By Robert Jackson, CPA
March 13, 2021
By Robert Jackson, CPA
On Thursday, the President signed the American Rescue Plan Act (ARPA) into law. While the act does not expressly focus on tax legislation, it does contain income tax and payroll tax provisions worth discussing. In addition to the highly publicized direct payments (recovery rebates) to many Americans, there are new rules for PPP loans and other similar Covid-19 relief. This article is intended to provide the highlights of the tax provisions, along with selected highlights of other provisions that may be applicable to our clients.
While the act provides additional funding for the Paycheck Protection Program (PPP), it does not extend the expiration date of the program. Thus, absent legislation later this month, you will not be able to get a PPP loan after March 31st. In addition to increasing the funding, the act also adds two categories to the list of eligible recipients. The first – “additional covered nonprofit entity” – includes those 501(c)s other than those described in (c)(3),(4),(6) or (19) that are in line with the new lobbying criteria and that are not otherwise listed in the SBA’s prohibited entities. The second new category is for certain internet publishing organizations.
In addition, while the new eligible nonprofits described above are limited to 300 employees per physical location, the ARPA also permits 501(c)(3)s that have not yet applied or that were previously ineligible due to size to apply using a 500 per physical location limit (also a (c)(6) that has not applied yet can use the 300 per location limit). While larger 501(c)(3)s and other nonprofits such as social and recreational clubs and fraternal orders are now eligible under the ARPA, keep in mind that those new eligible entities only have until the end of the month to apply (unless Congress separately extends the deadline).
As to PPP loan forgiveness – the new COBRA credit to employers (discussed later in this article) cannot be used for loan forgiveness for forgiveness applications received on or after March 11, 2021 (provided the PPP is extended).
Employee Retention Credit (ERC)
The ERC has been extended until 12/31/21 under the ARPA. The ARPA also provides special rules for two new categories of employers – “recovery startup businesses” and “severely financially distressed employers”. “Recovery startup businesses” are those companies that began business after 2/15/2020, meet a gross receipts test and otherwise would not be eligible for the ERC. The quarterly credit for these companies is capped at $50,000. “Severely financially distressed employers” can use all wages for an eligible period, even if they would otherwise be limited under the large employer rules. An employer is severely financially distressed if the receipts for one of their quarters in 2021 is less than 10% of the equivalent quarter in 2019.
In addition to the already existing double dip rules (such as the restriction on counting wages used for PPP loan forgiveness or the FFCRA credits), you also cannot take the ERC for payroll costs used for the COBRA premium subsidy credit, second draw loans or the Restaurant Revitalization and Shutter Venue Operator grants (discussed below). The ARPA also increases the statute of limitations on assessment from 3 to 5 years (i.e., IRS has two more years to assess tax).
The ARPA also limits the 3rd and 4th quarter ERC to Medicare tax. Since the credit is refundable, this in essence means that more employers will have to use Form 7200 to claim the credit for those quarters.
Note that all changes to the ERC by the ARPA take effect beginning in the 3rd calendar quarter of 2021.
FFCRA Sick and Family Medical Leave Credits
The ARPA extends the now voluntary FFCRA credits until 9/30/2021.
In addition to extending the credit period, the ARPA also:
- Expands the eligible criteria, including time needed to seek or await results of a COVID-19 test or time related to obtaining a vaccine or recovering from the vaccine.
- Resets the counting of sick days as of 4/1/2021 for employees (1/1/2021 for the self-employed).
- Increases the family leave days to 60 (from 50) and increases the family leave eligible wages to $12,000 (from $10,000).
- Expands the double counting provision to include Restaurant Revitalization and Shuttered Venue Operator grants as well as the new COBRA premium credit (all discussed below).
- Increases the statute of limitations on assessment from 3 to 5 years (i.e. IRS has two more years to assess tax).
Targeted EIDL Advance – The ARPA increased the funding available for these advances. Note that the tax treatment of these advances are similar to the tax treatment for the PPP loan and previous EIDL advances.
Shuttered Venue Operator Program – The ARPA increased the funding available for these grants and also reduces the amount of the grant available to a recipient by their PPP loans received on or after 12/27/2020 (the effective date of the CAA).
New COBRA Premium Subsidy and Credit
Congress had previously provided for a premium subsidy and credit for COBRA back in 2009 but allowed the provision to sunset. The ARPA now provides a similar subsidy (85%) and employer credit beginning on 4/1/2021. In general, the employee must be enrolled in COBRA prior to 9/30/2021, or for a former employee that did not elect COBRA, the 18-month period must fall between 4/1/2021 and 9/30/2021. The subsidy is available for involuntary terminations and reduction in hours (not for voluntary terminations), and the eligible period terminates upon the employee being eligible for group health coverage. The employer receives a refundable payroll tax credit for premium amounts paid by the employer for those employees (or former employees) eligible for the subsidy. Similar to the new provisions for the FFCRA and ERC credits, the IRS will also have two more years to assess tax with respect to this credit.
Restaurant Revitalization Grants (RRG)
While the ARPA did not extend the date for the PPP, it allows for tax-free grants to food and drink establishments where those establishments must use rules similar to the PPP allowable uses to determine if they can keep the funds.
An entity is generally eligible for a grant if:
- It is place of business with the primary purpose of being served food or drink,
- The eligible entity, together with affiliated businesses, own or operate 20 or less locations (regardless of names used),
- Has not received or applied for a Shuttered Venue Operator grant,
- Is not publicly traded,
- Sustains a “pandemic-related revenue loss”, and,
- Makes a good faith certification that the grant is needed to support the ongoing operations of the entity.
If the entity was in existence for the entire 2019 and 2020 calendar years, the “pandemic-related revenue loss” is the excess, if any, of the (1) 2019 annual receipts over (2) the sum of the entity’s 2020 receipts and their first or second draw loans received in 2020 or 2021. Thus, the receipt of a first or second draw PPP loan will prevent or reduce an entity’s ability to get a Restaurant Revitalization grant. Special formulas apply if the entity was not in business for the entire 2019 or 2020 calendar year, and the formulas are adjustable by the SBA.
The grant is equal to the lesser of the “pandemic-related revenue loss” discussed above or the grant maximum, but the entity must return any funds in excess of the total payroll and nonpayroll costs for the covered period (funds must also be returned if they are in excess of the actual revenue loss). With certain addition modifications, payroll costs and nonpayroll costs are computed in a method similar to the PPP. The pandemic-related revenue loss is determined per eligible entity, but the grant maximum is determined on an affiliated basis (lesser of $10 million total for all affiliated businesses or $5 million per physical location of the entity). In addition, there is grant priority and limits according to classification that the SBA must consider when making grants.
The covered period for measuring the use of the funds actually begins on February 15, 2020 (yes you heard correct that it is 2020) and tentatively ends on December 31st, 2021 (subject to extension by the SBA through 2/15/22). Thus, the entity may have already spent all or part of the grant they are eligible for. Note, however, that payroll costs for RRG purposes excludes wages used for FFCRA sick and medical leave credits, the ERC, and the COBRA premium subsidy credit.
As to whether payroll and nonpayroll costs used for PPP purposes may also be used for RRG purposes, this appears permissible since the amount of the grant was already reduced by the first and second draw PPP loans.
There are a number of issues where guidance is needed, including how to compute receipts for a legal entity with more than one “eligible entities”, or where there are other non-eligible activities with receipts. There is also concern over the interpretation of how the good faith certification requirement will be applied.
As briefly mentioned above, the grant, if the entity is eligible to keep it, is not taxable. Similar to the PPP loan forgiveness, any related expenses are deductible, and the S Corporation shareholder or partner in a partnership receives basis for the amount of the grant that the pass-through entity is eligible to keep.
Other Notable Tax Provisions
To conclude, we have listed other notable tax provisions below that were also included in the ARPA. All of them begin in 2021 (and some also end in 2021), except for the retroactive treatment of unemployment compensation for 2020:
- Additional direct payments (recovery rebates) of $1,400 per individual ($2,800 if married), plus $1,400 per each qualifying dependent; however, these amounts are subject to reduction (phaseout) depending on the amount of the individual’s adjusted gross income (AGI).
- For 2020 only – unemployment compensation up to $10,200 is not taxable if AGI, computed by including all unemployment compensation, is less than $150,000. Note that the ARPA also extends and expands most of the federal unemployment benefits through 9/6/21, including those provided under the Pandemic Unemployment Assistance program.
- Extension of the excess business loss limitation rules through 2027 (which were reinstated beginning in 2021).
- Expansion of the student loan forgiveness income exclusion eligibility (through the 2025 tax year).
- Expansion of eligibility for insurance premium tax credits for 2021 and 2022.
- Changes for 2021 Only:
- Increases to the child and dependent care tax credit (including providing for refundability), including increasing the wage exclusion for dependent care assistance from $5,000 to $10,500;
- increased the credit percentage and phaseouts for the earned income tax credit; and
- Increases to the amount and eligibility of the child tax credit, as well as increasing the refundability of the credit.
- Repeal of the worldwide interest allocation rules (Internal Revenue Code Section 864(f)) after 2020.
- Expanded disallowance of the tax deduction for public company employee compensation beginning after 2026.
Please contact your AGP Team Member with any questions.
Apple Growth Partners’ published material provides general coverage of its subject area and is presented to the reader for educational purposes based on the most current regulatory information available at the time it was written. All communications, whether written or oral should be reaffirmed prior to the submission of any application. All information in this published material and on our website is provided in good faith; however, we make no representation or warranty of any kind, express or implied, regarding the accuracy, adequacy, validity, reliability, availability, compliance with any law (federal, state or local) or professional standard or completeness of any information. We assume no responsibility to any recipient of this material to correct or update its contents for any reason, including changes in any law or professional standard. It is not intended to be audit, tax, accounting, advisory, consulting or investment advice. The information in this article is also not a substitute for legal advice and may not be suitable in a particular situation. Consult your attorney for legal advice.
Our articles, other published materials and website occasionally contain links to other web pages. Links to organizations and government agencies are provided as a convenience to our readers. The firm does not endorse and is not responsible for any third-party content that may be accessed from its website and does not recommend or endorse the use of any third-party’s services. The links are to be accessed at the user’s own risk, and the authors of this website make no representations or warranties about the content of these links.