On March 11, 2021, President Biden enacted the American Rescue Plan Act of 2021 (ARPA). ARPA was designed to provide relief to businesses and individuals in light of the ongoing COVID-19 pandemic. While the legislation contained provisions affecting public health and education, it also updated certain tax provisions, especially those tax provisions related to the coronavirus pandemic. This summary focuses on some of the major tax impacts of the ARPA, especially as they affect credits available to employers.
One area where the ARPA made modifications was the Employee Retention Tax Credit (ERTC). The ERTC, which was created by the CARES Act and extended through the first two quarters of 2021 by the Consolidated Appropriations Act (CAA), is a tax credit that allows eligible employers to claim a credit against its employment taxes for certain wages paid to its employees.
ARPA continued the CAA’s expansion of the ERTC by extending the availability of the credit through all quarters of 2021. In addition, it expanded the availability of the credit to businesses known as “recovery startup businesses.” A recovery startup business is a business that began after February 15, 2020, whose annual gross receipts do not exceed $1 million, and which does not meet the general tests for ERTC eligibility – either being affected by a full or partial suspension or having a significant decline in gross receipts. Thus, recovery startup businesses can qualify for the ERTC even if they don’t meet the general requirements. However, the credit for such businesses is limited to $50,000 per quarter.
Another expansion of the credit was created for “severely financially distressed employers.” A severely financially distressed employer is one whose quarterly gross receipts have decreased by more than 90% as compared to the same quarter in 2019. For these employers, all wages paid to employees will qualify, regardless of how many employees the employer has.
Both of the above expansions apply to the third and fourth quarters of 2021.
Finally, ARPA also expanded the time limit the IRS has to make assessments with respect to ERTC credits to five years. Employers should be aware of this extended time limit and maintain appropriate documentation to support their claim of the credit throughout this time period.
Another robust tool to aid businesses during the coronavirus pandemic was the creation of the emergency sick leave and family leave and related tax credits by the Families First Coronavirus Response Act (FFCRA). The provision of this type of leave, which was available for various reasons related to COVID-19, was required to be provided by certain employers throughout 2020. A credit was available for the amount of wages paid as emergency sick or family leave, up to a daily limit based on why the leave was being taken. In December, the CAA expanded the availability of the credit through the first quarter of 2021. Importantly, however, the leave itself was no longer mandatory—rather, the credit was available if employers chose to offer the leave.
Similar to the expansion for the ERTC, the ARPA expanded the availability of the emergency paid sick and family leave credit. Specifically, these credits are now available through the second and third quarter of 2021. Like the first quarter of 2021, the leave is not required to be offered, but if employers do offer the leave, they can qualify for the credit. The ARPA also expanded qualifying reasons for the leave to include a worker receiving a COVID-19 vaccine or recovering from complications related to the COVID-19 vaccine.
In addition, leave can also qualify if the employee is awaiting test results for COVID-19 and the employee has been exposed to COVID-19, or the employee’s employer requested the employee be tested for COVID-19. In addition, the ARPA increased the maximum amount for the emergency family leave credit to $12,000 per employee.
Finally, as was the case for the ERTC, the ARPA also expanded the time period for assessment related to claims of emergency paid sick or family leave credits to five years. Thus, appropriate documentation should be maintained throughout that time period to support any credit claims.
In addition to the above changes to COVID-19 related credits, the ARPA created tax changes related to other individual and business tax provisions. P&N will be continually updating coverage of ARPA to include tax-related topics as well as topics related to overall economic relief created under the act. Please contact us or connect with your P&N tax advisor if you have questions related to the above tax updates.