The president signed a $1.9 trillion stimulus package on March 11 with a $590 billion tax title that extends the employee retention credit and includes narrow revenue-raising provisions with delayed effective dates. The American Rescue Plan Act of 2021 (ARPA) passed the Senate on a 50-49 party-line vote using the reconciliation process, and then passed the House by a 220-211 margin.
The legislation was the top priority of the new Biden administration, and it represents the first major legislative achievement for the new Democratic majority in Congress. The bulk of the tax title comprises provisions for middle- and low-income individual taxpayers, but there a handful of provisions with important business implications. Democrats did not offset the cost of the bill with any major tax increases from their campaign platforms, and included only smaller revenue raising provisions to make the bill compliant with reconciliation, which bars any revenue loss outside the 10-year budget window. The major changes for businesses include:
- Extending the employee retention credit through the end of 2021
- Extending and modifying the paid sick and family leave credits
- Excluding restaurant revitalization grants and economic injury disaster loan (EIDL) advances from income
- Repealing worldwide interest allocation rules that were scheduled to take effect in 2021
- Lowering the threshold for reporting third-party settlement network payments on Form 1099-K to $600 beginning in 2022
- Expanding the number of employees subject to the limit on the deduction for executive compensation under Section 162(m) beginning in 2027
- Postponing the expiration for the Section 461(l) loss limitation rule from 2026 to 2027
- Providing pension funding relief
Democrats are now expected to turn to longer-term economic recovery legislation that could be centered around infrastructure and include other major Democratic priorities. It will present Democrats with their first major decision on how aggressively to pursue the tax increases and other transformational tax proposals in their campaign tax platform. The legislative process could be long and contentious.
Democrats are already dealing with some disagreement on whether to use the reconciliation process again to avoid 60-vote procedural hurdles in the Senate. Reconciliation can generally be used only once per budget cycle, but Democrats can immediately start another budget cycle by writing a budget resolution for the next government fiscal year. Many Democrats believe this is the only viable option to avoid Republican opposition. But the reconciliation process has limits that are spurring some Democrats to push to work outside of it.
Reconciliation generally cannot be used on provisions with no direct impact on federal revenues or outlays. Democrats were frustrated when the Senate parliamentarian ruled that a minimum wage increase violated these rules. Senate Budget Committee Chair Bernie Sanders, I-Vt., and Senate Finance Committee Chair Ron Wyden, D-Ore., briefly floated a tax penalty based on corporate wages as a substitute. It was abandoned quickly in the race to complete the bill. It is possible it is resurrected in the future, but it raises administrability, policy and political issues.
There are many other priorities for infrastructure that could run afoul of reconciliation rules. Democrats would generally need at least 10 Republican votes to pass anything in the Senate outside of reconciliation, and this could have an extremely moderating influence on any tax provisions. Some Democrats have begun calling again for the removal of the filibuster altogether, but key Senate Democratic moderates have expressed opposition.
Businesses should adjust their planning to account for the tax changes in the latest stimulus bill, and monitor the legislative process for potential future tax changes on the next recovery bill. The following includes more details on the ARPA’s stimulus tax provisions.
Employee retention credit
The Consolidated Appropriations Act enacted in December recently extended and enhanced the employee retention credit through the first two quarters of 2021. It offers a 70% credit against up to $10,000 in wages per employee per quarter. Taxpayers are eligible to claim the credit if gross receipts are reduced by 20% from the same calendar quarter in 2019, with some flexibility to use other quarters. All wages of employers with 500 or fewer full-time-equivalent employees qualify, but over this threshold, wages and healthcare costs only qualify if paid while employees are not providing services or full services. The ARPA extends this enhanced version of the credit through the end of 2021 so taxpayers can claim the credit in the third and fourth quarters of the calendar year. It also makes employers launching a trade or business after Feb. 15, 2020 eligible for the credit if gross receipt over the prior three years do not exceed $1 million.
Grant Thornton Insight:
The extension of the credit through the end of 2021 doubles the maximum available per employee. Taxpayers can now claim up to $7,000 in credits per employee per quarter for a total per employee credit of up to $28,000. IRS guidance has been fairly generous in allowing employers to claim the credit for wages paid to employees who are working but not providing full services. Employers can use any reasonable method to determine amounts paid to salaried employees for time not worked, although mere reductions in productivity do not qualify.
Paid leave credits
The APRA extends the tax credits for family and paid sick leave enacted as part of the Families First Coronavirus Response Act (FFCRA). The FFCRA required employers with fewer than 500 employees to provide COVID-19 paid sick and expanded family medical leave, but created 100% tax credits to fully offset the cost. The paid leave requirements expired on Dec. 31, 2020, but the legislation extends the credits without the leave requirements for certain paid leave through Sept. 30, 2021, with some modifications.
Payment settlement network reporting
The ARPA lowers the threshold for reporting on sales through third-party payment networks such as an online sales platform. Section 6050W currently requires payment card processors and third-party settlement entities to report the gross amount of all payments to merchants each year. Payment card reporting is required regardless of the amount, but a third-party payment settlement entity only needs to report payments for vendors with more than 200 transactions totaling more than $20,000 in payments.
The ARPA lowers this threshold to $600 regardless of the number of transactions, beginning for transactions in 2022. The requirements for payment cards are unchanged. The legislation also clarifies that reporting is only required for the sale of goods or services, not for gifts, reimbursements, or personal or charitable payments.
Section 162(m) compensation deduction limit
The ARPA expands the number of covered employees subject to the $1 million limit on the deduction for public company compensation under Section 162(m), but the change is not scheduled to take effect until 2027. The Tax Cuts and Jobs act amended Section 162(m) to apply the limit to the CEO, CFO and the three other most highly paid officers. In addition, once employees are covered, they remain covered in future years even if they no longer meet the criteria, so employers can have more than five covered employees.
The ARPA adds five additional employees: The five highest-paid employees other than the previously identified officers. With the five already covered under the existing rules, the $1 million deduction limit will apply to a minimum of 10 covered employees each year. These five additional employees will not be covered in future years unless they continue to meet the criteria.
Grant Thornton Insight:
The long delay in the effective date for this provision creates the potential for it to be modified or repealed before it ever becomes effective. Its current effective date lines up with the expiration of many other TCJA tax provisions in 2026, and it could be encompassed in broader future discussions about how to address major TCJA changes scheduled for 2027.
Worldwide interest allocation repeal
The ARPA repeals worldwide interest allocation rules under Section 864(f) that were only now scheduled to take affect for the first time in 2021. The rules were originally enacted in 2004, but were not scheduled to take effect until 2009. They were then repeatedly delayed in order to raise revenue to pay for other priorities, and will now be repealed retroactively without ever taking effect.
Income exclusions
The Coronavirus Aid, Relief, and Economic Security (CARES) Act and its follow-up legislation excluded many benefit programs from income, including:
- Paycheck Protection Program loan forgiveness
- Treasury Program Management Authority payments under Section 1109(d)(2)(D) of the CARES Act
- Economic Injury Loan Disaster (EIDL) grants
- Loan payments under Section 1112(c) of the CARES Act
- Grants under Section 324 of the Economic Aid to Hard Hit Small Businesses, Non-profits and Venues Act
No deduction is reduced because of the income exclusion for any of these provisions, and the ARPA now extends this income exclusion and deduction treatment to cover Economic Injury Loan Disaster (EIDL) advances and restaurant revitalization grants.
Section 461(l) loss limit
The ARPA postpones the expiration of the $500,000 individual limit on business losses under Section 461(l) from 2026 to 2027. This provision was enacted as part of the TCJA and originally became effective in 2018 before the CARES Act suspended it for 2018, 2019, and 2020. Democrats have criticized the suspension repeatedly, as well as the five-year net operating loss carryback rules, but the ARPA does not affect either the current suspension of Section 461(l) or loss carrybacks.
Grant Thornton Insight:
Like the Section 162(m) provision, the delayed effective date for this provision means it could be modified in the intervening years. Lawmakers will be forced to address the expiration of Section 461(l) along with all the other individual provisions enacted as part of the TCJA.
Pension funding relief
The ARPA includes a number of provisions offering relief for pension funding requirements. These changes are scored as revenue-raising provisions because they reduce the amount of deductible contributions and increase taxable income for plan sponsors.
Individual changes
The lion’s share of tax cuts in the ARPA are directed at individuals. The relief provisions include:
- $1,400 tax credit rebates per taxpayer and dependent, phasing out for taxpayers with adjusted gross income exceeding $75,000 (single) or $150,000 (joint)
- Child tax credit enhancements for 2021
- Earned income tax credit enhancements
- Expansion in the exclusion from income for student loan forgiveness and an income exclusion for certain unemployment benefits
- Enhancements to credits and deductions for child and dependent care
- Enhancements to health coverage premium tax credits
Next steps
Taxpayers should explore opportunities to claim the employee retention credit, and adjust planning as needed for any other applicable provisions. It will be critical to monitor the legislative process moving forward, as the next economic recovery bill could have more substantial tax provisions affecting businesses.
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