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American Rescue Plan Act– Key Tax Provisions

To Our Valued Clients and Friends,

On Thursday March 11, 2021 President Joe Biden signed into law the $1.9 trillion American Rescue Act of 2021. Among the act’s many provisions are several tax items that will be impactful. Here are some of the key provisions of the act:

Recovery rebates

The act creates a new round of economic impact payments to be sent to qualifying individuals. Like last year’s two rounds of stimulus payments, the economic impact payments are set up as advance payments of a recovery rebate credit. The act provides individuals with a $1,400 recovery rebate credit ($2,800 for married taxpayers filing jointly) plus $1,400 for each dependent for 2021, including college students and qualifying relatives who are claimed as dependents. As with last year’s economic impact payments, the IRS will send out the advance payments of the credit.

For single taxpayers, the credit and corresponding payment will begin to phase out at an Adjusted Gross Income (AGI) of $75,000, and the credit will be completely phased out for single taxpayers with an AGI over $80,000. For married taxpayers who file jointly, the phase out will begin at an AGI of $150,000 and end at an AGI of $160,000. And for heads of household, the phase out will begin at an AGI of $112,500 and be complete at an AGI of $120,000. The act uses 2019 AGI to determine eligibility, unless the taxpayer has already filed a 2020 return.

Unemployment benefits

The first $10,200 of the unemployment benefits is excluded from 2020 taxable income for people with Adjusted Gross Income (AGI) of less than $150,000. There is no phase out. If AGI is $150,000 or greater, no exclusion is available. Also, the $150,000 limit applies to returns filed jointly, as head of household or with single status. However, if both spouses receive unemployment benefits, each spouse may exclude up to $10,200 each. Those who have already filed their 2020 tax returns reporting unemployment benefits will likely have to file an amended return.

In addition, the $300 enhanced unemployment payments are extended to September 6, 2021. The maximum number of weeks enhanced unemployment benefits may be received is increased to 79.

Child tax credit

The act expands child tax credit in several ways and provides that taxpayers can receive the credit in advance of filing a return. The act makes the credit fully refundable for 2021 and makes 17-year-olds eligible as qualifying children.

The act increases the amount of the credit to $3,000 per child ($3,600 for children under 6). The increased credit amount phases out for taxpayers with incomes over $150,000 for married taxpayers filing jointly, $112,500 for heads of household, and $75,000 for others, reducing the expanded portion of the credit by $50 for each $1,000 of income over those limits.

The IRS is directed to estimate taxpayers’ child tax credit amounts and pay monthly in advance one-twelfth of the annual estimated amount. Payments will run from July through December 2021. The IRS must also set up an online portal to allow taxpayers to opt out of advance payments or provide information that would be relevant to modifying the amount. A taxpayer in general will have to reconcile the advance payment amount with the actual credit amount on next year’s return and increase taxable income by the excess of the advance payment amount over the actual credit allowed.

COBRA continuation coverage

The act provides COBRA continuation coverage premium assistance for individuals who are eligible for COBRA continuation coverage between the date of enactment and September 30, 2021. The act creates a new COBRA continuation coverage premium assistance credit to taxpayers. The credit is refundable, and the IRS may make advance payments to taxpayers of the credit amount. The credit applies to premiums and wages paid after April 1, 2021, and through September 30, 2021.

Earned income tax credit

The act also makes several changes to the earned income tax credit. It introduces special rules for individuals with no children. For 2021, the applicable minimum age is decreased to 19, except for students (age 24) and qualified former foster youth or homeless youth (age 18). Also, the maximum age is eliminated. Some additional changes to the earned income tax credit are the following:

Child and dependent care credit

The act makes various changes to the child and dependent care credit, effective for 2021 only, including making the credit refundable. The credit will be worth 50% of eligible expenses, up to a limit based on income, making the credit worth up to $4,000 for one qualifying individual and up to $8,000 for two or more. Credit reduction will start at household income levels over $125,000. For households with income over $400,000, the credit can be reduced below 20%. The act also increases the exclusion for employer-provided dependent care assistance to $10,500 for 2021.

Family and sick leave credits

The act extends the credit for the provision of paid qualified sick and family leave established in the Families First Act through September 30, 2021. Leave is not mandated but a credit is available if paid leave is provided. These fully refundable credits against payroll taxes compensate employers and self-employed people for coronavirus-related paid sick leave and family and medical leave. The act also increases the limit on the credit for paid family leave to $12,000. In addition, the number of days a self-employed individual can take into account in calculating the qualified family leave equivalent amount for self-employed individuals increases from 50 to 60 days. Another change is the paid leave credits will be applicable for leave that is due to a COVID-19 vaccination and the limitation on the overall number of days taken into account for paid sick leave will reset after March 31, 2021.

Employee retention credit

The Employee Retention Credit is extended through the end of 2021 and expanded to startup firms that opened a trade or business after February 15, 2020, with average annual gross receipts that do not exceed $1 million.

Premium tax credit

The act expands the premium tax credit for 2021 and 2022 by changing the applicable percentage amounts. Taxpayers who received too much in advance premium tax credits in 2020 will not have to repay the excess amount. A special rule is added that treats a taxpayer who has received, or has been approved to receive, unemployment compensation for any week beginning during 2021 as an applicable taxpayer.

Student loans

Under the act student loan defaults for taxable years 2021 through 2025 would not be included in gross income. This provision includes “any loan provided expressly for postsecondary educational expenses, regardless of whether provided through the educational institution or directly to the borrower”.

Miscellaneous tax provisions

The act extends the limitation on excess business losses of non-corporate taxpayers for one year, through 2027.

The act provides that targeted Economic Injury Disaster Loan (EIDL) grants received from the U.S. Small Business Administration (SBA) are not included in gross income and that this exclusion from gross income will not result in a denial of a deduction, reduction of tax attributes, or denial of basis increase. Similar treatment is afforded for SBA restaurant revitalization grants.

If you wish to discuss the impact of the law on your particular situation or if you have any questions, please give us a call.
Sincerely,

The Clausen & Company Team

To Our Valued Clients and Friends,

The Coronavirus Aid, Relief and Economic Security Act (CARES) was signed into law by the President on March 27, 2020. The legislation includes tax relief for individuals and businesses. Below is a summary of the key individual and business tax provisions from the CARES Act:

INDIVIDUAL PROVISIONS

Tax Rebate Checks. U.S. residents who are not dependents of another taxpayer will be sent tax rebate payments equal to $1,200 per person, plus $500 for each qualifying child under the age of 17, dependent upon prior income level.

The rebate phase out will begin once Adjusted Gross Income (AGI) exceeds the following:

Rebates decrease by $5 for every $100 of excess AGI. Therefore, when AGI exceeds $99,000 for a single filer, $136,500 for a head of household and $198,000 for married filing jointly, no rebate check will be issued. The complete phase out could increase slightly based on the number of qualifying children in a household. Those who have not yet filed a 2019 return will have the rebate amounts computed based on their 2018 tax return, or the most recent Social Security Benefit Statement as provided on Forms SSA-1099 and RRB-1099.

The rebate check works as an advance credit against your 2020 tax return. It is based on your 2018 or 2019 tax return for the initial payout. The rebate will need to be recomputed on an individual’s 2020 tax return using 2020 information. Therefore, when the 2020 tax return is filed, the information for 2020 will be used to determine the amount of the rebate that should have been received. If in 2020, the amount of the rebate owed is more than what you received based on the 2019 or 2018 returns, the excess will be treated as a credit against any 2020 tax liability. However, on the other hand, if the advanced rebate was too much, the amount received will not be required to be repaid.

The IRS will electronically deposit the rebate to a bank account that was previously authorized by a taxpayer with their 2018 or 2019 tax returns. Once the payment is made to a taxpayer’s bank account the IRS will mail a notice to the taxpayer’s last known mailing address confirming the direct deposit. If direct deposit was not used in 2018 or 2019, paper checks will be mailed to eligible taxpayers, though we do not yet have a date for when that will be completed.

Required Minimum Distribution Rules. The minimum distribution rules for withdrawals from a qualified retirement account (including IRAs) are waived for the 2020 tax year.

Loans and Withdrawals from Qualified Retirement Accounts. CARES waives the normal 10% penalty for eligible taxpayers withdrawing money from a qualified retirement account for distributions up to $100,000 made during 2020.

Additionally, the income tax associated with the coronavirus distribution can be eliminated by repaying the distribution though contributions returned to the plan in not less than equal payments over three years, starting with 2020. Taxpayers can recontribute funds into a qualified retirement account within those three years without regard to any annual limitation. Taxpayers can also borrow up to $100,000, from a qualified retirement account. The test for the upper limit for a loan is also increased to now be based on 100% of the present non-forfeitable value. Plus, on existing loans a one-year extension on any associated due dates is now available.

Eligible taxpayers include:

Charitable Deductions. The act creates an above-the-line charitable deduction for 2020 (not to exceed $300). The act also modifies the adjusted gross income limitations on charitable contributions for 2020, to 100% of AGI for individuals and 25% of taxable income for corporations.

BUSINESS PROVISIONS

Employee Retention Credit. The act creates an employee retention credit for employers that were fully or partially suspended due to orders from an appropriate governmental authority limiting commerce, travel or group meetings due to the coronavirus. Or, employers that have gross receipts that are less than 50% of their gross receipts for the same quarter in the prior year are also eligible. Eligible employers are allowed a credit against employment taxes equal to 50% of qualified wages (up to $10,000 in wages) for each employee. However, for purposes of the credit, qualified wages do not include wages counted as part of paid sick leave and paid family payroll tax credits in the Families First Coronavirus Act. Also, if an employer receives a covered Paycheck Protection Program (PPP) loan under Section 1102 of the act, the employer is not eligible to claim an employee retention credit.

Payroll Tax Credit Refunds. The law provides for advance refunding of the payroll tax credits enacted last week in the Families First Coronavirus Act. The credit for required paid sick leave and the credit for required paid family leave can be refunded in advance using Form 7200.

Payroll Tax Delay. Employers and self-employed individuals can defer payment of the employer’s share of the Social Security tax they are otherwise responsible for paying (generally a 6.2% tax on wages or earned income) for the 2020 tax year. The deferred employment tax can be paid over the following two tax years, with half of the amount required to be paid by December 31, 2021 and the other half by December 31, 2022.

Net Operating Losses. The Tax Cuts and Jobs Act (TCJA) placed several limitations on the use of the net operating losses (NOLs) for the tax years from 2018 forward. First, NOLs could only be carried forward (previous law had allowed NOLs to be carried back two years). Second, NOLs could be used to offset no more than 80% of a taxpayer’s taxable income, with any remainder carried forward for use in a subsequent year. CARES temporarily repeals the 80% income limitation for net operating loss deductions for years beginning before 2021 and allows losses arising in 2018, 2019 and 2020 to be carried back five years.

Qualified Improvement Property. Qualified improvement property generally includes interior, non-structural improvements to nonresidential buildings that are placed in service, after a building was originally placed in service. Qualified improvement property was intended to be classified as 15 year property under the TCJA which would have allowed the property to be eligible for bonus depreciation. However, due to a drafting error, qualified improvement property was not assigned a recovery period of 15 years. As a result, qualified improvement property placed in service after December 31, 2017 was assigned a recovery period of 39 years and was not eligible for bonus depreciation. The CARES retroactively corrects the drafting error and assigns qualified improvement property a 15 year recovery period, which allows those improvements to be eligible for bonus depreciation.

SBA Loans. The CARES Act introduced significant additional financial aid to small businesses called the Paycheck Protection Program (PPP). Administered through the Small Business Administration (SBA), participating banks and other qualified lenders will be able to issue businesses with no more than 500 employees (subject to certain limitations) loans equal to the lesser of $10 million or 2.5 times an employer’s average monthly payroll costs. All or a portion of the loan amounts can be forgiven by the government if the employer meets certain requirements. For more information on the Paycheck Protection Program please visit our COVID-19 resource guide.

As new developments and guidance is released as a result of the COVID-19 pandemic we will do our best to provide you the latest updates. As a reminder, our office remains closed until further notice based on the Governor’s directive. We are continuing to work remotely as we help you through these difficult times. Please feel free to contact us if we can provide any assistance and please stay safe.

Sincerely,

The Clausen & Company Team






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