american rescue plan: tax implications

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American Rescue Plan:Tax Implications

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AMERICAN RESCUE PLAN: TAX IMPLICATIONS

Course objectives: This course reviews tax implications of the American Rescue Plan Act (ARPA), signed into law on March 11, 2021, and providing relief to individuals and businesses impacted by COVID-19. Topics discussed include: unemployment insurance and Pandemic Unemployment Assistance; economic impact payments; ARPA modifications to the Child Tax Credit, Child and Dependent Care Tax Credit, Premium Tax Credit, Earned Income Credit; expansion of paid sick leave and paid family leave; Employee Retention Credit; COBRA continuation coverage; Restaurant Revitalization Fund; Paycheck Protection Program; and more.

After completing this course, you will be able to:

Determine whether filing MFS will benefit a married couple by maximizing the exclusion for unemployment compensation

Recall how to reconcile the Child Tax Credit on the 2021 tax return

Recall how the ARPA affects filing decisions for separated taxpayers claiming the Earned Income Credit

Identify how employer credits for paid leave are applied under the ARPA

Determine eligibility for a Restaurant Revitalization Fund grant

Category: Taxes Recommended CPE Hours: CPAs — 1 Tax

EAs — 1 Federal Tax CRTPs — 1 Federal Tax

Level: Basic Prerequisite: None Advance Preparation: None Expiration Date: March 2022

American Rescue Plan: Tax Implications

©2021 i Spidell Publishing, Inc.®

Table of Contents April 15 deadline extended for individual returns only ........................................................................... 1 Individual income tax provisions .................................................................................................................. 1

Unemployment Insurance/Pandemic Unemployment Assistance ..................................................... 1 Gross income exclusion ....................................................................................................................... 1 Expanded UI benefits extended ......................................................................................................... 3

Another round of economic impact payments ....................................................................................... 4 Payment amounts ................................................................................................................................. 4 How payments determined ................................................................................................................ 5 Reducing AGI ....................................................................................................................................... 6 UI exclusion bonus ............................................................................................................................... 7 Using MFS to maximize UI exclusion and other benefits ............................................................... 8 Dependent loophole closing? ........................................................................................................... 19 Social Security numbers required .................................................................................................... 19 Deceased taxpayers ............................................................................................................................ 19 Ineligible individuals ......................................................................................................................... 20 Direct deposits .................................................................................................................................... 20

Child tax credit .......................................................................................................................................... 20 Phaseout of increased credit ............................................................................................................. 20 Refundable credit ............................................................................................................................... 21 Advance payment of credit ............................................................................................................... 21 Reconciliation ...................................................................................................................................... 23 Safe harbor .......................................................................................................................................... 23

Dependent care assistance ....................................................................................................................... 24 Increase in credit amount .................................................................................................................. 24 Refundable .......................................................................................................................................... 26 Exclusion increased ............................................................................................................................ 26

Earned income tax credit expansion ....................................................................................................... 26 Taxpayers without qualifying children ........................................................................................... 27 Separated taxpayers ........................................................................................................................... 27 Earned income .................................................................................................................................... 27 Investment income cap ...................................................................................................................... 28

Premium tax credit.................................................................................................................................... 28 2020 repayment requirement repealed ............................................................................................ 28 Enhanced credit for 2021 and 2022 .................................................................................................. 28

Student loan forgiveness exclusion ........................................................................................................ 31 Business tax provisions .................................................................................................................................. 31

Paid sick and family leave employer credits ......................................................................................... 31 Expansion of paid sick and family leave credits ............................................................................ 31 Claiming the employer credits ......................................................................................................... 32 Denial of double benefit .................................................................................................................... 32 Extended limitations period ............................................................................................................. 33


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Employee retention credit ........................................................................................................................ 33 Recovery start-up businesses ............................................................................................................ 34 Severely financially distressed employers ...................................................................................... 34 Extended limitations period ............................................................................................................. 34 Allocating wages for PPP loan recipients ....................................................................................... 34

Why Forms 941-X may be necessary for 2020 ....................................................................................... 36 Payroll companies sleeping on the job ............................................................................................ 36

Revenue raising measures ....................................................................................................................... 37 COBRA continuation coverage .................................................................................................................... 37

Premium subsidies .................................................................................................................................... 37 Gross income exclusion ..................................................................................................................... 38 Premium reimbursements ................................................................................................................. 38 Double benefits disallowed............................................................................................................... 38

Continuation coverage premium assistance credit .............................................................................. 38 Ordering rules ..................................................................................................................................... 38 Advance credit .................................................................................................................................... 38 Denial of double benefit .................................................................................................................... 39 Extension of statute of limitations .................................................................................................... 39

Loan and grant programs ............................................................................................................................... 39 Restaurant Revitalization Fund grants .................................................................................................. 39

Tax treatment ...................................................................................................................................... 39 Amount of the grant .......................................................................................................................... 39 Business opened in 2019 .................................................................................................................... 39 Business opened in early 2020 .......................................................................................................... 40 Brand new businesses ........................................................................................................................ 40 Grant cap ............................................................................................................................................. 40 Eligible entity ...................................................................................................................................... 40 Certification ......................................................................................................................................... 40 Use of funds ........................................................................................................................................ 40 Covered period ................................................................................................................................... 41 Priority in awarding grants ............................................................................................................... 41

Shuttered venue operator grants ............................................................................................................ 41 Paycheck protection program ................................................................................................................. 41

Additional covered nonprofit entities ............................................................................................. 42 Employee caps .................................................................................................................................... 42 Affiliation rules waived ..................................................................................................................... 42

Targeted EIDL advance ............................................................................................................................ 42 Appendix .......................................................................................................................................................... 43


©2021 1 Spidell Publishing, Inc.®

AMERICAN RESCUE PLAN: TAX IMPLICATIONS President Biden signed the American Rescue Plan Act (ARPA) on March 11, 2021, providing

much needed relief to those impacted by COVID-19, and even to some who weren’t.

APRIL 15 DEADLINE EXTENDED FOR INDIVIDUAL RETURNS ONLY

The IRS announced that it is moving the April 15, 2021, filing deadline to May 17, 2021, for individual taxpayers (including Schedule C filers) only. However, the extension does not apply to estimated tax payments for the first quarter of 2021. These payments are still due April 15, 2021.

Taxpayers do not have to request an extension for the one-month delay, but if returns are not filed by May 17, they must file for an extension by that date.

The March 15 filing deadline for calendar-year partnerships and S corporations was not extended, nor was the April 15 filing deadline for C corporations or trusts.

The IRS announcement is available at:

Website www.irs.gov/newsroom/tax-day-for-individuals-extended-to-may-17-

treasury-irs-extend-filing-and-payment-deadline

INDIVIDUAL INCOME TAX PROVISIONS

UNEMPLOYMENT INSURANCE/PANDEMIC UNEMPLOYMENT ASSISTANCE

Gross income exclusion The ARPA provides for an exclusion of up to $10,200 of unemployment compensation for taxpayers

with up to $150,000 of modified AGI for the 2020 taxable year only. (ARPA §9042; IRC §85(c))

Added benefits

In addition to the exclusion of the UI benefits from taxable income, the exclusion reduces taxpayers’ AGI, which can increase other benefits that are phased out or calculated based on AGI, including economic impact payments and Premium Tax Credits (see below for more information on these calculations).

For purposes of computing the $150,000 limit, any unemployment compensation received is excluded from the AGI computation, and the AGI is computed after the:

• Exclusions for Social Security benefits, education savings bonds, and employer provided adoption assistance; and

• Deductions for retirement savings contributions, student interest payments, higher education tuition payments, and passive activity losses.


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Caution

The law states that the unemployment compensation is excluded from modified AGI for these purposes. However, the IRS worksheet is currently including the unemployment compensation in the calculation. We have reached out to multiple contacts to clarify this issue. If the unemployment income pushes your client’s modified AGI over $150,000, we recommend that you wait until this issue is clarified to file the returns. For married couples, you could consider filing MFS to solve this problem. We will discuss this in more detail below.

To view the IRS worksheet to calculate the modified AGI, go to:

Website www.irs.gov/faqs/irs-procedures/forms-publications/new-exclusion-of-up-to-10200-of-

unemployment-compensation

Planning Pointer

The $150,000 AGI threshold applies regardless of filing status, so married taxpayers filing joint returns are subject to the same threshold as single taxpayers. However, if the couple files married filing separate, each return will be subject to the $150,000 threshold, and each return can exclude up to $10,200 of unemployment compensation. It may benefit some couples to file MFS to maximize the exclusion of up to $20,400 of the unemployment compensation. However, you must consider the following items:

• You cannot amend a MFJ return to MFS. If the couple’s 2020 return was filed prior to the enactment of the ARPA, absent further guidance from the IRS, you must file the MFS returns as superseding original returns prior to the May 17, 2021 filing deadline unless a valid extension is filed, in which case the return may be superseded up until the extended due date;

• Filing the MFS return is a bit more complicated, as all community property income must be split between the two returns, but your software should help you with this; and

• You must take into account the other impacts of filing MFS:

o MFS taxpayers can't take the student loan interest deduction, the tuition and fees deduction, the education credits, or the Earned Income Credit; and

o MFS taxpayers who live together can’t take the Child and Dependent Care Credit or the Credit for the Elderly or the Disabled, and they can’t claim the $25,000 passive activity loss allowance for rental property.

As we work our way through the material, you will see how maximizing the benefit of the UI exclusion can also help increase other benefits available to the taxpayers. See page 8 for a full example showing these benefits on a sample tax return.



Example of splitting the return

Jason and Amanda are a married couple with modified AGI of $180,000 on their 2020 MFJ return. Each spouse received unemployment compensation of $15,000. On their MFJ return, they do not qualify to exclude any of the unemployment compensation because their AGI is over the $150,000 threshold.

If instead Jason and Amanda file MFS, assuming all of their income is community income, they now each have modified AGI of $90,000, and both spouses will qualify for an unemployment compensation exclusion of $10,200.

This exclusion is welcome relief for those taxpayers who faced unexpected tax bills when they discovered that the state agencies issuing the payments failed to withhold taxes on the additional $600/$300 weekly Pandemic Unemployment Assistance (PUA) benefits that were paid. In addition the tax withheld on the regular unemployment was only 10%. However, according to some news reports, the $10,200 amount represents about 17 weeks of benefits, so many taxpayers who’ve been receiving benefits throughout the pandemic will still pay tax on a portion of their UI benefits (even if their AGI is less than $150,000).

Practice Pointer

Note the following:

• When these materials went to press, the IRS was advising taxpayers not to file an amended return to claim this benefit. What we don’t know is at what point the IRS and software providers will be able to process returns claiming the exemption. Unless the IRS is able to compute this exclusion for taxpayers who had previously filed returns, those taxpayers will be required to file amended or superseded returns to claim this new benefit exclusion.

• While many “one-time” tax benefits often are extended year after year, it’s unclear whether this is one benefit that will be renewed for 2021 taxable year. There was a lot of controversy over whether to provide tax-free unemployment benefits when workers making comparable amounts are required to pay taxes on their W-2 wages. However legislators wanted to address the issue that millions of recipients were unaware that no withholding was being taken on the additional $300/$600 of weekly benefits and were facing “surprise” tax liabilities. You should advise your clients that they may not be so lucky next year and to plan accordingly.

Expanded UI benefits extended The COVID-19-related unemployment insurance and pandemic assistance programs are

extended for an additional 25 weeks through September 6, 2021. (ARPA §9011 et seq.) The additional $300 in weekly benefits is also extended. (ARPA §9013)

Comment

The ARPA also authorizes $2 billion to be expended by the federal and state governments on fraud prevention, promoting equitable access, and ensuring timely payment of UI benefits. (ARPA §9032)



ANOTHER ROUND OF ECONOMIC IMPACT PAYMENTS

A third round of economic impact payments (EIPs) is authorized. (ARPA §9601; IRC §6428B) Like the EIPs authorized under the CARES Act and Consolidated Appropriations Act of 2021, the payments will be automatically sent out to taxpayers. However, the EIPs authorized under the American Rescue Plan Act are different than those authorized under the CARES Act and CAA in that:

• The amount of the payments are higher ($1,400 per taxpayer and dependent); • Adult dependents qualify under the ARPA; • The AGI phaseout ranges are much smaller; • The advance payments are based on a taxpayer’s 2020 AGI (2019 if no 2020 return has been

filed); and • The payments are considered advance credits against the taxpayer’s 2021 tax liability rather

than the 2020 liability, so the reconciliation will be made on the 2021 tax return.

In its current form, the bill does not prevent debt collectors from levying a bank account that contains an EIP. The first two rounds of EIPs were protected from garnishment ― but the special rules that Democrats used to pass the latest bill did not allow them to include the protections this time. However, it is likely legislation will be introduced and enacted quickly to fix this problem.

Comment

According to various news accounts, the payments have already started going out.

Payment amounts The payments are equal to $1,400 per eligible individual ($2,800 for MFJ) plus $1,400 per

dependent (as defined under IRC §152). (IRC §6428B(a))

Comment

This is a significant expansion from the prior EIPs that were issued, not only in the amount of the payment, but in expanding the number of dependents that may receive the EIPs. The prior EIPs were limited to dependents under age 17, so taxpayers were not receiving payments for some high school and most college student dependents or adult dependents such as parents. Households with these adult dependents will be receiving much higher payments this round.

The amount of the credit is phased out (but not below zero) for taxpayers with income above the phaseout thresholds as follows (IRC §6428B(d)):

2021 Economic Impact Payment AGI and Phaseout Levels

Filing Status Phaseout begins at … Credit phased out at …

Married filing joint $150,000 $160,000

Head of household $112,500 $120,000

Single and married filing separate $75,000 $80,000

These phaseouts are calculated differently from the prior two phaseouts. Previously the credit was phased out by 5% of every dollar by which the taxpayer’s AGI exceeded the thresholds. For this round of payments, the taxpayer’s total credit on the return (including amounts for dependents) is


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reduced by a percentage that is calculated using a ratio that takes the AGI amount over the threshold (up to the credit phaseout amount) and divides it by the following dollar amounts:

• $10,000 for MFJ; • $7,500 for HOH; and • $5,000 for single and MFS.

Example of single taxpayer

Jane is a single taxpayer with no dependents, and a 2019 AGI of $76,000. She has not yet filed her 2020 tax return. Her 2021 EIP will be $1,120, calculated as follows:

Amount over threshold: $76,000 - $75,000 = $1,000

2021 EIP reduction:

$1,400 × $1,000 $5,000

= $280

2021 EIP: $1,400 - $280 = $1,120

Example of MFJ taxpayers

Jack and Jill are married, with two dependent children. Their 2019 AGI was $157,000. They have not yet filed their 2020 tax return. Their 2021 EIP of $5,600 ($1,400 × 4) will be reduced to $1,680, calculated as follows:

Amount over threshold: $157,000 - $150,000 = $7,000

2021 EIP reduction:

$5,600 × $7,000

$10,000 = $3,920

2021 EIP: $5,600 - $3,920 = $1,680

How payments determined Payments will be based on a taxpayer’s 2019 AGI, unless a taxpayer has filed a 2020 return (and

the IRS has processed the return). If the IRS bases the payment on a taxpayer’s 2019 AGI, and the taxpayer subsequently files a 2020 return showing a lower AGI amount, the IRS may remit an additional payment to the taxpayer based on the 2020 return, but only if the 2020 return is filed bythe “additional payment determination date.” (IRC §6428B(g)(5))

The additional payment determination date is the earlier of:

• 90 days after the 2020 calendar year filing deadline (August 15, 2021); or• September 1, 2021.



Comment

Although the filing due date was extended until May 17, 2021, we are not sure if the 90 days will be extended from July 14 until August 15. So we suggest you file 2020 returns before July 14, 2021 if you wish the IRS to use the 2020 income to compute the economic impact payment.

No payments will be made after December 31, 2021.

Practice Pointer

For purposes of issuing additional payments, the act states that a tax return will not be treated as “filed” until the return has been “processed” by the IRS. (IRC §6428B(g)(7)) Taxpayers who would qualify for higher EIPs as a result of a drop in their 2020 AGI should consider filing their returns early to ensure that their returns are processed in time to receive the additional payment.

Conversely if a taxpayer’s AGI is going to be higher in 2020, they may want to consider delaying filing their return in order to maximize the amount of their available rebate. Like the first and second round of EIPs, taxpayers will not have to repay amounts if the amount of the rebate based on 2020 or 2021 AGI is more than what was actually paid based on 2019 AGI.

Reducing AGI Since the EIPs are based on AGI, for a taxpayer who is above the threshold, consider accelerating

deductions into 2020 (or 2021) to reduce the AGI below the phaseout amounts.

Suggestions include:

• Make a deductible contribution to an IRA; • For a bigger benefit, establish a pension plan and make a contribution for 2020; • Maximize §179 and bonus depreciation deductions; and • If applicable, be sure to claim:

o The above-the-line charitable contribution; and o Student loan interest and tuition and fees deduction.



Example of making IRA contribution

Betsy is 72 years old and still working part-time. Her 2020 AGI is $80,000. She did not receive any EIP, as her income in 2019 was over $125,000, and her 2020 return had not been filed when the 2021 EIPs were issued. Based on the $80,000 AGI for 2020, her economic impact credit for 2020 will be:

First payment $1,200 – (($80,000 – $75,000) × 0.05) $ 950 Second payment $600 – (($80,000 – $75,000) × 0.05) 350 Total $1,300

She will not receive a 2021 EIP because her payment is phased out at $80,000 AGI.

However, if she contributes $5,000 to a deductible IRA, her AGI will go down to $75,000, and her economic impact credits for 2020 will be:

First payment $1,200 Second payment 600 Total $1,800

She will claim a $500 Recovery Rebate Credit on her 2020 return. She will also receive a 2021 EIP of $1,400.

Thus, Betsy will receive an extra $1,900 in combined EIPs as sort of a “bonus” on her contribution.

UI exclusion bonus

Example of UI exclusion

Robert was unemployed for part of 2020 but was able to return to work later in the year. Before applying the new UI exclusion, his 2020 AGI was $85,000 including all of his UI income. He did not receive any EIPs as his income in 2019 was over $125,000, and his 2020 return had not been filed when the 2021 EIPs were issued. Based on the $85,000 AGI for 2020 (prior to the UI exclusion), his economic impact credit for 2020 was calculated as follows:

First payment $1,200 – (($85,000 – $75,000) × 0.05) $700 Second payment $600 – (($85,000 – $75,000) × 0.05) 100 Total $800

He would not be eligible to receive a 2021 EIP because his payment is phased out at $80,000 AGI.

After we exclude his $10,200 of UI, his AGI will go down to $74,800, and his economic impact credits for 2020 will be:

First payment $1,200 Second payment 600 Total $1,800

The $1,000 additional amount will be claimed as a Recovery Rebate Credit on his 2020 return. He will also receive a 2021 EIP of $1,400.

Thus, Robert will receive an extra $2,400 in addition to the tax he saves on his UI income.



Practice Pointer

If the IRS is able to compute the UI exclusion for taxpayers who have already filed their returns, it is not clear if they will also recompute the additional Recovery Rebate Credit. This is something you will want to verify for your clients.

Using MFS to maximize UI exclusion and other benefits As we previously discussed, even though filing as MFS can limit some benefits on a married

couple’s tax returns, the reduced AGI can still provide a large benefit for your clients.

Example of MFS

Louis and Lexi are a married couple with four children. For 2020, if the couple files MFJ, their modified AGI is more than $150,000, so they do not qualify for the UI exclusion. Filing MFJ they would have a federal tax liability of $17,197, with a Recovery Rebate Credit of $1,387.

If instead, the couple files MFS, they each reduce their modified AGI to less than $150,000, and they each qualify for a $10,200 UI exclusion. They will lose their $600 dependent care credit, but their tax liability is reduced to $14,150, and their Recovery Rebate Credit for 2020 is increased to $3,766. Additionally, if you claim all four dependents on Lexi’s return, her 2020 AGI is less than $75,000, and she will then qualify for a 2021 EIP of $7,000 ($1,400 for her and each of the four dependents.)

Filing MFS saves them more than $13,000 (see the following spreadsheet and sample 1040s for the calculations).

Taxpayer and Spouse

MFJ vs. MFS comparison

Calculated with UI exclusion

1040 line MFJ Taxpayer Spouse Notes/Comments

Income

1 Wages 111,194 55,597 55,597

2b Interest 230 117 113

Sch. 1 Schedule C 38,578 19,286 19,291

Sch. 1 Passthrough income 15 8 7

Sch. 1 Unemployment comp. 33,589 6,595 6,594

9 Total income 183,606 81,603 81,602

Adjustments to income

Sch. 1 1/2 SE Tax 2,726 - 2,726 SE tax charged to wife only

Sch. 1 SEP IRA contribution 6,000 - 6,000 SEP IRA charged to wife only

10c Total adjustments 8,726 - 8,726

11 AGI 174,880 81,603 72,876

Itemized deductions

Sch. A SALT 10,000 5,000 5,000

Sch. A Mtg. interest 21,039 10,520 10,519

Sch. A Contributions 7,118 3,559 3,559

12 Total itemized ded. 38,157 19,079 19,078

13 199A deduction 5,970 3,857 2,113 Only wife has QBI reduction from 1/2

of SE tax

14 Total deductions 44,127 22,936 21,191

15 Taxable income 130,753 58,667 51,685

16 Tax 20,346 8,699 7,159

Credits

19 Child tax credit 8,000 - 7,159

Sch. 3 Dependent care credit 600 - Dependent care credit not allowed on

MFS return

21 Total credits 8,600 - 7,159

22 Income tax (net of credits) 11,746 8,699 -

Sch. 2 SE tax 5,451 - 5,451 SE tax charged to wife only

24 Total tax 17,197 8,699 5,451

25d Withholding Eliminated to illustrate tax savings

28 Add'l child tax credit - - 841

30 Recovery Rebate Credit 1,387 - 3,766

Form 7202 FFCRA SE credits 5,970 - 5,970 7202 only for wife only

32 Total other payments 7,357 - 10,577

33 Total payments 7,357 - 10,577

37 (34) Amount due (refund) 9,840 8,699 (5,126)

Tax savings 6,267

MFS

(99)Department of the Treasury ' Internal Revenue Service

Form 1040 2020 IRS Use Only ' Do not write or staple in this space.U.S. Individual Income Tax Return OMB No. 1545-0074

Filing Status Head of household (HOH) Qualifying widow(er) (QW)Single Married filing jointly Married filing separately (MFS)

Check only If you checked the MFS box, enter the name of your spouse. If you checked the HOH or QW box, enter the child's name if the qualifyingone box.

person is a child but not your dependent G

Last name Your social security number

Last name Spouse's social security number

Apt. no. Presidential Election Campaign

Check here if you, or your spouse

if filing jointly, want $3 to go to thisState ZIP code

fund. Checking a box below will

not change your tax or refund.

Foreign country name Foreign province/state/county Foreign postal codeYou Spouse

At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency? Yes No

Standard Someone can claim: You as a dependent Your spouse as a dependent

DeductionSpouse itemizes on a separate return or you were a dual-status alien

You:Age/Blindness Were born before January 2, 1956 Are blind Spouse: Was born before January 2, 1956 Is blind

(2) Social security (3) Relationship (4) b if qualifies for (see instructions):Dependents (see instructions):number to you

Child tax credit Credit for other dependents(1) First name Last nameIf more

than four

dependents,

see instructions

and check

here G

1 Wages, salaries, tips, etc. Attach Form(s) W-2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Taxable interest . . . . . . . . . . . . . . .2 2a aTax-exempt interest. . . . . . . . . .Attach b 2bSch. B if

required. 3a3a Ordinary dividends. . . . . . . . . . . . . 3bbQualified dividends. . . . . . . . . . .

IRA distributions. . . . . . . . . . . . .4 Taxable amount . . . . . . . . . . . . . . .a 4 4ba b

5a 5aPensions and annuities . . . . . . Taxable amount . . . . . . . . . . . . . . . 5bb

Taxable amount . . . . . . . . . . . . . . . 6bbSocial security benefits . . . . . . . . . . .6 6a a

7 7Capital gain or (loss). Attach Schedule D if required. If not required, check here. . . . . . . . . . . . . . . . . . . . . . . G

88 Other income from Schedule 1, line 9. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Add lines 1, 2b, 3b, 4b, 5b, 6b, 7, and 8. This is your total income. . . . . . . . . . . . . . . . . . . . . G 99Standard

10 Adjustments to income:Deduction for 'Single or? From Schedule 1, line 22. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .a 10aMarried filing

separately, $12,400 Charitable contributions if you take the standard deduction. See instructions . . .b 10b?Married filing 10cAdd lines 10a and 10b. These are your total adjustments to income. . . . . . . . . . . . . . . . . . . c Gjointly or Qualifying

widow(er), $24,800 Subtract line 10c from line 9. This is your adjusted gross income. . . . . . . . . . . . . . . . . . . . . . G11 11?Head of

12household, $18,650 Standard deduction or itemized deductions (from Schedule A). . . . . . . . . . . . . . . . . . . . . . . . . .12If you checked any? 1313 Qualified business income deduction. Attach Form 8995 or Form 8995-A . . . . . . . . . . . . . . . . . box under StandardDeduction,

1414 Add lines 12 and 13. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .see instructions.

Taxable income. Subtract line 14 from line 11. If zero or less, enter -0- . . . . . . . . . . . . . . . . . .15 15

BAA For Disclosure, Privacy Act, and Paperwork Reduction Act Notice, see separate instructions. Form 1040 (2020)

FDIA0112L 08/24/20

174,880.

38,157.

130,753.

111,194.

230.

5,970.

183,606.

Your first name and middle initial

TAXPAYER XXX-XX-XXXXIf joint return, spouse's first name and middle initial

SPOUSE XXX-XX-XXXXHome address (number and street). If you have a P.O. box, see instructions.

123 MAIN STREET

X

City, town, or post office. If you have a foreign address, also complete spaces below.

ANAHEIM, CA 92801

44,127.

8,726.

72,182.

X

8,726.

CHILD 1 XXX-XX-XXXX CHILD XCHILD 2 XXX-XX-XXXX CHILD XCHILD 3 XXX-XX-XXXX CHILD XCHILD 4 XXX-XX-XXXX CHILD X

Form 1040 (2020) Page 2

Tax (see instructions). Check if any from Form(s): 8814116

2 3 164972 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

17 Amount from Schedule 2, line 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Add lines 16 and 17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18 18

1919 Child tax credit or credit for other dependents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

20Amount from Schedule 3, line 7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20

21Add lines 19 and 20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21

Subtract line 21 from line 18. If zero or less, enter -0-. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22 22

Other taxes, including self-employment tax, from Schedule 2, line 10 . . . . . . . . . . . . . . . . . . . .23 23

2424 Add lines 22 and 23. This is your total tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . G

25 Federal income tax withheld from :

a 25aForm(s) W-2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Form(s) 1099 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .b 25b

c Other forms (see instructions). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25c

d Add lines 25a through 25c . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25d

26 262020 estimated tax payments and amount applied from 2019 return. . . . . . . . . . . . . . . . . . . . . .If you have a?qualifying child, Earned income credit (EIC). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27 27attach Sch. EIC.

28 28Additional child tax credit. Attach Schedule 8812 . . . . . . . . . . . . . .If you have?nontaxable 29 29American opportunity credit from Form 8863, line 8. . . . . . . . . . . . combat pay,see instructions. Recovery rebate credit. See instructions. . . . . . . . . . . . . . . . . . . . . . .30 30

31Amount from Schedule 3, line 13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31

Add lines 27 through 31. These are your total other payments 3232and refundable credits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . G

Add lines 25d, 26, and 32. These are your total payments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 33G

34 34If line 33 is more than line 24, subtract line 24 from line 33. This is the amount you overpaid . . . . . . . . . . . . . . . .RefundG35 a Amount of line 34 you want refunded to you. If Form 8888 is attached, check here. . 35a

Direct deposit? b cG GRouting number . . . . . . . . Type: Checking SavingsSee instructions. dG Account number. . . . . . . .

36 Amount of line 34 you want applied to your 2021 estimated tax. . . . . . . . . 36G

Subtract line 33 from line 24. This is the amount you owe now. . . . . . . . . . . . . . . . . . . . . . . . . 37 37GAmountYou Owe Note: Schedule H and Schedule SE filers, line 37 may not represent all of the taxes you For details on owe for 2020. See Schedule 3, line 12e, and its instructions for details.how to pay, see

38 38Ginstructions. Estimated tax penalty (see instructions). . . . . . . . . . . . . . . . . . .

Do you want to allow another person to discuss this return with the IRS ?Third PartySee instructions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Yes. Complete below. NoGDesigneeDesignee's Phone Personal identification

G G Gname no. number (PIN)

Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, theySignare true, correct, and complete. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge.

HereYour signature Date Your occupation If the IRS sent you an Identity Protection

PIN, enter itJoint return?here (see inst.) GSee instructions. A Date Spouse's occupation If the IRS sent your spouse an IdentitySpouse's signature. If a joint return, both must sign.Keep a copy for Protection PIN, enter

your records. it here (see inst.)G

Phone no. Email address

Date Check if:Preparer's name PTIN

Self-employedPaidPreparer GFirm's name Phone no.Use Only

G GFirm's address Firm's EIN

Form 1040 (2020)Go to www.irs.gov/Form1040 for instructions and the latest information.

FDIA0112L 08/25/20

TAXPAYER AND SPOUSE XXX-XX-XXXX

20,346.

20,346.

8,000.

600.

8,600.

11,746.

5,451.

17,197.

10,770.405.

11,175.

1,387.

5,970.

7,357.

18,532.

1,335.

1,335.X

X

Preparer's signature

OMB No. 1545-0074SCHEDULE 1Additional Income and Adjustments to Income(Form 1040)

2020A Attach to Form 1040, 1040-SR, or 1040-NR.

Department of the Treasury AttachmentA Go to www.irs.gov/Form1040 for instructions and the latest information.Internal Revenue Service 01Sequence No.

Name(s) shown on Form 1040, 1040-SR, or 1040-NR Your social security number

Part I Additional Income

1Taxable refunds, credits, or offsets of state and local income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Alimony received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2a2a

b Date of original divorce or separation agreement (see instructions) G

3 Business income or (loss). Attach Schedule C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Other gains or (losses). Attach Form 4797. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 4

Rental real estate, royalties, partnerships, S corporations, trusts, etc. Attach Schedule E. . . . . .5 5

6Farm income or (loss). Attach Schedule F. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6

7 7Unemployment compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

GOther income. List type and amount8

8

9 Combine lines 1 through 8. Enter here and on Form 1040, 1040-SR, or 1040-NR,line 8 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Part II Adjustments to Income

10 Educator expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

11 Certain business expenses of reservists, performing artists, and fee-basis government officials.

11Attach Form 2106. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Health savings account deduction. Attach Form 8889. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12 12

Moving expenses for members of the Armed Forces. Attach Form 3903 . . . . . . . . . . . . . . . . . . . . . .13 13

Deductible part of self-employment tax. Attach Schedule SE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1414

15Self-employed SEP, SIMPLE, and qualified plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15

Self-employed health insurance deduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1616

17 Penalty on early withdrawal of savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

18a18a Alimony paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Recipient's SSN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b G

c Date of original divorce or separation agreement (see instructions) G

19 19IRA deduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Student loan interest deduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20 20

21 Tuition and fees deduction. Attach Form 8917 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

22 Add lines 10 through 21. These are your adjustments to income. Enter here and on Form 1040,1040-SR, or 1040-NR, line 10a. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

BAA For Paperwork Reduction Act Notice, see your tax return instructions. Schedule 1 (Form 1040) 2020

FDIA0103L 08/26/20

TAXPAYER AND SPOUSE XXX-XX-XXXX

8,726.

2,726.

6,000.

0.

38,578.

15.

33,589.

72,182.

STATEMENT 2







If joint return, spouse's first name and middle initial Last name Spouse's social security number













than four

dependents,

see instructions

and check

here G

















FDIA0112L 08/24/20

81,603.

19,079.

58,667.

55,597.

117.

3,857.

81,603.


TAXPAYER XXX-XX-XXXX

XXX-XX-XXXXHome address (number and street). If you have a P.O. box, see instructions.

123 MAIN STREET

X


ANAHEIM, CA 92801

X

22,936.

25,889.

X

SPOUSE

Form 1040 (2020) Page 2


2 3 164972 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


Add lines 16 and 17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18 18



21Add lines 19 and 20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21





a 25aForm(s) W-2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Form(s) 1099 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .b 25b
























FDIA0112L 08/25/20


8,699.

8,699.

0.

8,699.

8,699.

5,386.203.

5,589.

5,589.

3,149.

39.

X







1Taxable refunds, credits, or offsets of state and local income taxes . . . . . . . . . . . . . . . . . . . . . . . . . .1









8





11Attach Form 2106. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .







18a18a Alimony paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .



19 19IRA deduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .





FDIA0103L 08/26/20


0.

19,286.

8.

16,795.

-10,200.

25,889.

UCE







If joint return, spouse's first name and middle initial Last name Spouse's social security number













than four

dependents,

see instructions

and check

here G

















FDIA0112L 08/24/20

72,876.

19,078.

51,685.

55,597.

113.

2,113.

81,602.


SPOUSE XXX-XX-XXXX

XXX-XX-XXXXHome address (number and street). If you have a P.O. box, see instructions.

123 MAIN STREET

X


ANAHEIM, CA 92801

X

21,191.

8,726.

25,892.

X

8,726.

CHILD 1 XXX-XX-XXXX CHILD XCHILD 2 XXX-XX-XXXX CHILD XCHILD 3 XXX-XX-XXXX CHILD XCHILD 4 XXX-XX-XXXX CHILD X

TAXPAYER

Form 1040 (2020) Page 2


2 3 164972 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


Add lines 16 and 17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18 18



21Add lines 19 and 20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21





a 25aForm(s) W-2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Form(s) 1099 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .b 25b
























FDIA0112L 08/25/20

SPOUSE XXX-XX-XXXX

7,159.

7,159.

7,159.

7,159.

0.

5,451.

5,451.

5,384.202.

5,586.

841.

3,766.

5,970.

10,577.

16,163.

10,712.

10,712.X

X







1Taxable refunds, credits, or offsets of state and local income taxes . . . . . . . . . . . . . . . . . . . . . . . . . .1









8





11Attach Form 2106. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .







18a18a Alimony paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .



19 19IRA deduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .





FDIA0103L 08/26/20

SPOUSE XXX-XX-XXXX

8,726.

2,726.

6,000.

19,291.

7.

16,794.

-10,200.

25,892.

UCE



Dependent loophole closing? A big loophole under the previous EIP programs had to do with dependents who were claimed

on one taxpayer’s return during 2019 but on another taxpayer’s return on 2020. In this situation, an EIP advance was sent to the taxpayer who filed the return in 2019, and then the taxpayer who claimed the dependent on the 2020 return could claim a “Recovery Rebate Credit” for that dependent on the 2020 return.

This loophole may be closing with this latest round of EIPs. The ARPA directs the IRS to issue “regulations or other guidance to ensure to the maximum extent administratively practicable that, in determining the amount of any [credit or refund] an individual is not taken into account more than once, including by different taxpayers and including by reason of a change in joint return status or dependent status between the taxable year for which an advance refund amount is determined and the taxable year for which a credit under is determined.” (IRC §6428B(h)(2))

Social Security numbers required As with the first two rounds of EIPS, the credit (including the advance credit) is only available to

taxpayers with Social Security numbers. (IRC §6428B(e)(2)) For taxpayers filing a joint return and/or claiming a dependent qualifying child, the return must also include the spouse’s Social Security number and any qualifying child’s Social Security number if they are included on the return.

The only exceptions are:

• If one spouse is a member of the Armed Forces, then a Social Security number need only be provided for one of the spouses; and

• If the credit is taken for a qualifying child who is adopted or placed for adoption, the adoption taxpayer identification number should be used.

Any omission of a correct Social Security number or adoption taxpayer identification number will be treated as a mathematical or clerical error, meaning the credit advance will be disallowed without prior notice.

Deceased taxpayers Any individual who was deceased before January 1, 2021, is treated as if they did not have a

valid Social Security number on the tax return for such taxable year. (IRC §6428B(g)(2)(B)) An exception applies if one of the spouses was deceased prior to January 1, 2021, and that spouse was a member of the U.S. armed forces during any time during the taxable year, and the spouse’s Social Security number was included on the tax return for that taxable year.

Example of deceased taxpayer

Nancy and Joe are married, and both of their Social Security numbers were provided on their MFJ return. Nancy was a member of the Marines during 2020 and passed away on October 1, 2020. Even though she passed away prior to January 1, 2021, an EIP will still be sent and will not have to be returned to the IRS.

If Nancy was not in the U.S. armed forces in 2020 (or 2019), she would not have been eligible for an EIP, and if the payment was erroneously issued, Joe would be required to return the payment to the IRS.

If Joe was the spouse who passed away, Nancy would be required to return the payment to the IRS.



Ineligible individuals As under the CARES Act and the CAA, the following individuals are ineligible for the payments:

• Nonresident aliens; • Any individual who is a dependent of another taxpayer (the taxpayer claiming the

dependent will receive a credit, the dependent will not receive their own credit); and • Estates or trusts.

(IRC §6428B(c))

Direct deposits If available, payments will be directly deposited into:

• Any account to which the payee authorized, on or after January 1, 2019, payments of tax refunds;

• Any account belonging to a payee from which that individual, on or after January 1, 2019, made a payment of income taxes; or

• Any Treasury-sponsored account (as defined in §208.2 of title 31 of the Code of Federal Regulations).

Comment

This is the same list that was used for EIPs authorized under the CAA. This list of direct deposit accounts is more expansive than that under the CARES Act, which limited direct deposits into those accounts for which the taxpayer had previously authorized a federal direct deposit (not payments).

CHILD TAX CREDIT

The Child Tax Credit is increased and made refundable but only for the 2021 taxable year. (ARPA §9611; IRC §24(i)) Specifically, the ARPA makes the following changes for the 2021 taxable year:

• Increases the amount of the credit from $2,000 per child to $3,000 per child ($3,600 for a child under age 6) for certain households;

• Makes the credit fully refundable (under current law, only $1,400 is refundable); • Repeals the requirement that taxpayers must have earned income of at least $2,500 in order

to qualify for a refund of the credit; • Allows for advance payments of the credit starting in July 2021; and • The definition of a qualifying child is expanded to include children who have not turned age

18 by the end of 2021. This means that for 2021 only, 17-year-olds are qualifying children for purposes of the credit.

Phaseout of increased credit The amount of the increased credit under the ARPA (e.g., $1,000 for children age 6 and older;

$1,600 for children under age 6) is phased out by $50 for every $1,000 (or fraction thereof) by which the taxpayer’s modified AGI exceeds the following amounts:

• $150,000 for MFJ or surviving spouses; • $112,500 for HOH; and • $75,000 for single taxpayers and MFS.

(ARPA §9611; IRC §24(i))



The original credit amounts ($2,000 per child) are still subject to the standard credit phaseouts, meaning that the additional credit amounts are much more targeted to low and moderate income families. For the 2018 through 2025 tax years, the $2,000 per child credit is phased out but not below zero, by $50 for each $1,000, or fraction thereof, by which the taxpayer's modified AGI exceeds the following thresholds:

• $400,000 if MFJ; • $200,000 if single, HOH, or surviving spouse; • $200,000 if MFS.

Example of phased out credit

Mary files HOH, with one 10-year-old child, and she has modified AGI of $135,000 for 2021. As a result, the increased amount of the credit is phased out as follows:

2021 modified AGI $135,000 HOH threshold amount - 112,500 $ 22,500 ÷ 1,000 22.5 Round up to the next whole number 23 × $50 Reduction to additional $1,000 $ 1,150

Because the reduction amount exceeds the increased $1,000 credit amount, Mary is not entitled to an increased credit. However, Mary is still entitled to the original credit amount of $2,000 because her AGI is below the $200,000 threshold for the original credit.

Refundable credit To qualify for the increased refundable credit, the taxpayer, or at least one of the spouses in a

couple that files MFJ, must have a principal place of abode in the U.S. for more than one-half of the taxable year or be a bona fide resident of Puerto Rico.

Advance payment of credit Starting July 1, 2021, until December 31, 2021, the IRS and the Department of the Treasury are

directed to issue at least 50% of the credit owed to taxpayers in advance monthly payments (less frequently if the IRS and Treasury determine monthly is not feasible).

Comment

The ARPA states that the logistics for these advance payments are to be worked out by the IRS. At this time there is no information as to how, or when, the payments will be made.

The annual advance amount is based on the taxpayer’s status, number of qualifying children, and AGI for 2020 (or 2019 if a 2020 return has not yet been filed). (ARPA §9611(b)(1); IRC §7527A) However, for advance payments, the ages of the taxpayer’s qualifying children are based on what their ages would be in 2021.



Example of advance payment calculation

In 2020, Tom and May have two children, ages 10 and 16, and would be entitled to $6,000 of credit on their 2021 return. They may receive $500 per month (2 × ($3,000 ÷ 12)) for July through December of 2021 for a total of $3,000. The remaining $3,000 would be claimed on their 2021 tax return.

Note: If the older child were age 17 in 2020 and would be turning age 18 in 2021, no advance credit would be allowed for that child.

The advance monthly payment amounts may be adjusted to reflect a return filed during the 2021 calendar year or any other information provided by the taxpayer to the IRS. We will need to wait for additional guidance from the IRS on these payments.

Online portal

The ARPA requires the IRS to establish an online portal that allows taxpayers to:

• Elect not to receive advance payments; and • Report information that would result in a modification of the advance amounts paid,

including:

o Change in number of the taxpayer’s qualifying children, including the birth of a child; o A change in the taxpayer’s marital status; o A significant change in the taxpayer’s income (“significant” is not defined); or o Any other factor that the Treasury Secretary may provide.

Notice of payments

The IRS must provide taxpayers with a notice no later than January 31, 2022, that includes:

• The taxpayer’s taxpayer identity (e.g., name, mailing address, taxpayer identification number);

• The total amounts paid to the taxpayer during 2021; and • Any other information the Treasury Secretary determines appropriate.

How payments are made

If the information is available, payments will be directly deposited into:

• Any account to which the payee authorized, on or after January 1, 2019, payments of tax refunds;

• Any account belonging to a payee from which that individual, on or after January 1, 2019, made a payment of income taxes; or

• Any Treasury-sponsored account (as defined in §208.2 of title 31 of the Code of Federal Regulations).

Comment

It is unclear how payments will be made to taxpayers who do not have direct deposit information. We are awaiting guidance from the IRS on this issue.



No offsets

The advance payments are not subject to reduction or offset:

• For collection by any U.S. executive, judicial, or legislative agency under 31 U.S.C. §3716 or §3720A;

• For child support, delinquent federal debts, state income taxes, or unemployment overpayments under IRC §6402(c), (d), (e), or (f); or

• By other assessed federal taxes that would otherwise be subject to levy or collection.

Reconciliation The amount of any Child Tax Credit claimed on the 2021 return must be reduced by the total

advance payments paid to the taxpayer. Any failure to reduce the credit on the return by the advance payments will be treated as a mathematical or clerical error. (ARPA §9611(b)(2); IRC §24(j))

The taxpayer’s tax liability for the 2021 taxable year will be increased by the amount of any excess advance credit received. A taxpayer’s failure to increase their 2021 tax liability for receiving excess advance credit will be treated as a mathematical or clerical error.

Practice Pointer

Keep in mind that advance payments must be repaid when the 2021 tax return is filed if the taxpayers’ 2021 income is above the thresholds. Advise clients that these advance payments could create large tax bills later, and unless they truly need the funds currently, they should elect not to receive advance payments.

Safe harbor A safe harbor applies to taxpayers who received an overpayment of the advance credit due to a child

for whom the advance was paid in 2021, when in fact the child was no longer that taxpayer’s dependent. Under the safe harbor, a taxpayer below the income threshold ($40,000 for a single taxpayer, $50,000 for a head of household, and $60,000 for a joint filer) will not have to repay up to $2,000 in overpayments per child that was incorrectly taken into account. The hold-harmless threshold is decreased to zero as the taxpayer’s income rises to double the threshold amount, meaning that taxpayers with income above the following amounts will have to repay the entire credit amount advanced:

• $80,000 for single filers; • $100,000 for HOH; and • $120,000 for MFJ.

(IRC §24(j)(2)(B)

Caution

Divorced parents who alternate claiming their children as dependents may find themselves subject to overpayments and tax assessments if the IRS automatically issues an advance credit based on a taxpayer’s 2020 return when the taxpayer is eligible to claim the child on his or her return. If he or she is not eligible to claim the child on the 2021 return (per terms of a divorce or other agreement), he or she will be liable for the amount of credit advanced.

Tax professionals should warn their clients in this situation to log in to the online portal previously discussed and elect out of receiving the advance payment.



DEPENDENT CARE ASSISTANCE

For the 2021 taxable year only, the Child and Dependent Care Credit is increased and made refundable. (ARPA §9631) In addition the employer-provided dependent care assistance exclusion is increased.

Increase in credit amount For 2021, the credit amount is significantly increased by:

• Increasing the maximum credit percentage from 35% to 50%; • Increasing the amount of the eligible expenses to $8,000 for one qualifying individual and

$16,000 for more than one (from $3,000 for one qualifying individual and $6,000 for more than one); and

• Increasing the AGI phaseout threshold from $15,000 to $125,000.

The 50% credit rate phases out by 1% for each $2,000, or fraction thereof, the taxpayer’s AGI exceeds $125,000, but is not reduced below 20% (reached at $185,000). For higher income taxpayers, that 20% credit amount is then reduced by 1% for each $2,000, or fraction thereof, the taxpayer’s AGI exceeds $400,000. This completely phases the credit out at $500,000.

Example of lower income phaseout

Dennis pays $15,000 in qualified expenses in 2021 to care for his two children, who are both qualifying individuals. For 2021 Dennis has AGI of $133,000. His credit is calculated as follows:

2021 AGI $133,000 - 125,000 8,000 ÷ 2,000 4 × 1 Credit reduction 4% Qualified expenses $ 15,000 Reduced percentage (50% – 4%) × 46% Credit $ 6,900



Example of higher income phaseout

Donald pays $15,000 in qualified expenses in 2021 to care for his two children, who are both qualifying individuals. For 2021 Donald has AGI of $420,000. His credit is calculated as follows:

2021 AGI $425,000 - 400,000 25,000 ÷ 2,000 2.5 Rounded up to the next whole number 3 × 1 Credit reduction 3% Qualified expenses $ 15,000 Reduced percentage (20% – 3%) × 17% Credit $ 2,550

Practice Pointer

With more children attending school at home, many working parents have new or additional expenses for child care. This credit can be very beneficial to those clients. Practitioners should ask clients with children if they have any of these qualifying expenses so they do not miss out on these expanded credits.



Quick Law: Child and Dependent Care Tax Credit

The Child and Dependent Care Credit is available to taxpayers that paid expenses for the care of a qualifying individual to enable the taxpayer (and their spouse, if filing a joint return) to work, actively look for work, or attend school full time. (IRC §21)

Generally married taxpayers must file a MFJ return to claim the credit unless the couple is:

• Legally separated; or • Married and living apart, and the taxpayer’s home is the qualifying person’s home for

more than half the year, the taxpayer pays more than half the cost of keeping up the home for the year, and the spouse doesn’t live in the home for the last six months of the year.

A qualifying individual is:

• A dependent qualifying child who was under age 13 when the care was provided; • A spouse who was physically or mentally incapable of self-care and lived with the

taxpayer for more than half of the year; or • An individual who was physically or mentally incapable of self-care, lived with the

taxpayer for more than half of the year, and either:

o Was the taxpayer’s dependent; or o Could have been the taxpayer’s dependent except that he or she received gross income

of $4,300 or more, or filed a joint return, or the taxpayer (or taxpayer’s spouse, if filing jointly) could have been claimed as a dependent on another taxpayer's 2020 return.

Details about the credit, the expenses that may be claimed, and what information must be provided concerning the care provider are available in IRS Publication 503, Child and Dependent Care Expenses, available at:

Website www.irs.gov/pub/irs-pdf/p503.pdf

Refundable The 2021 Child and Dependent Care Credit is refundable for taxpayers who have a principal

place of abode in the U.S. for more than one-half of the taxable year. For taxpayers filing MFJ, only one of the spouses must have a U.S. principal abode. (ARPA §9631; IRC §21(g)(1))

Exclusion increased For the 2021 taxable year only, the employer-provided dependent care assistance exclusion is

increased from $5,000 to $10,500 ($5,250 for MFS). (ARPA §9632; IRC §129(a)(2))

The employer’s plan must be amended by December 31, 2021, in order to include the increased exclusion in its employee benefit plan.

EARNED INCOME TAX CREDIT EXPANSION

Numerous changes are made to expand and increase the Earned Income Credit (EIC). (ARPA §9621; IRC §32)



Taxpayers without qualifying children For the 2021 taxable year only (except as noted), the EIC for individuals without qualifying

children is expanded by:

• Reducing the minimum age to claim the credit from age 25 to:

o Age 19, generally; o Age 24 for “eligible students” for purposes of the American Opportunity and Lifetime

Learning Credits for at least five calendar months during the taxable year (the IRS will use the Form 1098-T, Tuition Statement, to confirm a student’s eligibility); and

o Age 18 for qualified homeless youth;

• Eliminating the maximum age for the credit (currently only taxpayers under age 65 may claim the credit); and

• Repealing the provision that prevented taxpayers with qualifying children from claiming the EIC because they do not have a valid Social Security number for the child. These taxpayers will now be able to claim the “childless” EIC. This provision applies indefinitely beginning with the 2021 taxable year. (ARPA §§9621(a), 9622; IRC §32(n))

The ARPA also increases the credit amount for the 2021 taxable year only by increasing:

• The credit percentage and phaseout percentage from 7.65% to 15.3%; • The income at which the maximum credit amount is reached from $4,220 to $9,820; • The income at which the phaseout begins from $5,280 to $11,610 for non-joint filers.

Comment

As a result of these changes the maximum credit for taxpayers without children for 2021 is increased from $543 to $1,502.

Separated taxpayers For taxable years beginning after December 31, 2020, a married taxpayer with qualifying

children may claim the EIC on a MFS return if he or she resides with his or her qualifying child for more than one-half of the taxable year and:

• During the last six months of the taxable year does not have the same principal place of abode as his or her spouse; or

• Has a divorce or separation decree, instrument, or agreement (other than a divorce decree) as described in IRC §121(d)(3)(C) and is not a member of the same household as his or spouse by the end of the taxable year. (ARPA §9623; IRC §32(d))

Currently married taxpayers may only claim the EIC if they file MFJ.

Earned income Taxpayers may elect to base their 2021 credit on their 2019 earned income rather than their 2021

earned income, but only if their 2019 earned income is higher than 2021. (ARPA §9626)



Investment income cap The investment income cap is increased from $3,650 to $10,000 beginning with the 2021 taxable

year and increases the cap for inflation thereafter. (ARPA §9624; IRC §32(i))

PREMIUM TAX CREDIT

2020 repayment requirement repealed The Premium Tax Credit repayment requirement is repealed for taxpayers whose 2020 subsidies

(which were based on income estimated from tax returns for prior years) were higher than the amount that they were actually entitled to. (ARPA §9662) This means taxpayers whose income was higher than expected in 2020 are not required to repay any Premium Tax Credit on their 2020 tax return.

Planning Pointer

Taxpayers who already filed their 2020 returns may have to amend those returns, or file a superseding return, to eliminate the Premium Tax Credit repayment that was originally calculated on the return.

Enhanced credit for 2021 and 2022 For 2021 and 2022, the Premium Tax Credit is significantly expanded by:

• Increasing the amount of subsidies people can receive when purchasing the plans through the health care exchange by decreasing the taxpayer’s maximum income contribution toward the premiums (ARPA §9661; IRC §36B(b)(3)(A));

• Deeming taxpayers who received at least one week of unemployment insurance benefits (including Pandemic Unemployment Assistance) during 2021 as having received income of 133% of the poverty level for purposes of determining the amount of their Premium Tax Credit for 2021 (even if their income was actually higher) (ARPA §9663); and

• Repealing the 400% federal poverty level cap on receiving subsidies. Under current law there is a cliff, and taxpayers whose modified AGI exceeds 400% of the poverty level must pay 100% of their premiums for insurance coverage through the marketplace. By repealing the cap, all taxpayers with incomes above the 400% federal poverty level will not have to pay more than 8.5% of their income on health insurance premiums. (ARPA §9661; IRC §36B(b)(3)(A))

Under current law, the Premium Tax Credit is calculated as the difference between the benchmark premium (the premium for the second-lowest-cost silver plan available in the marketplace in the area of residence) and a specified percentage of income for a person with income at a given percentage of the federal poverty level. By lowering the specified percentage, the ARPA increases the amount of the subsidies/Premium Tax Credit available as illustrated in the following table.

The table shows the reduction in household contributions from current law based on the incomes within specified levels of the federal poverty level (FPL).



Maximum Income Contribution Percentage by Household Income for Premium Tax Credits in 2021

Income Range (Percentage of FPL)

Range of Maximum Income Contribution (Percentage of Income)

Under Current Law for 2021 (Rev. Proc. 2020-36)

Under ARPA §9661

100%–133% 2.07% 0%

133%–150% 3.10%–4.14% 0%

150%–200% 4.14%–6.52% 0%–2%

200%–250% 6.52%–8.33% 2%–4%

250%–300% 8.33%–9.83% 4%–6%

300%–400% 9.83% 6%–8.5%

400%+ N/A 8.5%

(Congressional Budget Office: www.cbo.gov/system/files/2021-02/hwaysandmeansreconciliation.pdf)

2021 Poverty Levels

Size of family Poverty line 400%

1 $12,880 $51,520

2 $17,420 $69,680

3 $21,960 $87,840

4 $26,500 $106,000



Comparison of Premium Savings Under Current Law and ARPA

Single individual, 2021 income of $19,320 (150% of federal poverty level)

Benchmark premium

Premium Tax Credit

Net premium paid

Current law1

21 years old $4,300 $3,500 $800

45 years old $6,200 $5,400 $800

64 years old $12,900 $12,100 $800

ARPA2

21 years old $4,300 $4,300 $0

45 years old $6,200 $6,200 $0

64 years old $12,900 $12,900 $0

Single individual, 2021 income of $100,000 (776% of federal poverty level)

Benchmark premium

Premium Tax Credit

Net premium paid

Current law3

21 years old $4,300 $0 $4,300

45 years old $6,200 $0 $6,200

64 years old $12,900 $0 $12,900

ARPA4

21 years old $4,300 $0 $4,300

45 years old $6,200 $0 $6,200

64 years old $12,900 $4,400 $8,500

1 Maximum income contribution is $800 ($19,320 × 4.14%) 2 Maximum income contribution is zero 3 No maximum income contribution because income exceeds 400% of poverty level 4 Maximum income contribution is $8,500 ($100,000 × 8.5%)

Planning Pointer

The Premium Tax Credit is another area where the UI exclusion will benefit taxpayers. Reducing the taxable UI amount will reduce the modified AGI figure used for purposes of calculating the credit, which will result in larger credits for many taxpayers. (IRC §36B(d)(2)(B))



STUDENT LOAN FORGIVENESS EXCLUSION A new COD exclusion applies to certain student loans forgiven during the 2021 through 2025

calendar years. (ARPA §9675; IRC §108(f)(5)) The expanded exclusion applies to:

• Federal loans; • State education loan programs; • Loans made by a college or university; and • Private educational loans.

Comment

While the ARPA does not actually expand the circumstances under which student loans will be forgiven, many commentators believe this provision was included in the ARPA to provide relief for future student loan forgiveness enacted in any subsequent federal legislation or by executive order.

BUSINESS TAX PROVISIONS

PAID SICK AND FAMILY LEAVE EMPLOYER CREDITS The refundable FFCRA credits for paid sick and family leave benefits are extended for benefits

paid April 1, 2021 (January 1, 2021, for self-employed individuals) through September 30, 2021, with the changes noted below. (ARPA §9641(a); IRC §3131 et seq.) This further extends these credits, which had previously been extended by the Consolidated Appropriations Act through March 31, 2021.

In addition to the extension of the time period for claiming the credits, the credits themselves have been expanded to benefit additional taxpayers.

Expansion of paid sick and family leave credits Other significant changes to the credits include:

• There is a “reset” of the 10-day paid sick leave benefit period, so employers that previously claimed the credit for payments made in 2020 and the first quarter of 2021 may claim the credit for an additional 10 days of paid sick leave paid during the period April 1, 2021 (January 1, 2021, for self-employed individuals) through September 30, 2021. (IRC §3131) Unlike the original FFCRA employer credit, tax-exempt 501(c)(1) federal government instrumentalities are eligible for this round of the credit;

• While there is no “reset” of the paid family leave credit, the aggregate amount of credit that may be claimed per employee is increased from $10,000 to $12,000, and the requirement that the first 10 days of leave taken be unpaid is repealed (IRC §3132);

• Self-employed taxpayers may claim a credit for up to 60 days (previously 50 days) of paid leave and may elect to use their net earnings from the prior taxable year rather than the current taxable year for purposes of calculating their credits (ARPA §§9642(c)(3), 9643(c)(3));

• For wages paid after March 31, 2021, through September 30, 2021, ”qualified leave” for both credits is expanded to include time taken off for COVID-19 testing (and awaiting results), diagnostics, vaccination or recovering from any injury, disability, illness, or condition related to the vaccination (IRC §§3131, 3132);

• Both credits may now also be claimed for qualified health plan expenses and collectively bargained defined pension plan and/or apprenticeship program contributions properly



allocable to the qualified sick leave wages paid. The qualified health plan expenses are those amounts paid to maintain a group health plan, but only if the amounts were excluded from the employee’s gross income under IRC §106(a) (IRC §§3131, 3132); and

• The employer paid leave credits cannot be claimed by any employer that in providing paid leave benefits, discriminates in favor of highly compensated employees, full-time employees, or employees on the basis of their employment tenure. (IRC §§3131(j), 3132(j))

Comment

Similar to the provisions enacted by the Consolidated Appropriations Act of 2021 (CAA), employers are not required to provide additional paid sick or family leave benefits. However, if they do, they may claim a 100% credit for providing these benefits. Especially in states or localities that are mandating paid sick or family leave, this is a win-win for these employers.

Claiming the employer credits Unlike the original FFCRA employer credits for paid leave, which were claimed against the

employer’s share of Social Security tax, the credits authorized under the ARPA are applied against the employer’s share of the Medicare tax under IRC §3111(b). However, the credit is increased by the amount of the employer’s share of the OASDI and Medicare tax. Under the original FFCRA, the credit was claimed against the employer’s OASDI tax, but was increased by the amount of the Medicare tax paid on the employee’s wages. (ARPA §9641(a); IRC §§3131, 3132, 3133) As before, employers will not be subject to penalties if they retain their Medicare tax deposit in anticipation of receiving the credit.

The credits claimed with respect to any calendar quarter may not exceed the Medicare tax paid by the employer for all employees for that calendar quarter (whether or not the employees took the leave).

However, excess credit will be refunded, and employers may claim advance refunds (we believe this will continue to be on the Form 7200, Advance Payment of Employer Credits Due to COVID-19).

Denial of double benefit As with the original FFCRA credit, employers claiming this credit must increase their gross

income on their income tax return for the amount of the credit claimed.

Employers who claim the Employee Retention Credit (ERC) or the Research Tax Credit may not include any wages used for those credits for purposes of the Credit for Paid Sick Leave/Paid Family Leave. (IRC §§3131(e)(3), 3132) Employers are also prohibited from claiming the Credit for Paid Sick Leave/Paid Family Leave for wages included in payroll costs included in forgiven PPP loan amounts, shuttered grant operator grants, or the restaurant revitalization grants discussed on page 39. (IRC §§3131(e)(7), 3132(e)(7))

Any wages taken into account in claiming the credit for paid sick leave/paid family leave cannot be taken into account for purposes of determining the allowable credit for:

• Indian Employment Credit (IRC §45A); • Military Differential Wage Payment Credit (IRC §45P); • Employer Credit for Paid Family and Medical Leave (IRC §45S); • Work Opportunity Credit (IRC §51); • Payroll Credit for Paid Sick Leave (IRC §3131); • Payroll Credit for Paid Family Leave (IRC §3132); and • Credit for Sick Leave for Certain Self-Employed Individuals. (IRC §3134)



Comment

Employers may elect to exclude certain qualified sick leave wages paid for purposes of determining the amount of the credit. The IRS will prescribe how and when the election is made.

Extended limitations period The statute of limitations for imposing an assessment attributable to the credit is extended to five

years from the later of:

• The date on which the original return, which includes the calendar quarter with respect to which the credit is determined, is filed; or

• April 15, 2022 (pursuant to IRC §6501(b)(2)). (IRC §3131(e)(6))

EMPLOYEE RETENTION CREDIT

The Employee Retention Credit (as modified by the Consolidated Appropriations Act of 2021) is extended through December 31, 2021. (ARPA §9651; IRC §3134) The ARPA also provides special provisions for recovery start-up businesses and severely financially distressed employers for wages paid after June 30, 2021, and before January 1, 2022.

Like the paid leave credits previously discussed, the ERC as modified is treated as a refundable credit against the Medicare tax rather than against the OASDI, and the statute of limitations for an assessment related to the credit is extended to five years (discussed later in this section).

The ARPA also clarifies that “qualified wages” for purposes of the ERC do not include any wages taken into account in computing the employer credits for paid sick or family leave discussed on page 31, or wages included in payroll costs included in forgiven PPP loan amounts, shuttered grant operator grants, or the restaurant revitalization grants discussed on page 39. (IRC §§3134(c)(3)(D), 3134(h)) However, ARPA §9651 requires the Treasury secretary to issue guidance providing that payroll costs paid during the covered period do not fail to be treated as qualified wages to the extent that a covered loan is not forgiven. As with the expansion of the ERC under the CAA, this continues to mean that Paycheck Protection Program (PPP) recipients are eligible if the forgiven PPP debt did not pay the wages in question.

Information on Notice 2021-20 and calculating wages used for the ERC for PPP loan recipients is discussed later in this section.



CAA amendments

Remember, the CAA extended the credit to apply to the wages paid during the first two quarters of 2021 and:

• Allowed PPP borrowers whose loans had been forgiven to claim the credit; • Increased the credit from 50% to 70%; • Increased the qualified wages that may be taken into account from a per-employee $10,000

annual limit to $10,000 per quarter; • Increased the qualified wages that may be taken; • Extended eligibility to businesses whose gross receipts had declined 20% (rather than

50%) from the corresponding 2019 calendar quarter; and • Includes wages paid to all employees by employers with 500 or fewer full-time employers

in 2019 (previously 100) rather than limiting it to those wages paid to only those employees who were not actually working.

Recovery start-up businesses The ARPA revises the credit for recovery start-up businesses by:

• Capping the total amount of credit that may be claimed to $50,000 per calendar quarter (IRC §3134(b)(1)(B)); and

• Waiving the requirement that the business be fully or partially suspended or meet a decline in gross receipts threshold to qualify for the credit. (IRC §3134(c)(2)(A)(ii)(III))

A “recovery start-up business” is any employer that began carrying on any trade or business after February 15, 2020, with gross receipts of less than $1 million. (IRC §3134(c)(5))

Severely financially distressed employers For severely financially distressed employers, wages paid to all employees qualify for purposes

of the credit, regardless of the number of full-time employees. Currently, employers with more than 500 full-time employees may only count wages paid to furloughed employees as qualified wages. (IRC §3134(c)(3)(C))

A severely financially distressed employer is any employer whose gross receipts declined more than 90% in a 2021 calendar quarter in relation to the comparable 2019 calendar quarter.

Extended limitations period The statute of limitations for imposing an assessment attributable to the credit is five years from

the later of:

• The date on which the original return, which includes the calendar quarter with respect to which the credit is determined, is filed; or

• April 15, 2022 (pursuant to IRC §6501(b)(2)). (IRC §3134(l))

Allocating wages for PPP loan recipients One of the most significant changes made by the Consolidated Appropriations Act of 2021 is

that it allows PPP borrowers to claim the Employee Retention Credit, but precludes taxpayers from counting the same wages as qualified wages for the Employee Retention Credit and for PPP loan



forgiveness. (TCDTRA §206(a), contained in the Consolidated Appropriations Act of 2021 (H.R. 133)) The problem is, what do we do for borrowers that have already filed their forgiveness applications?

Notice 2021-20 illustrates that wages included in the PPP forgiveness amount may not be used for purposes of the Employee Retention Credit. However, the guidance clarifies that we only consider the minimum amount of payroll costs, together with any other eligible expenses reported on the PPP Loan Forgiveness Application, sufficient to support the amount of the PPP loan that is forgiven. (Notice 2021-20, Question 49)

Because the forgiveness amount must be at least 60% wages, borrowers with sufficient other expenses may allocate those other qualified expenses to 40% of their forgiveness amount.

Example of borrower with sufficient other expenses

Big Biz received a PPP loan of $200,000. During their PPP covered period, Big had qualified payroll costs of $200,000 and qualified rent expenses of $100,000, for a total of $300,000 in qualified expenses.

When Big applied for forgiveness of their PPP debt, they included the $300,000 of qualified expenses in support of forgiveness of the entire PPP loan. Big is deemed to have used $120,000 ($200,000 loan amount × 60%) of payroll costs for purposes of PPP forgiveness and may not use those wages for purposes of the Employee Retention Credit.

Example of borrower without sufficient other expenses

Little Biz received a PPP loan of $200,000. During their PPP covered period, Little had qualified payroll costs of $200,000, and qualified rent expenses of $20,000, for a total of $220,000 in qualified expenses.

When Little applied for forgiveness of their PPP debt, they included the $220,000 of qualified expenses in support of forgiveness of the entire PPP loan. Little is deemed to have used $180,000 ($200,000 - $20,000 of other expenses) of payroll costs for purposes of PPP forgiveness and may not use those wages for purposes of the Employee Retention Credit.

With covered forgiveness periods of up to 24 weeks, borrowers should have sufficient other expenses to account for at least 40% of the forgiveness amount, which is something to consider when choosing a forgiveness period and completing the forgiveness application.

You want to ensure a long enough covered period to have qualified nonpayroll expenses of at least 40% of the loan amount and make sure to include all of those expenses on the forgiveness application. Many borrowers have found it easier to just report their payroll costs to substantiate forgiveness of the PPP loans, but this could limit their eligibility for Employee Retention Credits.

Unfortunately, the notice states that only expenses included on the forgiveness application can be included for these calculations. This could be a problem for borrowers that have already submitted applications using only payroll costs because there is no mechanism to amend those applications.



Example of not including other expenses

EZ Way Out received a PPP loan of $400,000. During their PPP covered period, EZ had qualified payroll costs of $600,000 and other qualified expenses of $200,000.

Since EZ has payroll costs greater than their loan amount, they only include payroll costs on their forgiveness application. As a result, $400,000 of the payroll costs are deemed to be used for forgiveness.

If EZ includes all $800,000 of their qualified expenses on the PPP forgiveness application, only $240,000 ($400,000 loan amount × 60%) of the payroll costs will be deemed to be used for forgiveness.

Note the difference between this and the two previous examples where the application included all the expenses and not just the wage expense.

WHY FORMS 941-X MAY BE NECESSARY FOR 2020

There are two reasons why amended payroll tax returns may be necessary for the 2020 calendar year:

• The TCDTRA repealed the CARES Act provision preventing taxpayers that received PPP loans from claiming the Employee Retention Credit (TCDTRA §207); and

• Many payroll companies did not make much, if any, effort to help their clients determine whether the client was eligible to claim credits for paid sick leave or family leave under the FFCRA or the Employee Retention Credit under the CARES Act.

Payroll companies sleeping on the job Many payroll companies have relied on their own clients to provide information necessary to

claim the COVID-19 payroll tax credits. If the client didn’t tell the payroll company that they paid wages eligible for paid sick leave or family leave under the FFCRA or the Employee Retention Credit, then the payroll companies didn’t claim the credits on the payroll tax returns. For smaller employers, the payroll companies made little effort to help their clients make this determination.

Practice Pointer

By reviewing our clients’ 2020 payroll tax returns, we can provide them with a great service if we determine they are eligible for additional payroll tax credits. Here’s the catch: Any changes to your client’s payroll tax returns to claim COVID-19–related payroll tax credits will create an adjustment that must be made to their income tax return. This leaves the tax professional with two options:

• File amended payroll tax returns prior to filing your client’s 2020 income tax returns; or • File the income tax returns now, then amend them after the amended payroll tax returns

are filed.



Helpful worksheet for reviewing payroll tax returns

We have created a helpful worksheet for you to use when reviewing your client’s payroll tax returns. The worksheet accomplishes three goals:

• Aids in the quick review of payroll tax returns (you can even have administrative staff quickly breeze through Steps 1 and 2);

• Provides a quick reference guide to determine if amended payroll tax returns may be warranted; and

• Can be used as a workpaper in making tax return adjustments for clients that claim FFCRA or employee retention payroll tax credits.

The worksheet is reprinted in the appendix at the end of these materials, and is also available at:

Website www.caltax.com/files/2021/ptcworksheet.pdf

Practice Pointer

The payroll tax review worksheet is for use with 2020 payroll tax returns. We will provide an updated worksheet for 2021 payroll tax returns in future materials.

REVENUE RAISING MEASURES

To help defray some of the costs of this bill, the ARPA includes the following revenue raising measures:

• Extends the limitation on excess business losses for an additional year, through 2026. Currently the excess business loss limitations are scheduled to be in effect for the 2021 through 2025 tax years (ARPA §9041; IRC §461(l)(1));

• Reduces the threshold under which third party settlement organizations (e.g., credit card companies, PayPal, Venmo) must file Form 1099-K, Payment Card and Third Party Network Transactions, from $20,000 and 200 transactions per payee to $600, regardless of the number of transactions., beginning with the 2022 calendar year. (ARPA §9674) Note: A clarifying amendment makes it clear that the 1099-K only needs to be filed to report transactions involving the sale of goods or services, applicable to transactions after the date of enactment of the ARPA;

• Increases the scope of the $1 million deduction limitation applied to publicly held corporations for excessive employee compensation to apply to the top eight highest compensation employees (other than the CEO and CFO for the taxable year, applicable to taxable years beginning after December 31, 2026 (ARPA §9708; IRC §162(m)); and

• Repeals the worldwide interest allocation under IRC §864(f). (ARPA §9671)

COBRA CONTINUATION COVERAGE

PREMIUM SUBSIDIES

The ARPA provides premium “free” COBRA continuation to “assistance eligible individuals” for a six month period starting April 1, 2021, and provides employers and/or insurers a refundable



payroll tax credit for essentially subsidizing these benefits. (ARPA §9501(a)) The subsidized COBRA coverage is available from April 1, 2021 (the first of the month following enactment of the ARPA) through September 30, 2021. Assistance-eligible individuals will also be given an opportunity to change their coverage or to elect coverage after receiving notice that the subsidized premiums are available.

Gross income exclusion Any premium assistance subsidies provided are excludable from the individual’s gross income.

(ARPA §9501(b)(4); IRC §139I))

Premium reimbursements An assistance-eligible individual who pays any premium during the period April 1, 2021 through

September 30, 2021 is entitled to be reimbursed from the employer/plan/insurer, whichever is applicable (see upcoming section). The reimbursement must be paid within 60 days after the date in which the individual elects the COBRA continuation coverage. (ARPA §9501(b)(1)(D)(i))

Double benefits disallowed An assistance-eligible individual who receives premium assistance for any month during the taxable

year, is ineligible for the IRC §35 Health Coverage Tax Credit. (ARPA §9501(b)(3); IRC §35(g)(9)).

CONTINUATION COVERAGE PREMIUM ASSISTANCE CREDIT

The person to whom premiums are payable for COBRA continuation coverage may claim a refundable credit against their quarterly employer’s share of Medicare tax for the amount paid on behalf of the employee/former employee. (ARPA §9501(b); IRC §6432) Generally, the person to whom premiums are payable is the employer, but may be:

• The plan in the case of any group health plan that is a multiemployer plan; or • The insurer in the case of any group health plan that is not a multiemployer plan if 100% of

the COBRA continuation coverage is provided by the insurance company.

Ordering rules The Continuation Coverage Premium Assistance Credit is applied against the employer’s share

of Medicare tax after reductions for any credits for paid sick leave or paid family leave under IRC §3131, §3123, or §3133 (discussed on page 31).

Advance credit Taxpayers may expedite their receipt of the credits by:

• Claiming an advance credit; or • Reducing the amount of their share of the Medicare tax payroll deposit.

(IRC §6432(c)(2)(B))

Comment

We assume that the IRS will include the advanced continuation coverage payroll tax credit on Form 7200, but we’ll have to wait for IRS guidance to be sure.



Denial of double benefit Taxpayers claiming the credit must increase their amount of gross income by the amount of such

credit claimed. (IRC §6432(e))

Taxpayers may not claim the credit with respect to any amount that is taken into account as qualified wages or qualified health care expenses under the paid sick leave or family credits authorized by the FFCRA or the ARPA (see discussion on page 31).

The premiums taken into account in claiming the credit may not be included in the PPP forgivable payroll costs, applicable to forgiveness applications received on or after March 11, 2021 (the date that ARPA was enacted). (ARPA §9501(c))

Extension of statute of limitations The statute of limitation for assessing any amount attributable to claiming the Continuation

Coverage Premium Assistance Credit is extended to five years after the later of the date on which:

• The original return that includes the calendar quarter with respect to which the credit is determined; or

• The date on which such returns are treated as filed under IRC §6501(b)(2) (April 15, 2022).

LOAN AND GRANT PROGRAMS

RESTAURANT REVITALIZATION FUND GRANTS

The SBA is authorized to issue up to $25 billion in restaurant revitalization grants to restaurants that experienced pandemic-related revenue losses ($5 billion of the $25 billion will initially be set aside for entities with gross receipts during 2019 of $500,000 or less). (ARPA §5003)

Tax treatment The Restaurant Revitalization Fund grants are excludable from gross income on the federal

return, and no deduction may be denied, no tax attribute reduced, and no basis increase denied by reason of such exclusion. (ARPA §9673)

This means that for grant income excluded on a partnership or S corporation return, the amount excluded is treated as tax-exempt income for purposes of IRC §§705 and 1366.

Amount of the grant The grant is equal to the business’s pandemic-related revenue loss, which is generally equal to

the restaurant’s 2019 gross receipts, less its 2020 gross receipts and reduced by any first or second draw PPP loans.

Business opened in 2019 If the business was not opened for the whole 2019 calendar year, the pandemic-related revenue

loss is determined by multiplying the average monthly gross receipts for 2019 by 12 and then subtracting the business’s average monthly gross receipts for 2020 multiplied by 12. The SBA may also develop an alternative formula for businesses to use.



Business opened in early 2020 If the business opened during the period beginning on January 1, 2020, and ending March 10,

2021 (the day before the ARPA was enacted), the pandemic-related revenue loss is equal to the restaurant’s “allowable expenses” (defined below) incurred less any gross receipts received. The SBA may also develop an alternative formula for the restaurant to use.

Brand new businesses If the restaurant has not yet opened as of the date of the grant application but has incurred

allowable expenses, the pandemic-related revenue loss is equal to the amount of the expenses or the amount based on a formula determined by the SBA.

Grant cap The aggregate amount of grants made to an eligible entity and its affiliates is capped at $10

million and is limited to $5 million per physical location of the entity.

Eligible entity The following entities are eligible for the grants:

• Restaurants, • Food stands, food trucks, and food carts; • Caterers; and • Saloons, inns, taverns, bars, lounges, brewpubs, tasting rooms, taprooms, licensed facility or

premise of a beverage alcohol producer where the public may taste, sample, or purchase products; or

• Other similar place of business in which the public or patrons assemble for the primary purpose of being served food or drink.

The entity is ineligible if:

• It is a state or local government-operated business; • As of March 13, 2020, it owned or operated (together with any affiliated business) more than 20

locations, regardless of whether those locations do business under the same or multiple names; • It received a grant for shuttered venue operators authorized under the Consolidated

Appropriations Act of 20201; or • It is a publicly traded company.

Certification An entity must certify that the uncertainty of current economic conditions makes the grant

necessary to support the ongoing operations of the entity and that the entity has not applied for a shuttered venue operator grant.

Use of funds During the covered period, the entity may use the funds for:

• Payroll costs as defined under the PPP provisions, excluding qualified wages taken into account for purposes of calculating the Employee Retention Credit, or premiums taken into account for purposes of the Cobra Continuation Coverage Premium Assistance Credit;

• Payments of principal or interest on any mortgage obligation (not including prepayments);



• Rent payments, including rent under a lease agreement (excluding prepayments); • Utilities; • Maintenance expenses, including construction to accommodate outdoor seating and walls,

floors, deck surfaces, furniture fixtures, and equipment; • Supplies, including protective equipment and cleaning materials; • Food and beverage expenses that are within the scope of the entity’s normal business

practice before the covered period; • Covered supplier costs (as defined in the PPP provisions); • Operational expenses; • Paid sick leave; and • Any other expenses determined by the SBA to be essential to maintaining the eligible entity.

Comment

The entity, including any entity that permanently ceases operations, must return any grant funds not used for allowable expenses by the end of the covered period.

Covered period The covered period is the period:

• Beginning on February 15, 2020; and • Ending on December 31, 2021, or a date determined by the SBA that is not later than 2 years

after the date of enactment of this section.

Priority in awarding grants During the initial 21-day period in which grants are awarded, the SBA must give priority to

applications submitted by small business concerns owned and controlled by women, or veterans, or socially and economically disadvantaged small business concerns.

SHUTTERED VENUE OPERATOR GRANTS

The ARPA authorizes another $1.25 billion for shuttered venue operator grants. (ARPA §5005) Applicants that received PPP loans may now apply for the grants, but the grant amounts will be reduced by the amount of any PPP loans received.

Caution

The SBA has stated that if a PPP applicant is approved for a shuttered venue operator grant before the SBA issues a loan number for the PPP loan, the applicant is ineligible for the PPP loan and acceptance of any PPP loan proceeds will be considered an unauthorized use.

PAYCHECK PROTECTION PROGRAM

The ARPA provides an additional $7.25 billion in funding for the PPP program and expands eligibility to include additional covered nonprofit entities and internet publishing organizations. Currently taxpayers have until March 31, 2021, to apply for either first or second draw PPP loans. Even though the ARPA provided additional PPP funding, it did not extend the March 31, 2021, deadline to apply.



Additional covered nonprofit entities Eligibility for the first draw and second draw PPP loans are expanded to include “additional

covered nonprofit entities, which includes most 501(c) organizations” (ARPA §5001(a); 15 U.S.C. §636(a)(36)(A)((xvii))

To qualify:

• The entity cannot receive more than 15% of its receipts from lobbying activities; • The entity’s lobbing activities cannot comprise more than 15% of its total activities; • The cost of its lobbying activities cannot exceed more than $1 million during its most recent

tax year ending prior to February 15, 2020; and • It cannot have employed more than 300 employees (previously authorized nonprofit

organizations could have no more than 500 employees). (ARPA §5001(a)(1)(B)(iii))

Employee caps To qualify for PPP loans, the additional covered nonprofit entity may not employ more than 300

employees per physical location of the entity. (ARPA §5001(a)(1)(B); 15 U.S.C. §636(a)(36)(D)(iii)(bb))

Affiliation rules waived The affiliation rules are waived for nonprofit organizations, additional covered nonprofit entities, or any organization that receives financial assistance from a company licensed under §301 of the Small Business Investment Act of 1958.

TARGETED EIDL ADVANCE

The ARPA authorizes another $15 billion for targeted Economic Injury Disaster Loan (EIDL) grants. The SBA is directed to provide an additional grant of up to $5,000 targeted EIDL advances to businesses with 10 employees or fewer who suffered a reduction in gross receipts of greater than 50%. (ARPA §5002)

These grants are excluded from gross income on the federal return, and no deduction may be denied, no tax attribute reduced, and no basis increase denied by reason of such exclusion. (ARPA §9672)

This means that for grant income excluded on a partnership or S corporation return, the amount excluded is treated as tax-exempt income for purposes of IRC §§705 and 1366.

Practitioner COVID-19 Payroll Tax Credit Worksheet



For reviewing 2020 payroll tax returns

Client:

Introduction

This worksheet is for tax professionals to use when reviewing their clients’ payroll tax returns to determine whether the client has claimed all COVID-19-related payroll tax credits.

This worksheet is to be used when reviewing payroll tax returns for the 2020 calendar year. Different rules apply for COVID-19-related payroll tax credits for 2021. This worksheet will be updated at a later time for 2021 payroll tax returns.

Step 1 – Review payroll tax returns for FFCRA credits

Form 941: Q1 Q2 Q3 Q4 Total FFCRA sick leave wages on line 5a(i) n/a FFCRA family leave wages on line 5a(ii) n/a FFCRA credits on line 11b* n/a FFCRA credits on line 13c* n/a *Sum of lines 11b and 13c must be added back to gross income on the income tax return (see Step 4)

If FFCRA wages and credits appear on Form 941

If FFCRA wages and credits DO NOT appear on Form 941

What this means Your client and their payroll company are aware of the credits and have claimed them

Either: • Client and payroll company

missed the credits; or • Client did not pay any

wages eligible for the FFCRA credits

Action to take Your decision whether to pursue the issue to determine if additional credits can be claimed by filing amended payroll tax returns (see chart at end of worksheet for FFCRA requirements and eligible credit amounts)

You should inquire further to determine whether the credits were missed or whether client did not pay any FFCRA wages (see chart at end of worksheet for FFCRA requirements and eligible credit amounts)



Step 2 – Review payroll tax returns for Employee Retention Credit (ERC)

Note: The Employee Retention Credit was originally not available to employers that received PPP loans, but the Taxpayer Certainty and Disaster Tax Relief Act (TCDTRA), passed on December 27, 2020, now allows PPP loan recipients to claim the Employee Retention Credit.

Employers that originally didn’t claim the Employee Retention Credit because they received PPP loans can claim all of their 2020 Employee Retention Credits on their fourth quarter payroll tax returns for 2020.

Form 941: Q1 Q2 Q3 Q4 Total ERC wages on line 21 n/a ERC health plan expenses on line 22 n/a ERC credits on line 11c* n/a ERC credits on line 13d* n/a *Sum of lines 11c and 13d reduce deductible wages on the income tax return (see Step 4)

If ERC wages and credits appear on Form 941

If ERC wages and credits DO NOT appear on Form 941

What this means Your client and their payroll company are aware of the credits and have claimed them

Either: • Client and payroll company

totally missed the credits; or

• Client did not pay any wages eligible for the ERC

Action to take Your decision whether to pursue the

issue to determine if additional credits can be claimed by filing amended payroll tax returns (see chart at end of worksheet for ERC requirements)

You should inquire further to determine whether the credits were totally missed or whether client did not pay any ERC wages (see chart at end of worksheet for ERC requirements)



Step 3 – Amend payroll tax returns, if necessary

If you determine that additional credits are available, calculate the eligible wages and credits using the charts at the end of this worksheet and coordinate with the client and their payroll provider to amend the necessary payroll tax returns (Forms 941X).

Complete Step 1 and Step 2 again using the charts in Step 3 and the amended payroll tax returns (skip this step if amended payroll tax returns are not required):

Q1 Q2 Q3 Q4 Total FFCRA sick leave wages on line 5a(i) n/a FFCRA family leave wages on line 5a(ii) n/a FFCRA credits on line 11b* n/a FFCRA credits on line 13c* n/a *Sum of lines 11b and 13c must be added back to gross income on the income tax return (see Step 4)

Q1 Q2 Q3 Q4 Total ERC wages on line 21 n/a ERC health plan expenses on line 22 n/a ERC credits on line 11c* n/a ERC credits on line 13d* n/a *Sum of lines 11c and 13d reduce deductible wages on the income tax return (see Step 4)

Step 4 – Income tax return reporting

The following income tax return adjustments must be made for the FFCRA credits and the Employee Retention Credits that were claimed on payroll tax returns.

Credit Federal income tax return adjustments/comments

California adjustments (California does not allow these

credits) FFCRA family leave and sick leave credits

• Gross income must be increased by the amount of the payroll tax credits claimed (report as “other income”) (sum of Form 941, lines 11b and 13c);

• No adjustment to deduction for wages; • No adjustment to §199A wages

• Back out the gross income reported on the federal return due to the FFCRA credits

Employee Retention Credit

• Deduction for wages paid must be reduced by ERC claimed (sum of Form 941, lines 11c and 13d);

• No adjustment to gross income; • No adjustment to §199A wages*

• Back out the reduction for wages paid on the federal return due to the ERC

*The IRS has not provided guidance on this topic. Note, however, that §199A(b)(4)(A) states that wages for purposes of the qualified business income deduction are based on wages “paid.” It does not say wages “deducted.” This seems to indicate that even though deductible wages are reduced on the income tax return, the taxpayer can still include all wages paid for purposes of the §199A deduction.



FFCRA Paid Sick Leave and Paid Family Leave

Paid Sick Benefits: Up to 80 Hours Maximum

Reason for leave Amount of benefit

The worker: • Is subject to a federal, state, or local

quarantine or isolation order related to COVID-19;

• Has been advised by a health care provider to self-quarantine due to concerns related to COVID-19; or

• Is experiencing symptoms of COVID-19 and is seeking a medical diagnosis

100% of the employee’s regular rate of pay (not less than the applicable minimum wage rate) up to a maximum of $511 per day and $5,110 in aggregate in paid sick leave benefits. Paid sick leave benefits are capped at 80 hours for full-time workers (proportional amount for part-time workers) total (Small business exemption does not apply)

The worker is: • Caring for an individual who is subject to

governmental quarantine, or an isolation order has been advised by a health care provider to self-quarantine;

• Caring for his or her child or if the child’s school or place of care has been closed, or the child care provider is unavailable due to COVID-19 precautions; or

• Experiencing any other substantially similar condition specified by the Secretary of Health and Human Services in consultation with the Secretary of the Treasury and the Secretary of Labor

Two-thirds of the regular rate of pay up to a maximum of $200 per day and $2,000 in aggregate in paid sick leave benefits. Paid sick leave capped at 80 hours for full-time workers (proportional amount for part-time workers) total (Small business exemption applies only if worker is staying home to take care of child due to child care/school closure)

Paid Family Leave Benefits: Up to 10 Weeks Paid Maximum

Reason for leave Amount of benefit

The worker is: • Caring for his or her child or if the child’s

school or place of care has been closed, or the child care provider is unavailable due to COVID-19 precautions

If the employee is staying home to care for his or her child due to school closure or unavailability of child care provider due to COVID precautions, the employee is entitled to an additional 12 weeks of emergency family and medical leave (paid family leave benefits). Two weeks of this may be unpaid, but the remaining 10 weeks must be paid at two-thirds of the regular rate of pay up to a maximum of $200 per day and $10,000 in aggregate (Small business exemption applies)



Payroll Tax Credits on FFCRA Paid Sick Leave and Family Leave

Eligible employers Employers with fewer than 500 employees

Date range Sick leave and family leave paid from April 1, 2020, through December 31, 2020

The credit amount is: 100% of the above-listed benefits paid per employee, increased by: • Qualified health plan expenses paid by the

employer and allocated to the paid sick leave (if the health plan expenses are excluded from the employee’s gross income); and

• The employer’s 1.45% of Medicare tax paid on such benefits; and

Reduced by: • Other credits claimed by the employer for

the same wages



Employee Retention Credit

Eligible employers Employers that: • Carried on a trade or business during the

2020 calendar year, including a tax-exempt organization, or a tribe that operates a trade or business; and

• With respect to any calendar quarter: o Fully or partially suspended their

operations due to orders from any governmental authority limiting commerce, travel, or group meetings due to COVID-19; or

o Experienced a significant decline in gross receipts for the calendar quarter (50% reduction compared to the same calendar quarter of the previous year)

Employers can continue claiming credit through the end of the first quarter that its gross receipts are greater than 80% of the gross receipts for the same calendar quarter in 2019

The credit amount is: 50% of eligible wages, up to $10,000 of eligible wages per employee, per year (for 2020 calendar year)

Wages Eligible wages: • Salaries and wages (cash and noncash); • Tips; • Bonuses and commissions; • Vacation pay; • Sick pay (with exceptions); and • Health plan expenses paid by the employer Ineligible wages: • Paid to a related party

Size of employer If more than100 full-time employees (those averaging at least 30 hours per week), then only wages paid to employees who are not working are counted If 100 full-time employees or fewer, then wages paid to employees who are still working are counted


©2021 Spidell Publishing, Inc.®

GLOSSARY

Child and Dependent Care Tax Credit: available to taxpayers that paid expenses for the care of a

qualifying individual to enable the taxpayer and spouse, if filing jointly, to work, actively look for

work, or attend school full time. For 2021 only, the maximum credit percentage is increased from

35% to 50% and made refundable. The amount of eligible expenses has been increased to $8,000 for

one qualifying individual and $16,000 for more than one, and the AGI phaseout threshold has been

increased from $15,000 to $125,000

Child Tax Credit: under the American Rescue Plan Act (ARPA), the Child Tax Credit has been

increased from $2,00 per child to $3,000 per child ($3,600 for a child under age 6) for certain

households and made fully refundable. The requirement that taxpayers must have earned income of

at least $2,500 to qualify for the credit is repealed

Earned Income Tax Credit (EITC): a tax credit for low-income workers depending on the taxpayer’s

income and whether the taxpayer has one, more than one, or no qualifying children. Originally not

available for married individuals filing separate returns. Under the ARPA, for the taxable year

beginning after December 31, 2020, a married taxpayer with qualifying children may claim the EIC

on a MFS return if he or she resides with his or her qualifying child more than one-half the taxable

year, and during the last six months of the tax year does not have the same principal place of abode

as the spouse or has a divorce or separation agreement (other than a divorce decree)

Economic impact payments: payments to eligible individuals under the CARES Act. Also known as

“2020 recovery rebates,” the advance payments of a 2020 taxable year credit are equal to $1,200 per

qualifying individual ($2,400 MFJ) and $500 per qualifying child. A second round of payments to

qualified individuals started going out the week of December 27, 2020, under the ACRRA, equal to

$600 per taxpayer ($1,200 for MFJ) plus $600 per dependent who is under age 17 at the end of 2020.

A third round of payments is authorized under the American Rescue Plan Act (ARPA), signed into

law on March 11, 2021, providing $1,400 per taxpayer and dependent for those who qualify

Economic injury disaster loan (EIDL): offered by the Small Business Administration to small

businesses, which may request an emergency advance grant against the loan for up to $1,000 per

employee up to a maximum of $10,000. The advance does not need to be repaid under any

circumstances. The grant is not included in taxable income on the federal return, but expenses paid

with the grant can be fully deducted. On the California return, the grant is included in taxable income,

and expenses are deductible. The ARPA authorizes another $15 billion for targeted EIDL grants

Employee Retention Credit: a refundable credit against quarterly employment taxes equal to 50% of

the qualified wages and compensation paid to each employee by a qualified employer. Wages paid

after March 12, 2020, and before January 1, 2021, qualify for the credit. The credit has been modified,

expanded, and extended under the TCDTRA and is available for the first two quarters of 2021, with an

increased credit rate from 50% of qualified wages to 70%, and an increase of the wage limitation to

$10,000 per quarter. The ERC as modified under the TCDTRA is extended through December 31, 2021.

Under the ARPA, special provisions for recovery start-up businesses and severely financially

distressed employers are provided for wages paid after June 30, 2021, and before January 1, 2022. The

ERC as modified is treated as a refundable credit against the Medicare tax rather than against the

OASDI, and the statute of limitations for an assessment related to the credit is extended to five years


Spidell Publishing, Inc.® ©2021

Families First Coronavirus Response Act (FFCRA): provides immediate relief for individuals and

employers affected by the coronavirus pandemic. Provisions include mandatory paid sick leave;

mandatory paid family leave; employer payroll tax credits; and expanded unemployment benefits.

Under the ARPA, the refundable FFCRA credits for paid sick leave and family leave benefits are

extended for benefits paid April 1, 2021 (January 1, 2021, for self-employed individuals) through

September 30, 2021. In addition to the extension of time, the credit themselves have been expanded

to benefit more taxpayers

OASDI: Old Age, Survivors, and Disability Insurance. The OASDI tax provides funding for Social

Security in the U.S., providing comprehensive federal benefits to retired persons and those who are

disabled, as well as their spouses, children, and survivors

Pandemic Unemployment Assistance: expanded unemployment benefits under the CARES Act to

include individuals who historically are ineligible for benefits, such as long-term unemployed or

self-employed individuals and independent contractors who are unemployed, partially

unemployed, or unable to work due to COVID-19. Benefits begin on or after January 27, 2020, and

end on December 31, 2020. Under the ACRRA, COVID-related unemployment benefits are extended

for an additional 11 weeks at $300 per week for 11 weeks of unemployment beginning after

December 26, 2020

Paycheck Protection Program (PPP): under the CARES Act, whereby the Small Business

Administration will guarantee 100% of loans made under the program between February 15, 2020,

and June 30, 2020 (known as the “covered period”). Benefits include: loans may be forgiven for

amounts used to cover basic operating expenses, loan payment deferral for six months (interest will

run), no personal guarantees required, and waiver of SBA administration fees. Under the PPP

Flexibility Act, the loan forgiveness period has been extended from eight weeks to 24 weeks for the

loan origination date, as long as the covered period does not extend beyond December 31, 2020.

Changes have also been made with regard to loan forgiveness and the payroll cost threshold,

maturity date, deferring payments, and eliminating the full-time equivalent employee reduction

provision under certain circumstances. Under the ACRRA, the loan program is extended to March

31, 2021, with an additional $284.45 billion in funding. The ARPA provides an additional $7.25

billion in funding and expands eligibility to include additional covered nonprofit entities and

internet publishing organizations. The deadline has not been extended

Premium Tax Credit: a refundable credit that is advanced to eligible individuals of low or moderate

income to assist them in purchasing health care through a health care exchange, also known as the

Marketplace. For the 2020 tax year under the ARPA, taxpayers whose income was higher than

expected in 2020 are not required to repay any PTC on their 2020 return

Restaurant Revitalization Fund: set up for grants to be issued by the SBA of up to $25 billion in

restaurant revitalization grants to restaurants that experienced pandemic-related revenue losses


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INDEX

B Business tax provisions ................................... 33

C Child tax credit ................................................. 22 COBRA continuation coverage ...................... 39

D Deceased taxpayers ......................................... 21 Dependent care assistance .............................. 26 Dependent loophole ........................................ 21 Double benefit .................................................. 34

E Earned income .................................................. 29 Earned income tax credit ................................ 28 Economic impact payments.............................. 6 Employee retention credit............................... 35 Expanded UI benefits ........................................ 5 Extended limitations period ........................... 35

F Form 941-X ........................................................ 38

G Gross income exclusion ..................................... 3

I Individual income tax provisions .................... 3 Ineligible individuals ....................................... 22 Investment income ........................................... 30

L Loan and grant programs ................................ 41

M Married filing single ......................................... 10

P Paid sick and family leave employer credits 33 Pandemic Unemployment Assistance ............. 3 Paycheck protection program ......................... 43 Payment amounts ............................................... 6 Phaseout ............................................................. 22 Premium subsidies ........................................... 39 Premium tax credit ........................................... 30

R Reconciliation .................................................... 25 Reducing AGI ..................................................... 8 Refundable credit ............................................. 23 Restaurant Revitalization Fund grants .......... 41 Revenue raising measures ............................... 39

S Safe harbor ......................................................... 25 Separated taxpayers ......................................... 29 Shuttered venue operator grants .................... 43 Student loan forgiveness exclusion ................ 33

U UI exclusion bonus ............................................. 9 Unemployment Insurance ................................. 3

american rescue plan: tax implications

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