The American Rescue Plan Act is enacted; providing new COVID-19 relief

On March 11, 2021, the American Rescue Plan Act of 2021 was signed into law by President Biden. This followed one day after the House of Representatives voted to approve the bill, which was recently modified by the Senate. The American Rescue Plan provides broad COVID-19-related support, including programs targeting businesses and individual taxpayers. As this legislative process concludes, here are our initial reactions to what’s included in this bill.

What’s in the bill?

Congress has provided support to businesses and individuals through a succession of COVID-19-related bills over the past year. Those included the Families First Coronavirus Response Act (FFCRA), the Coronavirus Aid, Relief, and Economic Security (CARES) Act and, more recently, the Consolidated Appropriations Act, 2021 (CAA). The American Rescue Plan builds on those COVID-19-related measures and expands them in many ways. The bill also includes funding for state and local governments, COVID-19 vaccines, and many more provisions. Here’s a summary of some key programs directed at businesses and individuals.

Changes impacting businesses

• Paycheck Protection Program (PPP) loans: The American Rescue Plan provides a limited expansion for certain nonprofit entities and internet publishing organizations to be eligible for PPP loans. It also provides $7.25 billion in additional funding for the PPP. The PPP was initially created by the CARES Act in late March 2020 and has been modified or expanded by three prior bills. The most recent expansion by the Consolidated Appropriations Act established the PPP second draw loans, which are currently in the process of being disbursed. The modifications in the American Rescue Plan are much more targeted.
• Restaurant Revitalization grants: The American Rescue Plan creates a new $28.6 billion Restaurant Revitalization Fund administered by the Small Business Administration. This will provide direct grants to restaurants and other places of business in which the public or patrons assemble for the primary purpose of being served food or drink. The grants are based on COVID-19-related revenue losses that were sustained in 2020. The grant funding must then be used for targeted expenses. This program is similar to both PPP loans and Shuttered Venue Operator Grants, but there are key distinctions.
  • Eligible entity: For an entity to be eligible for this grant, it must first meet a substantive business qualification test and then be excluded from several categories of disqualification.
    • Substantive test: Businesses must fit within a long listing of operations in which the public or patrons assemble for the primary purpose of being served food or drink. This includes restaurants, food stands, food trucks, food carts, caterers, saloons, inns, taverns, bars, lounges, brewpubs, tasting rooms, taprooms, and licensed facilities of a beverage producer where the public may taste, sample, or purchase products. An eligible entity also includes any of the foregoing businesses that are located in an airport terminal or are tribally owned.
    • Disqualification: An entity that meets the substantive test is nonetheless disqualified if it meets any of the following tests:
      • The entity is operated by a state or local government.
      • The entity owned or operated more than 20 locations as of March 13, 2020. All affiliated businesses based on 50% or greater ownership or contractual authority to control or direct the other business are included.
      • The entity has applied for or received a Shuttered Venue Operator Grants.
      • The entity is a publicly traded company.
  • Amount of the grants: The grants are initially determined based on pandemic-related revenue losses of the eligible entity but are subject to per entity and per location limitations.
    • Pandemic-related revenue loss: An eligible entity initially calculates its grant amount based on its revenue loss by comparing 2020 revenue to 2019 revenue. The amount of calculated revenue losses is reduced by the amount of any PPP loans received (both First Draw and Second Draw loans). Special rules apply to businesses that were either not operational for all of 2019 or began operations in 2020 or 2021.
    • Maximum grants: Total grants per eligible entity are then limited to $10 million per entity. However, an additional limitation of $5 million per physical location applies. Thus, an eligible entity with multiple locations and an aggregate revenue loss of $10 million might receive less than $10 million if the majority of its revenue loss was sustained in a single location.
  • Use of funds: Grant funding must be used to pay for payroll costs, mortgage payments (principal and interest), rent payments, utilities, maintenance expenses, supplies (including PPE and cleaning materials), food and beverage expenses, covered supplied costs (as described by PPP rules), operating expenses, paid sick leave, and any other expenses determined to be essential by the SBA. Grants that aren’t fully utilized for their intended purpose must be returned.
  • Tax treatment: In addition, the grants are excluded from taxable income of the eligible entity. This is done in a similar manner as PPP loan forgiveness. Accordingly, the grants aren’t included in taxable income, no tax deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied due to the income exclusion. Finally, partners and S corporation shareholders will be allocated an amount of tax-exempt income equal to their share of the grant.
• Shuttered Venue Operator Grants: The American Rescue Plan provides an additional $1.25 billion in funding for the Shuttered Venue Operator Grant program established by the CAA. In addition, that grant program has been modified to reduce any Shuttered Venue Grants by the amount of Second Draw PPP loans received by the business.
• Employee retention credit: The employee retention credit, which was recently expanded by the CAA, has been a successful source of stimulus for businesses. Please see our employee retention credit resource center for details on the program prior to the American Rescue Plan. This bill expands the employee retention credit in several key ways.
  • 2021 extension: The employee retention credit is extended from its current expiration date of June 30, 2021 to Dec. 31, 2021. This will double the maximum credit for 2021 from its prior limit of $14,000 per employee to $28,000 per employee ($7,000 per employee per quarter).
  • Startup employers: Many startup businesses have found it difficult to establish their eligibility for the employee retention credit under the prior rules. The American Rescue Plan directly targets startup businesses and provides a special, limited version of the retention credit. This applies to businesses that began operations after Feb. 15, 2020, have less than $1 million in annualized gross receipts, and would not otherwise satisfy the employer eligibility tests (based on gross receipts decline or suspension due to governmental order). The credit for startups is calculated under the normal retention credit rules based on per-employee qualified wages but is capped at $50,000 per quarter per employer. While this version of the credit is subject to an additional limitation, it does come with the advantage of a relaxed eligibility test.
  • Severely financially distressed employers: The American Rescue Plan also creates a special rule for employers that suffer severe financial distress. For this purpose, severe financial distress means a 90% or greater decline in gross receipts as compared to the same quarter in 2019. An employer that meets that test is not subject to the large employer rule limiting qualified wages to amounts paid to employees that aren’t providing services. As a result, eligible employers may claim the credit on wages paid to employees that continued to work during the applicable calendar quarter.
• FFCRA credits: The American Rescue Plan extends payroll credits for COVID-19-related paid sick leave and paid family leave. The FFCRA imposed a mandate for certain employers to provide paid leave, but that expired on Dec. 31, 2020. The CAA provided a limited extension of the credits until March 31, 2021, but didn’t extend the mandate to provide such leave. The American Rescue Plan continues this trend by extending the credit for paid leave provided through Sept. 30, 2021, but employers are not required to provide such leave. Employers wishing to provide the related paid leave and claim the FFCRA credits must satisfy two tests in order to qualify for the credits. The first test requires the paid leave to be of the type that is included in the FFCRA program, as amended by the American Rescue Plan. The second test is satisfied if the employer would have been required to provide such paid leave to this employee if the FFCRA mandate had been extended to cover the period from April 1, 2021 to Dec. 31, 2021.
  
  Specific changes imposed by the American Rescue Plan include the following:
  • Increasing the amount of wages and maximum number of days on which the credit can be claimed.
  • Expanding the types of paid leave to include time off related to COVID-19 vaccination.
  • Imposing nondiscrimination rules with respect to highly compensated employees, full-time employees, or employment tenure.
  • Changing the payroll taxes against which the credit is refundable.
• COBRA Premium Assistance Credits: The bill allows individuals to maintain COBRA insurance coverage through a subsidy funded by the federal government. Under prior law, individuals who were terminated from employment were eligible to retain their health insurance through the former employer by paying the premiums themselves. The American Rescue Plan enhances this program by providing that individuals receiving COBRA coverage are not required to make premium payments for coverage between April 1, 2021 and Sept. 30, 2021. Ultimately, this would mean that the employer or plan sponsor must fund the cost of this coverage. To make those parties whole, the American Rescue Plan provides a tax credit equal to the amount of the premiums. Similar to the employee retention credit and FFCRA credits, the COBRA premium assistance credit is a refundable credit that is applied against certain payroll taxes. Special notification rules are also included for this program.
• Corporate interest allocations: The American Rescue Plan repeals the election under Section 864(f) that allows members of a worldwide affiliated group of corporations to allocate and apportion their combined interest expense among their members.
• Compensation deductions for publicly traded companies: The American Rescue Plan extends rules limiting executive compensation deductions to publicly traded companies. Specifically, this prohibits deductions in excess of $1 million for the five highest compensated employees other than those that are already subject to deduction limitations. This limitation will take effect for tax years beginning after Dec. 31, 2026.
• Extension of excess business loss limitation: The Tax Cuts and Jobs Act (TCJA) imposed an annual limitation on the deductibility of business losses by owners of partnerships and S corporations that began in 2018 and was set to expire at the end of 2025. That limitation was deferred by the CARES Act until 2021 (retroactively allowing for loss utilization in 2018, 2019, and 2020). The American Rescue Plan extends the expiration date of that rule by one year to Dec. 31, 2026. However, it doesn’t alter the starting date for the excess business loss rule, which applies to tax years beginning after Dec. 31, 2020.

Changes to rules for individuals

• Recovery rebates: The American Rescue Plan will provide direct payments of up to $1,400 for individual taxpayers, $2,800 for married couples filing jointly, and $1,400 for each qualifying child. These payments are subject to an income-based phase-out, which has been significantly limited for this round of payments. For a single taxpayer, the phase-out begins at $75,000 of adjusted gross income (AGI) and is fully phased-out at $80,000. Similarly, married taxpayers filing jointly are subject to a phase-out on AGI between $150,000 and $160,000. Since these phase-out ranges have been narrowed, it’s expected that some taxpayers receiving prior rebates will receive less payments in this round.
• Unemployment benefits: The bill makes two significant changes to unemployment benefits. First, the existing $300-per-week benefits are extended through Sept. 6, 2021. Those benefits were set to expire on March 14, which was a motivating factor in the timing of this legislation. Second, the American Rescue Plan excludes $10,200 in 2020 unemployment benefits from taxable income. This income exclusion is subject to a phase-out cliff whereby the income exclusion is disqualified for taxpayers with a modified version of adjusted gross income in excess of $150,000. The same phase-out amount appears to apply to all taxpayers, so there are no special rules for married couples filing jointly. The bill notes that the excluded amount includes unemployment compensation received by each spouse, but does not clarify if the $10,200 maximum is per spouse or combined for a married couple filing jointly. The income exclusion will provide a cash benefit to taxpayers that received unemployment benefits during 2020. Unfortunately, this may require filing of an amended 2020 tax return for individuals who already filed their returns.
• Child Tax Credits: The bill significantly expands the Child Tax Credit (CTC) and accelerates payments for 2021.
  • General changes: The maximum credit increases from $2,000 to $3,000 per child ($3,600 for children under 6), and the maximum age increases to 17 for 2021. These credits are subject to an income-based phase-out, which applies to single taxpayers with AGI between $75,000 and $95,000. For married taxpayers filing jointly, that phase-out is applied between $150,000 and $170,000.
  • Advanced payments: The Treasury Department is also directed to make advanced payments of 50% of the expected CTCs that taxpayers are entitled to for the year. These advanced payments would be made on a periodic basis and would take into account information from tax returns or information submitted through an online portal that the Treasury Department is directed to create. Taxpayers will reconcile their advanced credits on their tax returns and would be required to repay any excess advanced payments. However, a special rule would prevent taxpayers below a certain income threshold from being forced to repay any excess credits paid in advance. For this purpose, the income threshold is a modified AGI for single taxpayers of $80,000 and married taxpayers filing jointly of $120,000.
• Earned Income Tax Credits: The American Rescue Plan also expands the Earned Income Tax Credit (EITC) in several ways. Those include:
  • The maximum age limitation is eliminated, and the minimum age is reduced to 19 (24 in the case of students, and 18 for qualified former foster youth or homeless youth).
  • Creation of a special rule allowing separated spouses to claim the EITC on an individual basis.
  • The credit percentage has been expanded, and the phase-out thresholds are increased.
  • The threshold for disqualifying investment income is also increased from $2,200 to $10,000.
  • Taxpayers are permitted to utilize their 2019 income instead of 2020 income when claiming the 2020 credit.
• Child and Dependent Care Tax Credit: The bill temporarily increases this credit by increasing the allowable expenses, increasing the credit percentage, and increasing the phase-out.
• Taxability of student loan discharge: The American Rescue Plan bill generally excludes from taxable-income student loan discharges that occur in 2021 through 2025. This rule only applies to a specifically defined list of eligible student loans. However, that definition appears to include the most common forms of loans for post-secondary educational expenses. Under prior law, there were very limited income exclusions related to student loan forgiveness. The significant expansion of this income exclusion by the American Rescue Plan is expected to be a first step to broader student loan forgiveness proposals.
• ACA premium subsidies: The American Rescue Plan also expands the Affordable Care Act (ACA) health insurance premium subsidies. Under prior law, the premium subsidies were fully phased-out for taxpayers earning modified AGI over 400% of the federal poverty line. For an individual, the federal poverty line is $12,880 in 2021, so the subsidy would end at $51,520 of income. For a family of four, the federal poverty line is $26,500, so the subsidy would end at $106,000. The American Rescue Plan removes the phase-out for subsidies. It also imposes a maximum health insurance rate of 8.5% of a household’s income through 2022. That maximum rate applies to households with incomes beginning at 400% of the federal poverty line with lower rates applying to incomes below that threshold.

Key takeaways

The American Rescue Plan is another significant step in providing support to businesses and individuals in response to the COVID-19 pandemic. Since these programs build on prior legislation, they’re likely to be familiar to many. However, there are new details and new programs to account for. As this bill is signed into law, now is a great time to revisit these programs, evaluate eligibility, and consider whether any actions will be required.