A $1.9 trillion measure —the American Rescue Plan Act (ARPA) —was signed into law on March 11, 2021. The key feature of the new law, also referred to as Stimulus 3.0, is a third Economic Impact Payment (EIP3) to eligible individuals. But there are other financial and tax changes impacting individuals as well as small businesses.
Stimulus payments and unemployment assistance
EIP3. Are you eligible to receive an EIP3 up to $1,400 ($2,800 for married persons filing jointly)? Do you have dependents, including children 17 and older and even adult dependents, for whom you can receive an additional $1,400? It depends on your adjusted gross income on your 2020 federal income tax return if it’s been filed, or the 2019 return if the 2020 return has not been filed. (Payments will also be made to those not required to file returns.) The full payment applies if AGI does not exceed $75,000 for singles and married filing separately, $112,500 for heads of households, and $150,000 for joint filers (and qualifying widow/widowers). The $1,400 decreases for excess AGI; it’s completely phased out when AGI reaches $80,000 for singles and married filing separately, $120,000 for heads of households, and $160,000 for joint filers and qualifying widow/widowers.
If you didn’t yet file your 2020 return but 2020 AGI is lower than in 2019 (what the IRS uses to figure EIP3), you will be able to claim a Recovery Rebate Credit when filing the 2021 return in 2022 and receive an additional amount. However, while initial EIP3 payments are not subject to any offset for debts, including federal taxes owed, the credit claimed on the 2021 return can be reduced by unpaid tax liabilities.
Unemployment benefits. Those who qualify for unemployment benefits can receive an additional $300 per week in federal assistance (on top of the applicable state unemployment benefits). This additional payment runs from March 14, 2021, through Labor Day (September 6, 2021). These benefits are taxable income. The special tax rule for 2020 is discussed below.
What this means to your business? Small businesses may be able to attract some of the stimulus payment money and even possibly some of the additional unemployment compensation. Marketing efforts in this regard need to be sensitive to the financial stress that many consumers are experiencing now despite the apparent economic recovery.
Financial help for businesses
In addition to direct help to individuals via stimulus payments, ARPA contains various measures to aid businesses:
- The Paycheck Protection Program (PPP) has another $7.5 billion to use for loans. Loan forgiveness on a tax-free basis applies if at least 60% of the proceeds are used to pay employee compensation and certain other eligible expenses. Note: ARPA does not extend the current March 31, 2021, deadline for loan applications, but the deadline may be extended by other means so monitor this on SBA.gov. A separate measure extends the PPP deadline to May 31, 2021 (when this blog posted, the measure had overwhelmingly passed the House and was expected to pass the Senate soon).
- Targeted Economic Injury Disaster Loans (EIDLs) received another $15 billion to assist small businesses in “underserved areas.”
- The Shuttered Venue Operators Grant (SVOG) program got another $15 billion as well. The SBA announced that this program’s new application rules apply in early April 2021. ARPA makes it clear that those receiving a grant can also apply for a first and second draw PPP loan.
- A State Small Business Credit Initiative has $10 billion allocated to state governments, which can be used to make low-interest loans and support other programs for businesses.
- The Child Care and Development Block Grant Program received $39 billion for direct funding to child-care providers.
- The Restaurant Revitalization Fund of $28.6 billion will provide direct tax-free grants for small and independent restaurants. And, because of increased funding for the Supplemental Nutritional Assistance Program (SNAP) and the National School Lunch Program, some restaurants may benefit by contracting to provide food to emergency shelters and schools.
Because most of the programs described above are handled by the SBA, its budget was increased by $1.325 billion. Check the SBA’s website for new details about these financing opportunities.
What this means to your small business? Whether you have an ongoing need for additional financing is something you should determine now. Then familiarize yourself with the programs for which you may be eligible and the opportunities they present. Watch for new information that will be forthcoming about applications, deadlines, and other rules.
Tax changes for individuals and businesses
Most of the tax changes don’t apply to 2020 returns, but the following discussion will serve as an additional supplement to J.K. Lasser’s Small Business Taxes 2021 and J.K. Lasser’s 1001 Deductions & Tax Breaks. It also provides you with a heads up for changes effective in 2021 and, in some cases, beyond, to help you do tax planning.
Individuals. In additional to the tax-free treatment for EIP 3, there’s one key change impacting 2020 returns: unemployment benefits up to $10,200 received in 2020 are excludable from gross income for any taxpayer (regardless of filing status) with AGI under $150,000. The IRS has advised those who’ve filed their 2020 returns to NOT file amended returns but wait for IRS guidance.
For 2021 only (unless otherwise indicated), various personal tax credits are enhanced:
- Child tax credit is increased to $3,600 per qualifying child from birth to age 5 and $3,000 from age 6 through 17. Income limits continue to apply, and may operate to restrict the credit to the pre-2021 amount or phase it out entirely. The increased credit amount (the amount above the $2,000 limit in 2020) phases out by $50 for each $1,000 over the income limit applicable to your filing status (these income limits are lower than the limits for the basic $2,000 credit) and the remaining $2,000 per child phases out based on 2020 phase-out rules. The credit is fully refundable. The IRS is supposed to issue one-half of the expected credit amount in equal periodic payments beginning this July (based on 2020 AGI, or 2019 AGI if the 2020 amount is not known because the 2020 tax return hasn’t been filed), with any additional amount claimed upon reconciliation when the 2021 tax return is filed. Excess credit payments must be repaid on the 2021 return (i.e., they become a tax liability).
- Earned income tax credit is expanded for those with no qualifying child (the credit percentage increases to 15.3%, up from 7.65%, and the income limits have been changed). Those age 19 and older may qualify (instead of the age 25 threshold before 2021), although in 2021 the age is 24 for certain students and 18 for qualified former foster youth or homeless youth; there’s no maximum age limit (compared with age 65 before 2021). The limit on disqualifying investment income is raised permanently to $10,000 (not just for 2021), and will be adjusted for inflation after 2021. Individuals can elect to use 2019 earned income in figuring their 2021 earned income tax credit if such income is less than in 2021.
- Child and dependent care credit is enhanced in many ways. Qualifying expenses are increased to $8,000, or $16,000 for 2 or more children (up from $3,000, and $6,000 respectively. The maximum credit is 50% (up from 35%) and applies to adjusted gross income (AGI) up to $125,000 (compared with $43,000). The credit begins to phase out if AGI exceeds $125,000, and no credit is allowed if AGI is $440,000 or more. The credit is now refundable. The credit is still coordinated with employer-provided dependent care assistance, which in 2021 can be up to $10,500 (instead of the usual $5,000 limit).
- Premium tax credit for those obtaining health coverage through a government exchange has no household income limit for 2021 and 2022. The individual contribution toward coverage, based on household income, is reduced to a range of zero to 8.5% (compared with the 2.06% to 9.78% in 2020). Anyone who received an advance premium tax credit in 2020 is not required on their 2020 return to reconcile the advance with the amount to which he or she was actually entitled; this rule only applies for 2020.
Former employees who receive a COBRA subsidy for their health coverage after an involuntary termination from April 1, 2021, through September 30, 2021 (explained later), are not taxed on this employer-paid benefit.
APRA also provides that if student loan debt (not only a federal loan but also a private education and institutional loan) is forgiven after December 31, 2020, and before January 1, 2026, the forgiveness is not taxable. However, the APRA does not provide for any loan forgiveness; this would have to be done another law.
Businesses. While there were not many tax changes impacting businesses, they are still important to note:
- Employee retention credit. The credit is extended through December 31, 2021 (it had been set to expire on June 30, 2021). A severely financially stressed employer (one having gross receipts reduction of 90% of the corresponding quarter in 2019) can treat all wages as qualified wages (compared with 70% that apply in 2021 for businesses that are not severely financially distressed; 50% in 2020 for all businesses). This change applies for calendar quarters after June 30, 2021. The credit can be used as an offset to the employer share of Medicare tax (part of FICA). A recovery start-up business (one established after February 15, 2020, with average annual gross receipts of $1 million or less) can claim the credit up to $50,000 per calendar quarter).
- Paid sick leave and paid family leave credits. The credits are extended through September 30, 2021 (it had been set to expire on March 31, 2021), but unlike the credit in 2020, it is not mandatory; employers may choose to offer the paid leave. The limits on the paid sick leave credit re-sets on April 1, 2021, so that employers can voluntarily cover up to 80 hours of such leave. The credit cap for family leave is increased to $12,000 of wages per employee (up from $10,000). An equivalent credit applies for self-employed individuals. The credit is an offset to the employer share of Medicare tax (part of FICA).
- COBRA subsidy. If your business is subject to COBRA (you have 20 or more employees and a group health plan), then you must pay 100% of COBRA premiums from April 1, 2021, through September 30, 2021, for any employee who is involuntarily terminated (the subsidy referenced above). You can take the new Continuation Coverage Premium Assistance credit against your share of Medicare taxes (1.45% of employee compensation). However, this credit is reduced by the credits above).
- Excess business losses of non-corporate taxpayers. The limit on deducting losses by owners of pass-through entities, which had been suspended for 2018, 2019, and 2020, is in effect again in 2021. The limit had been set to expire at the end of 2025, but has been extended through 2026. This change is a revenue raiser. Remember, the limit only applies to losses in excess of a threshold amount, which is adjusted annually for inflation. Any loss that is not currently deductible because of the limit becomes part of a net operating loss.
- Third-party reporting of payment transactions. Third-party settlement organizations (banks, PayPay, etc.) that process credit/debit cards and electronic payments for goods and services must report then to the IRS and you. Currently, the threshold for reporting is transactions totaling over $20,000. Starting for transactions in 2022, the threshold drops to $600 (the same threshold applicable to reporting payments to independent contractors); there is no longer any minimum number of transactions exempted from reporting. This change likely will impact independent contractors (gig workers) who receive payment through platforms such as FIVRR and TaskRabbit.
- Dependent care assistance. Because ARPA allows employees to exclude from gross income up to $10,500 in dependent care assistance (up from the usual $5,000 limit), employers may choose to offer more assistance or merely facilitate employee payments through pre-tax salary contributions under cafeteria plans. Retroactive changes are permissible as long as an employer’s plan is amended by the last day of the 2021 plan year.
What this means to your business. While you may be in the thick of 2020 tax return preparation—getting information together and working with a tax pro—it’s still advisable to schedule time with a tax pro to review APRA’s changes. Determine which are applicable to you and what to do about it.
Tax treatment of business assistance programs
ARPA makes it clear that like forgiveness of loans under the Paycheck Protection Program (PPP), as well as EIDL grants and Shuttered Venue Operator Grants, that are tax free while expenses covered by the loans are deductible, the following programs described above have similar tax treatment:
- Targeted Economic Injury Disaster Loans (EIDLs) for small businesses located in low-income communities.
- Restaurant Revitalization Fund grants to small and independent restaurants.
This may not be the only small business and tax-related measure from Congress this year. Stay tuned!