Key Tax Provisions in the American Rescue Plan Act of 2021 Affecting Businesses

On March 11, 2021, President Joe Biden signed into law the $1.9 trillion American Rescue Plan Act of 2021 (ARP), which includes spending provisions for COVID-19 vaccinations, aid to state and local governments, and a number of tax provisions that affect businesses. The ARP, which was passed through the budget reconciliation process, is the first legislative achievement for the Biden administration.

The tax provisions in the ARP that affect businesses include:

• Additional funding and expansion of eligibility for the Paycheck Protection Program
• Extension and expansion of the employee retention credit
• Extension and expansion of the paid sick and family leave credits
• Establishment of a “Restaurant Revitalization Fund”
• Expansion of the tax deduction limit for compensation paid to certain employees of a publicly held company
• Exclusion of targeted EIDL advances from gross income
• Repeal of the election to allocate interest expense on a worldwide basis

Paycheck Protection Program

The Act provides an additional $7.25 billion in Paycheck Protection Program (PPP) funding. It also expands eligibility to some non-profit organizations and internet publishing organizations that were previously excluded from the program.

Employee Retention Credit

The Act extends the Employee Retention Credit (ERC) to qualified wages paid between June 30, 2021, and January 1, 2022. The amount of the ERC remains at 70 percent of qualified wages and the amount of qualified wages with respect to any employee continues to be limited to $10,000 per quarter. Thus, the maximum ERC per employee for 2021 is $28,000 ([$10,000 x 4] x .70).

In addition, certain businesses established after February 15, 2020, are now eligible for the ERC on qualified wages paid between June 30, 2021, and January 1, 2022. Eligible businesses (referred to as “recovery startup businesses”) are those that would not otherwise qualify for the ERC (because they did not suffer a full or partial suspension in operations or a significant decline in gross receipts) and that had average annual gross receipts (as determined under IRC Section 448(c)(3)) of $1 million or less for 2020. The maximum ERC for such a business is limited to $50,000 per quarter (or $100,000 for 2021 — $50,000 for Q3 and $50,000 for Q4).

The ARP also includes additional ERC relief for “severely financially distressed employers,” which are employers that experienced a gross receipts reduction of more than 90 percent as compared to the same quarter in 2019. These employers may treat all wages paid to employees between June 30, 2021, and January 1, 2022, as qualified wages, regardless of their number of full-time employees.

Finally, the ARP extends the normal three-year statute of limitations to five years for any amount attributable to the ERC.

Paid Sick and Family Leave

The ARP codifies and extends the payroll credits for family leave and paid sick leave, as provided in the Families First Coronavirus Response Act, from April 1, 2021, to September 30, 2021. The ARP also increases the maximum amount of the family leave credit to $12,000 per individual, and allows for paid leave credits for leave due to a COVID-19 inoculation.

For self-employed individuals, the ARP increases the number of days used to calculate the “qualified family leave equivalent amount” to 60.

Finally, the ARP expands eligible organizations to include IRC Section 501(c)(1) governmental organizations, and it extends the normal three-year statute of limitations to five years for any amount attributable to the paid sick and family leave credits.

Restaurant Revitalization Fund

The ARP establishes a $25 billion “Restaurant Revitalization Fund” to help restaurants, via “Restaurant Revitalization Grants,” pay for payroll, mortgage principal and interest, rent, utilities, maintenance costs, supplies, food and beverage expenses, operational expenses, and paid sick leave. The grants, which are not taxable to the recipients, are limited to $10 million per business with a limit of $5 million per physical location.

Expansion of the IRC Section 162(m) Limitation

The ARP expands, for years beginning after December 31, 2026, the IRC Section 162(m) $1 million deduction limit on employee compensation paid by a publicly held corporation to include the corporation’s CEO, CFO, and the next five highest paid employees.

Exclusion of Targeted EIDL Advances from Gross Income

The ARP provides for $15 billion of additional funds for targeted “Economic Injury Disaster Loan” (EIDL) advances, and excludes such an advance from a recipient’s gross income. Further, the ARP states that “no deduction shall be denied, no tax attribute shall be reduce, and no basis increase shall be denied, by reason of the exclusion” of an EIDL advance from gross income.

Repeal of Election to Allocate Interest Expense on a Worldwide Basis

The ARP repeals IRC Section 864(f), which allowed members of a worldwide affiliated group to elect to allocate interest expense on a worldwide basis.

For more detailed information about specific tax provisions of the ARP, contact us. We are here to help.

© 2021