The American Rescue Plan (ARP) was passed by Congress in early March 2021. In addition to the well- documented stimulus payments which many have already received, the $1.9 trillion relief plan includes extended employee retention credits, sick leave, and child tax credits, and a retroactive tax-free unemployment addition.
1: Employee Retention Tax Credit:
The bill extends the ERTC from June 30, 2021 through the end of the year. Calculations in the second half of the year will be much like the first: 70% credits applied to the first $10,000 of wages per employee/per quarter. Aside from government-mandated shutdown orders, a decline in gross receipts of 20% can qualify a quarter for this attractive credit. An election is available to use the preceding quarter’s gross receipts drop. Generally, businesses with more than 500 FT employees can only claim the credit if paying employees not to work.
2: Paid Sick and Family Leave Credit:
This is an extension of the FFCRA plan that was passed in 2020. The credit benefits have now extended through September 30, 2021. The paid sick leave 10-day limitation resets on March 31, 2021, allowing a new ten days of qualified sick pay and a corresponding credit to the employer. The bill increases the amount of the family leave credit from $10,000 to $12,000 per employee and expands upon the eligible reasons for which paid leave applies, such as for receiving a COVID-19 vaccination or recovering from a COVID-19 caused condition or disability.
3: Child Tax Credit:
For 2021, the ARP increases the credit from $2,000 to $3,000 ($3,600 for a child under 6), increases the age limit from 16 to 17, and makes the full amount of the credit refundable. AGI phase-outs do apply. A portion of the credit may be paid in advance and reconciled to the actual credit claimed next year when filing 2021 personal returns.
4: Tax-free Unemployment Benefits:
The ARP extends the $300/week supplemental unemployment benefit through September 6. More importantly, in a retroactive provision, the bill makes the first $10,200 of benefits received in 2020 tax-exempt. The AGI limitation here is $150,000 and is a cliff. So for someone with $149,999 in AGI, $10,200 can be tax-exempt. But $1 higher, and the full amount of benefits are taxable.
For those who’ve already filed 2020 returns and paid tax on these benefits, IRS Commissioner Charles Rettig has encouraged taxpayers NOT to file amended returns. Rather, the IRS plans to correct this with a refund without the amendment. Who knows how long this will take.
For further questions on these or other provisions of the ARP, please reach out to our team or visit jhmcpa.com.