President Joe Biden, earlier this month, signed into law the American Rescue Plan Act of 2021, (ARPA), the much-touted $1.9 trillion stimulus bill meant to address both the pandemic and its attendant economic chaos. The Trusted Professional will be providing a deep dive into various parts of this bill over the coming days. This article examines some of the many tax-specific provisions in the act, particularly as they pertain to businesses. The Trusted Professional previously took an in-depth look at ARPA's provision on unemployment enhancements, direct payments, child tax credits and health insurance benefits.

The Small Business Credit Initiative

Sec. 3301. State Small Business Credit Initiative resurrects the 2010 Small Business Credit Initiative program, which was developed in response to the last financial crisis to support state-level programs that finance small businesses. Generally, program funding is based on a state's proportion of unemployed persons as a percentage of the national total. If this information is unavailable for this purpose, the Treasury Department will consider other economic and employment data otherwise available to determine the employment data of a state.

The bill allocates $10 billion for this iteration of the program, which comes in the form of grants to state governments, which are instructed to use the money to provide support to small businesses responding to and recovering from the economic effects of the COVID–19 pandemic; ensure that business enterprises owned and controlled by socially and economically disadvantaged individuals have access to credit and investments; provide technical assistance to help small businesses applying for various support programs; and pay reasonable costs of administering the initiative. The specific details would be up to individual states.

Of this money, $1.5 billion will be allocated specifically to assist business enterprises owned and controlled by socially and economically disadvantaged individuals; $1 billion will go toward an incentive program in which the Treasury Department will increase the second third and last third allocations for states that demonstrate robust support for business concerns owned and controlled by socially and economically disadvantaged individuals in the deployment of prior allocation amounts; $500 million will go toward very small businesses with fewer than 10 employees (which can include independent contractors and sole proprietors). Tribal governments will get a separate $500 million appropriation.

EITC Enhancements

Sec. 9041. Earned Income Tax Credit offers some relief regarding the Earned Income Tax Credit (EITC) to strengthen its impact on working people. For one, it relaxes the eligibility for those without qualifying children by replacing "age 25" in Sec. 32 of the Internal Revenue Code with the term "the applicable minimum age," which, for the purposes of the ARPA, means someone who is 19 years old or, in the case of certain students, age 24 or, in the case of a former foster youth or qualified homeless youth, age 18. Further, it eliminates the maximum age for the credit, which had been 64.

ARPA also changes the credit amounts and phase-out thresholds for the EITC. The earned income amount for those with no qualifying children has been raised from $4,220 to $9,820; meanwhile, the phase-out amount for those with no qualifying children has been raised from $5,280 to $11,610.

It also strikes the code section that says, “No credit shall be allowed under this section to any eligible individual who has one or more qualifying children if no qualifying child of such individual is taken into account under subsection (b) by reason of paragraph (3)(D).”

Further, the ARPA introduces new rules for the EITC in the case of separated spouses. Under these rules, an individual is not be treated as married if that person does not file a joint return, reside with a qualifying child for more than half the year, and, during the last six months of the tax year, does not have the same principal place of abode as the spouse. In addition, the aggregate amount of disqualified investment income that leads to a denial of the credit has been raised from $2,200 to $10,000.

Finally, if the earned income of a taxpayer, beginning in 2021, is less than the earned income at the beginning in 2019, the credit may, at the election of the taxpayer, be determined by substituting the 2019 income for the 2021 income.

Payroll Credits

Sec. 9641 offers several new payroll credit programs.

One gives a credit against applicable employment taxes for each calendar quarter in an amount equal to 100 percent of the qualified sick leave wages paid by an employer with respect to such calendar quarter. But this credit cannot exceed $200 for any day (or part of a day) for which the individual is paid qualified sick leave wages. Further, the aggregate number of days cannot exceed 10 divided by the aggregate number of days taken into account during preceding calendar quarters in that calendar year, other than the first quarter 2021.

The overall credit amount, further, cannot be more than the applicable employment taxes for a quarter on the wages paid with respect to all employees (meaning, it can't go less than zero). The credit is considered refundable and can be paid in advance, according to forms and instructions that the Treasury Dept. will eventually release. The new law also requires that the credit amount be increased to properly meet health plan expense allocation requirements.

The definition of "qualified sick leave" was also expanded to include situations where the employee is seeking or awaiting the results of a diagnostic test for, or a medical diagnosis of, COVID–19 and such employee has been exposed to COVID–19 or the employee’s employer has requested such test or diagnosis, or the employee is obtaining immunization related to COVID–19 or recovering from any injury, disability, illness, or condition related to such immunization’ after ‘medical diagnosis’

Another provision, applies a similar credit for those taking paid family leave, which shall not exceed $200 per person or $12,000 per year.

Another section provides sick leave and family leave credits for certain self-employed individuals. Those eligible include someone who regularly carries on any trade or business within the meaning of Section 1402 of the Internal Revenue Code of and would be entitled to receive paid leave during the taxable year pursuant to the Emergency Paid Sick Leave Act if the individual were an employee of an employer (other than himself or herself), and the act applies after March 31, 2021.

The credit is equal to the number of days (up to 10) in which the individual was unable to perform services in any trade or business for a reason with respect to which such individual would be entitled to receive sick leave, multiplied by either $200 or 67 percent of the average daily self-employment income for that year, whichever is smaller. In the case of paid sick time described in paragraph (1), (2), or (3) of section 5102(a) of the Emergency Paid Sick Leave Act), it is 100 percent. “Average daily self-employment income” is defined as the net earnings for the year divided by 270. Self-employed individuals have a similar credit for paid family leave.

Credit Extensions and Modifications

The ARPA extends several already existing programs as well.

Sec. 9041 extends the limit on excess business losses for noncorporate taxpayers by one year, from 2026 to 2027, with the amendments applicable to taxable years beginning after Dec. 31, 2025.

Sec. 9651 enhances the employee retention credit by making it available through Dec. 31, 2021 (previously it was to expire in June) and expanding eligibility in two categories. The first is what are classified as “recovery startup businesses,” defined as those that began operating after Feb. 15, 2020; have less than $1 million in average annual gross receipts; and would not otherwise be eligible for the credit. The second is “severely financially stressed employers,” which is defined as businesses that experience gross receipts reductions greater than 90 percent, compared to the same quarter in 2019.

Sec. 9632 increases the exclusion for employer-provided dependent care assistance, upping it from $5,000 to $10,500. If a plan otherwise satisfies all applicable requirements of Sec. 125 and Sc. 129 of the Internal Revenue Code, then it shall be treated as a cafeteria plan or a dependent care assistance program retroactively if the plan is amended to fit the program no later than the last day of the plan year in which the amendment is effective, and the plan is operated consistent with the terms of such amendment during the period beginning on the effective date of the amendment and ending on the date the amendment is adopted.

Sec. 9674, meanwhile, makes it so that a third party settlement organization won't be required to report any information under Section 6050W(e) of the Internal Revenue Code which would otherwise need to be reported under Subsection A provided the transaction does not exceed $600.

Finally, Sec. 9671 repeals the election to allocate interest on a worldwide basis.

The Premium Tax Credit

The ARPA also changed some of the rules on how the tax credit can help people pay for insurance premiums purchased through the Health Insurance Marketplace.

First, through the years 2021 and 2022, the bill changes premium percentage tables in Section 36B(b)(3)(A) of the Internal Revenue Code. Under the new law, the initial premium percentage for those making 0-200 percent of the federal poverty level is now zero, and the final percentage for those making between 150 to 200 percent of the poverty line is 2; the initial percentage for those making between 250 to 250 percent of the poverty line is 2, and the final percentage is 4; the initial percentage for those making 250-300 percent of the poverty line is 4 and the final percent is 6; the initial percentage for those making between 300 and 400 percent of the poverty line is 6, and the final one is 8.5; and the initial and final percentage for those making 400 percent or higher of the poverty line are both 8.5.

The measure also eliminates the upper income limit on eligibility for the credit.

Practitioners who want to learn more about the  American Rescue Plan Act of 2021, to the extent it addresses tax changes and new tax developments, can attend the American Rescue Plan Act of 2021 and IRS Notice 2021-20 New Stimulus Coverage and Changes to PPP Loan Forgiveness Webcast on March 25. The course also includes an analysis of IRS Notice 2021-20, relating to taxpayers who have PPP loans and who also are eligible to claim the Employee Retention Tax Credit (ERTC),