On March 11, 2021, President Biden signed the American Rescue Plan Act of 2021 (the “ARP Act”) into law. This $1.9 trillion economic stimulus package is designed to help the country, individuals, and businesses recover from the negative effects of the COVID-19 pandemic. The stimulus provisions of the ARP Act include, among other things:
- Changes to and expansion of the Paycheck Protection Program that was established by the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”);
- Changes to and expansion of the CARES Act Employee Retention Tax Credit;
- Establishment of a grant program for restaurant revitalization and recovery;
- Changes to the Economic Injury Disaster Loan program established by the CARES Act;
- Changes to the Paid Sick and Family Leave Credit;
- Changes to and expansion of federal unemployment compensation; and
- Changes to federal tax laws for (i) excess business losses for non-corporate taxpayers; (ii) excess employee compensation; and (iii) allocation of interest expenses on a worldwide basis.
CHANGES TO AND EXPANSION OF THE PAYCHECK PROTECTION PROGRAM
The ARP Act allocated an additional $7.25 billion to the Paycheck Protection Program. Under the Paycheck Protection Program established by the CARES Act (and expanded and changed under the Consolidated Appropriations Act, 2021 (the “Appropriations Act”)), the Small Business Administration (the “SBA”) lending program was utilized to provide forgivable loans of up to $10 million (“PPP Loans”) to qualified small businesses. The PPP loans were forgivable if used for specific expenses.
The ARP Act has also expanded eligibility for tax-exempt nonprofit organizations. Under the CARES Act and the Appropriations Act, only tax-exempt 501(c)(3), 501(c)(6), and 501(c)(19) organizations qualified for PPP Loans. However, under the ARP Act, eligibility for PPP Loans has been extended to all tax-exempt 501(c) organizations, except for 501(c)(4) organizations.
Notwithstanding the foregoing, these additional tax-exempt organizations that qualify under the ARP Act are subject to limitations on their lobbying activities as follows:
- No more than 15% of its receipts may come from lobbying activities;
- Lobbying activities may not comprise more than 15% of the total activities of the organization; and
- The cost of the lobbying activities during the most recent tax year that ended prior to February 15, 2020, did not exceed $1 million.
In addition, the ARP Act expands eligibility to larger nonprofit organizations. Section 501(c)(3), 501(c)(6), and 501(c)(19) organizations qualify if they have no more than 500 employees or less per physical location, which replaces the 300 employees or less qualification for second draw loans under the Appropriations Act. All other tax-exempt organizations that qualify under the ARP Act are eligible if they have 300 employees or less per physical location.
EXPANSION OF EMPLOYEE RETENTION CREDIT
The ARP Act extended the employee retention tax credit (the “Credit”) on payroll tax from June 30, 2021, through December 31, 2021. Also, like the Appropriations Act, the ARP Act raises the credit amount from 50% to 70% of up to $10,000 of qualified wages per employee per quarter (i.e., increased from $5,000 to $7,000 per employee per quarter).
The ARP Act also created a new provision for “recovery start-up businesses”, which are businesses that began operations after February 15, 2020 and have annual gross receipts not exceeding $1 million. These businesses qualify for the Credit, even if they do not meet the requirement of either suspended business operations or a significant decline in gross receipts. However, the Credit for these businesses is limited to $50,000 per quarter.
RESTAURANT REVITALIZATION GRANTS
The ARP Act allocated $28 billion for “restaurant revitalization grants” for eateries, which includes restaurants, bars, halls, brew pubs, tap rooms, and tasting rooms. Through an SBA grant program, eateries will be able to receive a grant of up to $5 million per restaurant or $10 million per restaurant group. Also, the ARP Act earmarked $5 billion of this program for restaurants with 2019 gross receipts of less than $500,000.
For federal tax purposes, these grants are excluded from gross income. However, for partnerships and S corporations, any amount excluded from gross income is treated as tax-exempt income. As such, partners and shareholders of these pass-through entities may increase their adjusted basis in their ownership interests by these amounts. Further, no tax deduction or basis increase is denied, and no tax attribute is reduced, by reason of this gross income exclusion.
CHANGES TO ECONOMIC INJURY DISASTER LOAN PROGRAM
The ARP Act provides $15 billion in new funding for Target Economic Injury Disaster Loan (“EIDL”) grants. In addition, for federal tax purposes, gross income does not include amounts received as EIDL grants. Also, partners and shareholders of partnerships and S corporations may increase their adjusted basis in their ownership interests by these amounts. Lastly, no tax deduction or basis increase is denied, and no tax attribute is reduced, by reason of this gross income exclusion.
CHANGES TO THE PAID SICK AND FAMILY LEAVE CREDIT
The ARP Act extended the paid sick and family leave credit for employers under the Families First Coronavirus Response Act from March 31, 2021, through September 30, 2021. It also increased the amount of wages that an employer may claim the credit on from $10,000 to $12,000 per employee per year.
CHANGES TO AND EXPANSION OF FEDERAL UNEMPLOYMENT COMPENSATION
The ARP Act also extends the $300 weekly supplement to unemployment compensation from March 14, 2021, through September 6, 2021. In addition, it makes the first $10,200 (and, for a joint return, up to $10,200 received by each spouse) of unemployment compensation tax-free for taxpayers with adjusted gross income of less than $150,000 (the text of the ARP Act does not provide different income thresholds for single or joint filers). This change applies starting in the 2020 tax year.
Because the tax-free treatment is retroactive to 2020, this is expected to cause delays in 2020 tax return filings because the tax preparation software will need to be modified to accommodate this change. Due to this potential delay and other hardships caused by the COVID-19 pandemic, the IRS announced on March 17, 2021, that the federal income tax filing and payment due date for individuals is automatically extended from April 15, 2021, to May 17, 2021.
For taxpayers with 2020 unemployment compensation and who filed tax returns prior to enactment of the ARP Act (and therefore did not get this benefit), the IRS has said that it will process the unemployment exclusion automatically and issue refunds as appropriate, so these taxpayers should not file amended tax returns at this time.
CHANGES TO FEDERAL TAX LAWS
In addition to COVID-19 relief, the ARP Act made three changes to federal tax laws:
- Extension of Limitation on Excess Business Losses for Non-Corporate Taxpayers. The Tax Cuts and Jobs Act of 2017 (“TCJA”) added Internal Revenue Code (“IRC”) § 461(l), which limited deductibility of current year losses for pass through entities and sole proprietorships to $250,000 (or $500,000 for joint filers). However, this provision of the TCJA only applied through the 2025 tax year. The ARP Act extends this provision through the 2026 tax year.
- Limitation on Excessive Employee Compensation. For the 2027 tax year and later, the $1 million limit on deductibility under IRC § 162(m) for compensation that a publicly traded company may pay its CEO, CFO, and three other most highly compensated executives is extended to the next five highest compensated executives.
- Repeal of Election to Allocate Interest on a Worldwide Basis. Effective for tax year 2021 and forward, the election to allocate interest expense on a worldwide basis under IRC § 864(f) is repealed.
DO YOU HAVE QUESTIONS ABOUT THIS OR PREVIOUS COVID-19 STIMULUS LEGISLATION?
While this client advisory is intended for informational purposes only and is not legal advice, we encourage you to call your SMDK attorney for advice regarding your specific situation. We are available to assist you in answering questions about the ARP Act, Appropriations Act, CARES Act or other federal or state aid for businesses impacted by the COVID-19 pandemic and how these programs apply to you or your business.