American Rescue Plan Act: What Businesses Need to Know

Overview of ARPA’s COVID-19 Relief Tax Provisions for Businesses

On March 11, 2021, President Biden signed H.R. 1319, the American Rescue Plan Act of 2021 (ARPA), a $1.9 trillion legislative package to assist businesses and individuals impacted by the pandemic.

For businesses, the COVID-19 relief provisions include an extension of the employee retention tax credit, increase in the exclusion for employer-provided dependent care assistance, COBRA premium subsidy, restaurant revitalization grants, and more.

We have provided highlights of these and other key provisions below. Your Keiter Opportunity Advisor is ready to discuss these and other tax considerations that apply to your unique business situation and identify planning options.

Employer Retention Credit Extension

The Consolidated Appropriations Act enacted in December recently extended and enhanced the employee retention credit (ERC) through the first two quarters of 2021. The ERC offers a 70% credit against up to $10,000 in wages per employee per quarter. Businesses 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 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 February 15, 2020, eligible for the credit if gross receipts over the prior three years do not exceed $1 million.

Increase in the Exclusion for Employer-Provided Dependent Care Assistance

An eligible employee’s gross income generally does not include amounts paid or incurred by an employer for dependent care assistance provided to the employee under a qualified dependent care assistance program (DCAP).

A DCAP can be maintained under a cafeteria plan as a DCAP flexible spending arrangement. In order for such an arrangement to be a qualified benefit that is excludible from gross income elected through a cafeteria plan, the cafeteria plan must satisfy Code Sec. 125 and the DCAP FSA must satisfy Code Sec. 129.

Under pre-ARPA law, the amount that could be excluded from an employee’s gross income under a DCAP during a tax year was not more than $5,000, or $2,500 in the case of a separate return by a married individual, subject to certain limitations. However, any contribution made by an employer to a DCAP cannot exceed the employee’s earned income or, if married, the lesser of employee’s or spouse’s earned income.

Under ARPA, for 2021 only, the exclusion for employer-provided dependent care assistance is increased from $5,000 to $10,500, and from $2,500 to $5,250 in the case of a separate return filed by a married individual.

A plan that adopts this change will not fail to satisfy the requirements of Code Sec. 125 and Code Sec. 129 if the plan is amended for this change retroactively as long as the amendment is adopted 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 the amendment on the effective date of the amendment and ending on the date the amendment is adopted.

COBRA Premium Subsidy

Assistance-eligible individuals (AEIs) may receive a 100% subsidy for COBRA premiums for any period of COBRA coverage during the period beginning on April 1, 2021 (the first day of the first month beginning after enactment) and ending on September 30, 2021.

Eligibility. An AEI is a COBRA qualified beneficiary (i.e., employee, former employee, covered spouse, or covered dependent) who, with respect to a period of coverage during the period beginning on April 1, 2021, and ending on September 30, 2021, is eligible for and elects COBRA coverage due to a qualifying event of involuntary termination of employment or reduction of hours.

Extended election period. Individuals who do not have a COBRA election in effect on April 1, 2021, but who would be an AEI if they did, are eligible for the subsidy. In addition, individuals who elected but discontinued COBRA coverage before April 1, 2021, are eligible if they would otherwise be an AEI and are still within their maximum period of coverage. Individuals meeting these criteria may make a COBRA election during the period beginning on April 1, 2021, and ending 60 days after they are provided required notification of the extended election period.

COBRA coverage elected during the extended election period will commence with the first period of coverage beginning on or after April 1, 2021, and may not extend beyond the AEI’s original maximum period of coverage.

Duration. The subsidy is available for any period of coverage during the period beginning on April 1, 2021, and ending on September 30, 2021.

Refundable tax credit. Employers will be allowed a quarterly tax credit against the Medicare payroll tax equal to the premium amounts not paid by AEIs. If the credit amount exceeds the quarterly Medicare payroll tax, the excess will be treated as an overpayment refundable under Code Sec. 6402(a) and Code Sec. 6413(b). The quarterly credit may be paid in advance according to forms and instructions to be provided by the Department of Labor.

Coordination with HCTC. Effective for tax years ending after the date of enactment, AEIs are not eligible for the health coverage tax credit (HCTC) under Code Sec. 35(g) for any period of coverage in which they receive a COBRA subsidy.

Exclusion from income. Effective for tax years ending after the date of enactment, subsidy amounts will not be included in the gross income of AEIs.

Restaurant Revitalization Grants

Under ARPA, eligible restaurants, food trucks, and similar businesses may receive restaurant revitalization grants from the Small Business Administration (SBA).

ARPA appropriates $28,600,000,000 for fiscal year 2021 to struggling restaurants to be administered by the SBA. The money will be available until expended. Eligible entities include restaurants, or other specified food businesses, and includes businesses operating in an airport terminal. It does not include a state or local government operated business, or a company that as of March 13, 2020, operates in more than 20 locations, whether or not the locations do businesses under the same name. It also does not include any business that has a pending application for, or has received, any grant under the Economic Aid to Hard-Hit Small Businesses, Non-Profits and Venues Act. The amount given to any business who fulfills the eligibility and certification requirements is $10,000,000 and limited to $5,000,000 per physical location of the business.

Amounts received as restaurant revitalization grants are not included in the gross income of the person who receives the amounts.

Grants may be used for:  (1) payroll costs; (2) mortgage payments; (3) rent; (4) utilities; (5) maintenance expenses; (6) supplies; (7) food and beverage expenses; (8) covered supplier costs; (9) operational expenses; (10) paid sick leave; and (11) any other expense determined to be essential to maintaining the business.

No deduction or basis increase is denied, and no tax attribute is reduced by reason of the gross income exclusion in ARPA Sec. 9673(1).

In the case of a partnership or S corporation that receives a restaurant revitalization grant, any amount of the grant excluded from income under ARPA Sec. 9673(1) is treated as tax-exempt income. Since the restaurant revitalization grants are treated as tax-exempt income, they will be allocated to the partners or shareholders and increase their bases in their partnership interests.

Targeted Economic Injury Disaster Loan Advances

Under ARPA, eligible small businesses may receive targeted economic injury disaster loan (EIDL) advances from the Small Business Administration. Amounts received as targeted EIDL advances are not included in the gross income of the person who receives the amounts.

No deduction or basis increase is denied, and no tax attribute is reduced by reason of the gross income exclusion in ARPA Sec. 9672(1).

In the case of a partnership or S corporation that receives targeted EIDL advances, any amount of the advance excluded from income under ARPA Sec. 9672(1) is treated as tax-exempt income for purposes of Code Sec. 705 and Code Sec.1366. Since the targeted EIDL advances are treated as tax-exempt income, they will be allocated to the partners or shareholders and increase their bases in their partnership interests.

Your Keiter Opportunity Advisors are closely monitoring new and changing tax and business regulations under the new Administration. We will keep you updated on matters that may impact you and your business. If you have questions, please reach out to your Keiter Opportunity Advisor or Email | Call 804.747.0000. We are here to help.