By Spencer Bunn, CPA, Price Kong & Co., CPAs, P.A.
On March 11, 2021, President Joe Biden signed into law the $1.9 trillion American Rescue Plan Act of 2021 to address the continued effects of COVID-19 on the economy, public health, state and local governments, individuals, and businesses. The following are key provisions included in the Act that may impact you and your business.
Eligible taxpayers will receive a third round of stimulus payments based on income reported on 2020 income tax filings, or 2019 for those that have yet to file 2020 tax returns. The $1,400 rebate is for single filers with an adjusted gross income (AGI) of $75,000 or less ($112,500 for heads of household and $150,000 for joint filers), and phases to $0 for single filers with an AGI of $80,000 or more ($120,000 for heads of household and $160,000 for joint filers). As with prior rounds, the rebate is essentially an advance against 2021 taxes. Eligible taxpayers that do not receive the rebate will be able to claim the credit on their 2021 tax returns in 2022. In addition, amounts received based on 2019 or 2020 returns that would have been lower when 2021 returns are prepared do not have to be repaid.
CHILD TAX CREDIT
The Act includes major revisions to the child tax credit for the 2021 tax year only. Taxpayers will receive a fully refundable credit of $3,600 per child under the age of six and $3,000 per child ages 6 to 17.
Half of the credit amount will be distributed in advance. Distribution will beginning on July 1, 2021 and continue periodically in equal amounts through the end of the year. The remaining half of the credit will apply to 2021 tax returns. The Internal Revenue Service (IRS) and U.S. Department of the Treasury will be releasing a website that will allow taxpayers to opt out of receiving these advance payments.
The Act also includes a safe harbor provision that protects taxpayers that receive advance payments in error. For example, if a child is declared a dependent on 2019 or 2020 tax returns, but is not a dependent in 2021, the taxpayer will be protected from having to return overpayments of up to $2,000 per child. Only single taxpayers with a modified AGI of $80,000 or less ($100,000 for head of household and $120,000 for joint filers) are eligible for the safe harbor.
EARNED INCOME TAX CREDIT (EITC)
Several changes to the EITC will apply for the 2021 tax year only. The EITC amount has been increased from $543 to $1,502 for filers without children. In addition, the amount of income at which the credit is maximized has been increased to $9,820, the threshold for the phase out of the credit for non-joint filers has been increased to $11,610, and the minimum age for childless filers of the EITC is 19, excluding full-time students. Lastly, if 2021 earned income is less than that of 2019, taxpayers are permitted to use 2019 earned income in claiming the EITC on their 2021 returns.
DEPENDENT CARE ASSISTANCE
The Act makes the dependent care credit fully refundable and increases the amount of eligible expenses qualifying for the credit to $8,000 for one individual and $16,000 for two or more. The credit has also been increased to 50% of qualified expenses, with a reduction of one point for each $2,000 of AGI in excess of $125,000. The credit percentage remains at 20% up to AGI of $400,000, at which point, the credit percentage reduction resumes until reaching zero. In addition, the maximum exclusion of employer-provided dependent care assistance has been increased to $10,500 ($5,250 for married taxpayer filing separately). Changes to the dependent care assistance are for the 2021 tax year only.
The enhanced $300 weekly unemployment relief benefit slated to expire March 2021 has been extended through the beginning of September 2021. Additionally, the first $10,200 of unemployment relief received in 2020 is tax exempt for households with up to $150,000 of income. The IRS has not yet provided guidance on how it will compensate taxpayers that have already filed their 2020 return.
PAID SICK AND FAMILY LEAVE CREDITS
The payroll tax credit for employers providing paid sick and family leave has been extended through September 30, 2021. Effective March 31, 2021, the limit on applicable wages for which the credit can be claimed will increase to $12,000, and employers will be able to claim a new ten-day per employee period. The reasons for leave eligible for the credit have been expanded to include time off for COVID-19 vaccine appointments and vaccine-related illness or injury. Self-employed taxpayers also received an increase from 50 to 60 days for which the credit can be claimed, retroactively effective after December 31, 2020.
EMPLOYEE RETENTION TAX CREDIT
The employee retention tax credit has been extended through the end of 2021. Hardest-hit businesses will be able to count all wages as qualifying wages, not just wages paid to employees not providing services. The Act also expands this credit to some startups.
SMALL BUSINESS LOANS AND PAYCHECK PROTECTION PROGRAM (PPP)
The Act includes numerous provisions aimed at assisting small businesses, particularly those underserved by or previously excluded from the Small Business Administration (SBA) PPP loans. An additional $7.25 billion has been allocated for the PPP; however, the current $284.45 billion has yet to be exhausted, and the forgivable loan program deadline of March 31, 2021 has not been extended.
Other significant updates are as follows:
- Eligibility for PPP has been expanded to include larger nonprofits and online-only news outlets.
- The SBA’s Targeted EIDL Advance program (formerly the Economic Injury Disaster Loan Advance program) received an additional $15 billion in funding.
- $100 million in grants has been allocated to organizations that help small businesses navigate assistance programs and take advantage of the various relief opportunities. Grants are exempt from taxation.
- $28.6 billion has been allocated to form a restaurant relief fund that will be facilitated through a new SBA grant program. These grants are also exempt from taxation.
- An additional $1.25 billion has been added to the $15 billion in funding for the SBA shuttered venue operators grant program, which has yet to open. A significant change is that businesses are now permitted to apply for both a venue grant and PPP loan.
At Price Kong, we are ready to help navigate these changes and answer any questions you may have. We will keep you apprised of any additional guidance and regulations as they are issued in the days and weeks following the passage of this legislation that materially add to our understanding of how these new provisions will be applied. Please feel free to contact us at 602.776.6300 if you have questions or need additional information on this new legislation and how it may impact your tax situation.
About the Author
Spencer Bunn has 13 years of tax and accounting experience. He joined Price Kong in 2013 and, as a manager of the firm’s tax department, supervises a multidisciplinary team of professionals to facilitate client relationships and expectations for exceptional tax services, including federal and state tax return preparation.
Spencer applies his extensive knowledge of federal, state, and local tax laws and regulations to ensure individuals and businesses are compliant, while providing sound tax strategies and solutions to tax issues. He is also experienced in tax controversy, assisting clients involved in federal tax disputes and compliance issues with the IRS.
Spencer also has knowledge and experience specific to numerous industries, including cannabis. He closely follows the unique tax issues related to this industry and has represented multiple dispensaries in IRS examinations and collection actions.
Spencer is a member of the Arizona Society of CPAs and the American Institute of Certified Public Accountants. He is also member of the BNI North Phoenix Business Leaders. Spencer regularly presents and writes articles on tax and accounting topics. He earned an accounting degree from the University of Arizona in 2007, and became a certified public accountant (CPA) in 2015. Outside the office, Spencer enjoys vacationing with family, bowling, and participating in church activities.