On March 10, 2021, congressional leaders sent President Biden the American Rescue Plan Act of 2021, which includes economic recovery impact payments to individuals, funding for vaccine distribution, refundable tax credits, expanded unemployment benefits, and aid to state and local governments. The President signed the legislation Thursday, March 11. The final version of the legislation did not include the increase in federal minimum wage to $15 per hour, as proposed by the Democrats.
For individuals, the economic recovery impact payments will provide the key relief measures to single individuals with income less than $75,000 and joint filers with less than $150,000. The payment is completely phased out for individual filers at $80,000 and joint filers at $160,000. Eligible individuals will receive $1,400 each, which was President Biden’s key relief proposal. In addition, the child tax credit will be increased from $2,000 to $3,000 for qualifying children, as a fully refundable credit. The credit increases to $3,600 per child for children under six years of age.
Part of this expanded child tax credit will be paid as advance payments beginning on July 1, 2021, with 50% of the available credit being paid to eligible families by the end of 2021. Most recently filed tax returns will be used for the calculation. Treasury is tasked with developing a program to enable taxpayers to apply for the advance payments, with a true-up of the amounts due when the 2021 tax return is filed.
With unemployment subsidies scheduled to expire at the end of March, the legislation provides for an extension of the $300 per week enhanced unemployment compensation until September 6, 2021. In addition, for the 2020 tax year, the first $10,200 of unemployment compensation will be nontaxable for households making less than $150,000. The income threshold is the same for single and joint filers, but the benefit applies separately to each taxpayer. Taxpayers should be aware that these payments may still be taxable for state income tax purposes, but a few states have indicated they will follow the federal treatment.
For businesses, the Employer Retention Tax Credit has been expanded to include recovery start-up businesses and allows businesses to count all wages paid as qualifying wages, not just wages paid to employees that are not providing services due to suspended or reduced operations. The credit is extended through December 31, 2021.
Internal Revenue Code (IRC) section 162(m) imposes on corporations a cap on deductible compensation of $1 million per employee for CEO, CFO, and the next three highest-paid officers of the corporation. For years after 2026, the corporation’s next five highest-compensated employees have been added to the list of individuals subject to the cap on deductible compensation under this section. These five individuals would be determined each year, and they would not be subject to “once a covered employee, always a covered employee” treatment that continues to apply to the Chief Executive Officer, the Chief Financial Officer, and the three highest-paid executive officers.
There is an additional tax increase for corporations as a result of the repeal of IRC section 864(f). That section allowed multinational corporations to elect to allocate interest on a worldwide basis. The repeal is effective for tax years beginning in 2021.
Ryan will continue to monitor any new federal and/or state legislation related to the American Rescue Plan Act of 2021.
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