the CARES Act allowed “eligible employers” an employee retention credit (the “ERC”), equal to 50 percent of “qualified wages” paid to each employee for each calendar quarter during the COVID-19 crisis. The ERC is a fully refundable payroll tax credit. “Eligible employers” were those employers whose businesses were fully or partially suspended during the calendar quarter due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to COVID-19. “Eligible employers” also included those employers that experienced a “significant decline in gross receipts” for a given calendar quarter. 

An employer became an “eligible employer” under the “significant decline in gross receipts” test during the first calendar quarter for which gross receipts for that quarter were less than 50 percent of gross receipts for the same calendar quarter in 2019. The eligibility period ended in the calendar quarter following the first calendar quarter in which gross receipts were greater than 80 percent of gross receipts for the same calendar quarter in 2019. The qualified wages which could be taken into account could not exceed $10,000 per employee for all quarters in 2020. In other words, the total 2020 credit for which an employer could receive for each employee in 2020 was $5,000. The credit was taken against the applicable employment taxes on the qualified wages, but any excess was fully refundable. Businesses that took PPP loans were originally not eligible to take the ERC.

CAA Updates

Section 206 of the CAA’s Taxpayer Certainty and Disaster Tax Relief Act of 2020 (the “Disaster Tax Relief Act”) retroactively changed the law to allow employers who received PPP loans to qualify for the ERC, as long as the payroll expenses paid with forgiven PPP proceeds are not the same wages used to claim the ERC. The CAA also extended and significantly expanded the ERC for 2021, through June 30, 2021. From January 1, 2021, through June 30, 2021, the new law increased the credit percentage from 50 percent of qualified wages to 70 percent. Additionally, it allowed employers to count qualified wages up to $10,000 per employee per quarter (instead of across all quarters) in calculating the credit. This meant that an eligible employer can now claim up to a $14,000 credit per employee for the first two quarters of 2021. And becoming an eligible employer under the decline in gross receipts test is made much easier. Employers may generally qualify for the credit if their gross receipts for a calendar quarter are less than 80 percent of the gross receipts for the same calendar quarter in calendar year 2019.

ARPA Expansion

Note: On April 2, 2021, IRS issued Notice 2021-23, providing guidance on the CAA updates to the ERC. It did not include guidance for the ARPA expansion.

The ARPA extends the ERC from July 1, 2021, until December 31, 2021. For all of 2021, the ERC credit percentage is now 70 percent of qualified wages, for a maximum of $10,000 in qualified wages per employee per quarter.  Given this extension, eligible employers may now qualify for an ERC up to $28,000 per employee for 2021 ($7,000 per quarter). This is in addition to the $5,000 maximum credit per employee available for 2020.

Although the ERC remains a fully refundable credit, it is a credit against certain payroll taxes. The CARES Act and CAA allowed employers to immediately claim the credit against the employer portion of social security taxes (6.2 percent) and the Medicare tax (1.45 percent). The ARPA, however, allows the credit only against the Medicare tax for quarters three and four of 2021. 

In addition to these provisions, the ARPA allows "recovery startup businesses" to receive the credit, limited to $50,000 per quarter. It also contains special rules for businesses not in existence in 2020. Additionally, the law creates a new category of "severely financially distressed employers." These businesses are defined as those whose revenue for any quarter in 2021 is less than 10 percent of its revenue for the comparable quarter in 2019. Severely financially distressed employers may count all wages paid to employees during that quarter as "qualified wages," except for those wages used to obtain relief from other provisions, such as the FFCRA or the Paycheck Protection Program.

For additional details on the ERC, which is now available through the end of 2021, read this post.

Modification of Treatment of Student Loan Forgiveness, Section 9675

The ARPA excludes any forgiven federal student loan debt from gross income from 2021 through 2025.

Note: This provision does not grant loan forgiveness. Instead, it provides that if a student loan is ever forgiven, the forgiven debt will be excluded from income.

Extension of Limitation on Excess Business Losses for Noncorporate Taxpayers (increase $31 billion), Section 9041

The Tax Cuts and Jobs Act enacted an “excess business loss” rule, restricting a noncorporate business taxpayer’s loss to $250,000 ($500,000 in the case of a joint return) for tax years 2018 through 2025. Section 2304 of the CARES Act temporarily suspended this loss limitation, allowing taxpayers to deduct excess business losses arising in tax years 2018-2020. To generate some revenue to help pay for relief provisions, the ARPA modifies IRC § 461(l)(1) to extend the limit on excess business losses for one year, through 2026. It does not retroactively reinstate the limitation for tax years 2018 through 2020.

Note: The excess business loss limitations are back in place for 2021 and will continue now through 2026.