On March 11, 2021, President Biden signed the American Rescue Plan Act (ARPA), which provides almost $2 trillion to support families and businesses affected by the COVID-19 pandemic. Here is a summary of the tax-related provisions in the Act.

Individuals

Recovery Rebate
This third round of stimulus checks will be $1,400 per taxpayer and $1,400 for dependents, of any age. There is gross income (AGI) limitations for this rebate and the limits are slightly different from the previous payments. For joint filers, the payments begin to phase out at $150,000 and are completely phased out at $160,000 AGI. For single individuals, the phase-out is from $75,000-$80,000 and for taxpayers who are head of household the phase-out is from $112,500-$120,000. The stimulus checks will be based on your 2020 income if you have already filed, otherwise, they will be based on your 2019 income. It is also important to note that this is an advanced payment for 2021 so if you don’t qualify based on your 2019 or 2020 income but do in 2021, you will be able to claim the refund with your 2021 tax return. This third round of stimulus checks, direct deposits, or EIP cards will start to be sent as early as this week.
Unemployment Benefits
The federal unemployment benefits were renewed until September 6th with a federal supplement of $300 per week. In addition, the first $10,200 in unemployment benefits received in 2020 is now nontaxable for households with under $150,000 in taxable earnings. If you are married and both spouses received unemployment in 2020 then each can exclude $10,200 on the 2020 tax returns. If your tax returns have already been filed for 2020, an amended tax return would need to be filed to claim this benefit.
Child Tax Credit
Beginning in 2021, the child tax credit increased from $2,000 to $3,000 per child between ages six and seventeen as of the end of the year. For children under six, the child tax credit is increased to $3,600. The AGI limitation for this increased credit is $75,000 for single, $112,500 for head of household, and $150,000 for joint filers. These AGI limitations are only for the increased credit and the original higher AGI limitations are still in effect for the $2,000 credit per child.
Dependent Care Credit
ARPA made several changes to the dependent care credit including increasing the dollar limitation to $8,000 per child, formerly $3,000, for up to two children. ARPA also made the child care credit refundable for taxpayers who have their primary residence in the US. In addition, if your employer offers a flexible spending account (FSA) for dependent care, the dollar limits also increased from $5,000 to $10,500.
Advanced Premium Tax Credit
The advanced premium tax credit (PTC) allowed taxpayers a credit on health insurance purchased through the exchange. This credit was based on projected income for the coming year. Under the new law, no additional income tax is imposed beginning in 2020 when the advanced credit exceeded the calculated credit.
Student Loan Discharges
The ARPA will exclude from income student loans debt that is forgiven in 2021-2025 from gross income. It is important to note that the ARPA does not actually provide any student loan forgiveness, but if the debt is forgiven, it will not be taxable income to the student.

Businesses

Employee Retention Credit
Extended through the end of 2021 and enhanced. For the 3rd and 4th quarters of 2021, new small employers that began after February 15, 2020, can now qualify. Severely distressed businesses with over 90% reductions in gross receipts can have over 500 average employees and still get the benefits of the credit on any wages paid.
Paycheck Protection Program Loans
$7.25 billion of additional funding for the program was authorized. Most §501(c) organizations are now eligible for 1st and 2nd draw loans as well, as long as there is less than 15% or $1 million spent on lobbying.
Restaurant Revitalization Grants
Tax-free grants are offered through the SBA to restaurants, food trucks, bars, caterers, and similar businesses. Grants are limited to the amount of reduction in gross receipts compared to 2019 but limited to a maximum of $10 million. Grant monies are to be used for payroll, rent, mortgage, utilities, maintenance, supplies, food & beverage, operational expenses, and paid sick leave during the period February 15, 2020, through December 31, 2021.
Paid Sick and Family Leave Credits
The credits are codified and extended through September 30, 2021. They are also expanded to a maximum of $12,000 per employee (from $10,000 previously). Economic Injury Disaster Loan Advances - Now clear that advances, as well as forgiveness, are free of adverse tax consequences. S corporations and Partnerships will treat loan advances as tax-exempt income.
Revenue Raisers
  • Compensation Limitations – The existing limitation on public companies’ deductible compensation to $1 million is expanded from the original three officers to now include the next five highest compensated employees. This becomes effective for tax years beginning January 1, 2027, or later.
  • Excess Losses – the rule limiting excess losses (over $250,000) from pass-through entities has been extended one more year through 2026.

Your BMF Advisor can help you determine the applicability of your unique situation. Contact us if you have questions about these changes or how your tax status could be affected.

About the Authors

Cindy H. Mitchell
CPA
Director, Taxation Services
Michael A. Hydell
CPA, MTax
Senior Manager, Taxation Services

Subscribe

Stay up-to-date with the latest news and information delivered to your inbox.

Subscribe Now