The American Rescue Plan & A Look Ahead at “Build Back Better” Economic Recovery Legislation
Congress has approved, and the President has signed the American Rescue Plan, which is a $1.9 trillion tax-and-spending package to address the continuing health and economic impacts of the COVID-19 pandemic. The final version of the bill passed the Senate on March 6th by a vote of 50-49 and passed the House on March 10th by a vote of 220-211.
Democratic leaders met their goal of enacting the legislation before March 14th when the current extension of enhanced federal unemployment insurance benefits was set to expire.
The Biden Administration is expected to now move on to proposing its “Build Back Better” economic recovery legislation, which will focus on economic stimulus and infrastructure. That legislation is likely to include several revenue-raising proposals including increased corporate tax rates, tax increases on high-income individuals, international tax law changes, and other business tax proposals. Although there has been speculation that there will be consideration of moving this legislation through the budget reconciliation process, there is also likely to be challenges to doing so, including from some Senate Democrats who have already expressed opposition to another key piece of legislation that does not have bipartisan support.
This True Alert will summarize the key tax issues for businesses in the American Rescue Plan, including the tax incentives for employers and the revenue offsets that were included. Business taxpayers would be well advised to review the business tax incentives that are included in the legislation in order to take advantage of them retroactively, when appropriate, and going forward for 2021. We will also consider the issues that are likely to be addressed in the “Build Back Better” economic recovery legislation that will be the next priority for Congress and the Biden Administration economic team in 2021.
The American Rescue Plan
The American Rescue Plan, which is the first major legislative accomplishment of the Biden Administration, was advanced through Congress using the budget reconciliation procedure with final approval in the Senate coming along party lines and final approval in the House by a very slim margin.
The final bill did not include a proposal to increase the minimum wage to $15 per hour by 2025 because the Senate parliamentarian ruled that it did not meet the requirements of the Senate budget reconciliation rules under which the legislation was being considered. The legislation did include additional direct economic payments to individuals, enhanced tax credits for families, workers, and businesses, and an extension of enhanced unemployment benefits.
Business Tax Incentives
The American Rescue Plan includes several provisions that assist businesses in dealing with the pandemic by expanding and/or extending assistance enacted in earlier COVID-19 relief bills. It also includes a package of pension-related changes:
- Expand and extend the Employee Retention Credit through 2021;
- Increase the exclusion for employer-provided dependent care assistance for 2021 from $5,000 to $10,500 (and from $2,500 to $5,250 for a married person filing separately);
- Expand and extend credits for paid family and medical leave through September 30, 2021;
- Exclusions from gross income for Economic Injury Disaster Loan grants and Restaurant Revitalization grants, along with a clarification that these exclusions would not result in a denial of business deductions, a reduction of tax attributes, or a denial of increase in tax basis;
- Provisions to shore up financially struggling multiemployer plans and single-employer pension plans
Employee Retention Credit
The Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Relief Act), which was signed into law on December 27, 2020, continued a number of key COVID-19 relief provisions that were included in the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which was enacted in March 2020, including an extension and enhancement of the Paycheck Protection Program (“PPP”) and an extension of the Employee Retention Credit (“ERC”) designed to help employers keep workers on their payrolls.
The Relief Act included an expansion of the ERC and an extension through June 30, 2021, and the American Rescue Plan now extends the ERC through the end of 2021. The ERC, which was enacted as part of the CARES Act, provides eligible employers with a refundable tax credit of up to $5000 per employee for qualified wages paid from March 13, 2020, through December 31, 2020. It was designed to help struggling businesses keep employees on their payrolls during the pandemic.
ERC Now available to PPP Loan Recipients: Under the CARES Act, a business had to choose between a PPP loan or ERC. The Relief Act included a significant change that permits employers who received a PPP loan to now claim the ERC, both retroactively for 2020 and going forward for 2021.
There are rules, however, that are designed to prevent “double dipping.” The Eligible Employer can claim the ERC on any qualified wages that are not counted as payroll costs in obtaining PPP loan forgiveness. Any wages that could count toward eligibility for the ERC or PPP loan forgiveness can be applied to either of these two programs, but not both.
IRS Notice 2021-20 explains when and how employers that received a PPP loan can claim the ERC for 2020 and details the rules that apply to determine how to treat wages for purposes of each program.
Extension of the ERC through 2021 and Expansion of the ERC benefits: The Relief Act extended the ERC through June 30, 2021, and the American Rescue Plan further extends the ERC through the end of 2021.
The Relief Act included an expansion of the ERC so that eligible employers can now claim a refundable tax credit against the employer share of Social Security tax equal to 70% of the qualified wages they pay to employees. Qualified wages are limited to $10,000 per employee per calendar quarter in 2021. Thus, the maximum ERC amount available is $7000 per employee per calendar quarter, for a total of $14,000 in 2021.
The business-loss threshold has been lowered to 20% of gross receipts down from 50% (compared year-to-year using 2019 data). The definition of a “Small Employer” now uses a threshold of 500 employees up from 100 employees, which effectively increases the value of the ERC significantly for those companies qualifying as Small Employers, who are allowed to take the ERC for “all qualified wages” even if employees are providing some services.
The American Rescue Plan adds language that allows “severely financially distressed” businesses to count all wages paid as “qualified wages” for purposes of claiming the ERC, not just those wages paid to employees that are not providing services, regardless of the number of employees the employer has. In order to qualify for this special treatment, the business must have a decline in gross receipts that takes them below 10% of their gross receipts for the same quarter in 2019.
The new legislation also allows certain start-up businesses to be eligible for the credit.
IRS Notice 2021-20 provides answers to these questions with respect to claiming the credit for 2020. Additional IRS guidance related to claiming the credit for 2021 should be issued in the near future.
- Who are Eligible Employers;
- What constitutes full or partial suspension of trade or business operations;
- What is a significant decline in gross receipts;
- How much is the maximum amount of an Eligible Employer’s ERC;
- What are “qualified wages”;
- How does an Eligible Employer claim the ERC; and
- How does an Eligible Employer substantiate the claim for the credit.
Revenue-Raising Provisions – Impact on Businesses
The American Rescue Plan includes a package of revenue-raising provisions designed to offset a portion of the revenue loss created by the overall bill. Those provisions include:
- Prevent companies from allocating interest expenses on a worldwide basis beginning in 2021;
- Lower to $600 the threshold transaction amount that third party settlement organizations must report under section 6050W(e);
- Extend the tax rules for excess business loss limitations under section 461 for an additional year; and
- Modify section 162(m) to prevent publicly traded companies from deducting the compensation of their ten highest-paid executives
Repeal of the worldwide interest allocation election under section 864(f): The bill would repeal a provision in current law that allows US multinationals to choose to allocate their interest costs on a worldwide basis. This policy has been part of the US tax law since 2004, when it was adopted as part of the American Jobs Creation Act, but it had a deferred effective date of December 30, 2020, so this is the first year it is effective.
Allowing the allocation of interest costs on a worldwide basis better aligns the treatment of expenses and income for purposes of calculating foreign tax credits. Due to the fact that there are no other changes to international tax rules included in this bill, there is a question of whether the repeal of this rule represents a policy decision on the part of Ways & Means Committee members who included it in their version of the bill or it is being used primarily because it increases tax revenues by $22.3 billion over 10 years.
The effective date of the provision has been repeatedly delayed in past years and was always used as a revenue offset when the deferral was approved. One interesting difference this time, however, is that the repeal is a permanent change and not a delay in the effective date.
Reduction in the Reporting Threshold for Third-Party Settlement Organizations: The bill reduces the reporting threshold for third-party settlement organizations from $20,000 and 200 transactions per payee under current law to $600 without regard to the number of transactions. The provision is generally effective in calendar quarters beginning after December 31, 2021, and is estimated to raise $8.4 billion over ten years.
This provision will affect organizations like Etsy, Airbnb, eBay, GrubHub, Doordash, and other “gig economy” entities. It will require them to provide more information to the IRS about the income earned through their platforms and to send that information to their users on Form 1099K’s.
Extension of Excess Business Loss Limitation: This provision was added in the Senate version of the bill. It would extend section 461(l), the so-called “excess business loss” rule, which generally limits certain current losses attributable to trades or businesses for noncorporate taxpayers to $250,000 ($500,000 in the case of joint filers), indexed for inflation through 2026. The limitation was enacted in the 2017 tax law with an expiration date of 2025, but was suspended for taxable years beginning in 2018, 2019, and 2020 in the CARES Act of 2020.
Expanded list of “covered employees” under section 162(m) deduction limitation: The Senate version of the bill added a provision that would expand the list of “covered employees” under the section 162(m) limitation on the deduction for excessive employee remuneration. Current law limits public companies from deducting more than $1 million in compensation paid to the CEO, CFO, and the next three highest-paid officers. This legislation would expand the list of covered employees to include the next five highest-paid employees. The effective date is tax years beginning after the end of 2026.
Previewing the Next Major Tax Bill – “Build Back Better” Economic Recovery Legislation & Tax Extenders
The “Build Back Better” economic recovery legislation is likely to include three key areas of the Biden agenda: Infrastructure investments, Green Energy, and manufacturing incentives. It is also expected to build on the individual economic relief included in the American Rescue Plan and include a number of the tax proposals Biden supports that will increase taxes on individuals and businesses. Finally, Congress and the Administration will have to address the package of tax extenders that arise every year with respect to those tax provisions that are not permanent.
How Will Democratic Leaders Move Forward on “Build Back Better” legislation?
Democratic leaders in Congress and the Biden Administration will have the same choices to make on “Build Back Better” legislation as they did with the American Rescue Plan in deciding how to proceed with a goal of enacting a new economic recovery package. They can forego any bipartisan support and draft a bill that is ambitious but meets the requirements of the budget reconciliation process, which requires only a simple majority for passage. They can scale back on the size and scope of the legislation in order to pick up Republican support and the 10 Republican votes needed to block a filibuster. They can split the issues into smaller, separate bills that may have a better chance of garnering bipartisan support.
Although the Congressional rules would allow the use of the budget reconciliation process a second time to move this legislation, there is resistance on both sides of the aisle in doing so. There will be conflict over the size of the package and whether there should be revenue offsets as well as with respect to the substantive issues like climate change and green energy, which many Democrats want to add to the more traditional list of infrastructure issues. There has been discussion of using the “earmarking” process that would allow for funding for specific projects, which could help get Republican support.
There have been suggestions that infrastructure legislation could have a price tag ranging from $2 to 4 trillion, and the expectation is that revenue offsets will certainly be included. This will provide the Biden Administration with the opportunity to enact some of the changes to the tax code on their wish list, including reversing provisions from the 2017 TCJA.
Senator Joe Manchin (D-WV), who is the Chair of the Senate Energy Committee, is expected to be a major player on this legislation, not only because of his key role as the chair of a committee that will be responsible for major parts of this bill, but also because he will likely once again be a potential swing voter on the legislation when it is considered on the Senate Floor. In remarks previewing some of his thoughts and plans about this legislation, he has stated that he will not support the bill unless there is bipartisan support for it, and he also believes the legislation should be paid for rather than increasing the deficit – a position that would suggest his support of tax increases, including raising corporate tax rates and reversing some of the 2017 tax law tax cuts for the wealthy.
Tax Issues on the Priority List for Congress and Treasury
The Biden Administration and the Treasury Department under newly-confirmed Treasury Secretary Janet Yellen have not signaled definitively yet which tax issues are on their priority lists for inclusion in the next economic recovery bill. Information available during the Presidential campaign and in public comments made thus far since the inauguration, however, have suggested a number of areas that business taxpayers should be monitoring as the legislation begins to develop.
Many of the items in the 2017 TCJA are set to change or expire in the next several years as well as some of the provisions included in all of the pandemic-related legislation. These issues will need to be addressed by Congress and the Administration and will likely be considered in the context of a major tax bill.
Those issues include:
- Increase in corporate tax rates from 21% — possibly to 28%
- Section 199A – possible phase-out for taxpayers earning in excess of $400,000
- Changes to the NOL rules
- A 15% “minimum tax” on book profits in excess of $100 million
- Doubling the global intangible low-taxed income (GILTI) tax rate from 10.5% to 21% and imposing it country-by-country
- An “offshoring penalty” surtax on US company offshore production profits for sales back into the US
- Denying all deductions and expensing write-offs for moving jobs or production overseas
- Establish a financial risk fee on certain large financial institutions
- Eliminate tax preferences for the fossil fuel industry
- Tax capital gains and dividends at the same rate as ordinary income for taxpayers with income of more than $1 million and tax unrealized capital gains at death
Climate Change and Green Energy
Democratic members of the Ways & Means Committee have taken the first shot at starting the debate on using the tax code in the “green energy” area. Additional proposals from Senate Democrats and the Biden Administration are expected. All three view renewable energy as an important priority that is tied to their initiatives on climate change, infrastructure, and job creation.
House Ways & Means Committee: All Democratic members of the Ways & Means Committee, including Chairman Neal (D-MA) have cosponsored the Growing Renewable Energy and Efficiency Now (GREEN) Act, which is designed to use the tax code to address the threat of climate change. These proposals would likely have broad economic impacts across several business sectors with some businesses benefiting from enhanced or new incentives, while others may see significant tax increases.
The legislation would do the following:
- Build on current tax incentives that promote the deployment of green energy technologies, while providing new incentives for activities that reduce greenhouse gas emissions
- Encourage residential investments in green energy and energy efficiency
- Expand incentives for energy efficiency and conservation in homes and building, with updated standards
- Support widespread adoption of zero-emission cars, vans, and buses through tax credits for purchasing vehicles, and supporting deployment of publicly accessible electric vehicle charging infrastructure
- Invest in the green workforce by providing tax credits for advanced manufacturing facilities and mechanical insulation installations
- Advance environmental justice using tax credits for research and other academic programs
- Price greenhouse gas emissions
Senate Democrats and Chairman Wyden: Senate Finance Committee Chairman Wyden (D-OR) introduced the Clean Energy for American Act in 2019, and he is likely to use that as a basis for his proposals at the SFC. His approach focuses on a “technology neutral” approach that would provide a tax incentive regardless of the specific renewable technologies used, instead basing the benefit on a metric such as the amount of carbon emissions reduced by the technology.
The Consolidated Appropriations Act, 2021 (CAA) that was enacted in December 2020 included the extension of nearly all of the tax provisions that were scheduled to expire on December 31, 2020. Several “tax extenders” were extended for just one year, but in some cases, Congress decided to make the extensions either permanent or for longer periods ranging from 2 to 5 years. The JCT staff estimated that the tax extender package along with the miscellaneous tax provisions included will cost $160.7 billion over 10 years.
This summary will highlight some of the key tax extender provisions important to businesses and individuals. No changes were made to the taxpayer-unfavorable provisions from the TCJA that related to the §163(j) net business interest limitation and the amortization of research expenses under §174, which are still scheduled to take effect starting in 2022.
Provisions made permanent
Key provisions that were extended on a permanent basis included:
- Lower excise tax rates on small brewers, vintners, and distillers under §5001, 5041, and 5051
- The deduction for energy-efficient commercial buildings under §179D, with the per-square-foot limitation indexed to inflation plus updated energy efficiency standards for claimants
- The lower adjusted gross income (AGI) threshold (i.e., 7/5% instead of 10%) above which out-of-pocket medical expenses can be claimed as an itemized deduction under §213(f)
- The above-the-line deduction for qualified tuition and related expenses under §222 would be repealed after 2020 and replaced with increased phase-out thresholds for the Lifetime Learning credit under §25A(d)(2).
The CAA included a 5-year extension for several provisions, which would effectively coordinate those expiration dates with the December 31, 2025 expiration date of most of the provisions of the TCJA for individuals. The TCJA also included some key business tax provisions that expire in 2025 including the §199A deduction for individuals, estates and trusts in addition to some of the new international tax provisions, which either expire or phase-in after 2025.
Some of the provisions that were extended for 5 years included:
- Look-through treatment of payments between related controlled foreign corporations for purposes of Subpart F (§954(c)(6))
- New markets tax credit
- Work opportunity credit
- 7-year recovery period for motorsports entertainment complexes
- Empowerment Zone tax incentives
- Employer credit under §45S for paid family and medical leave
One-year and two-year extensions
Several tax incentives were extended for two years, while others were extended for one year.
The CAA included significant relief for renewable energy developers by extending multiple windows by which construction must begin on projects in order to qualify for clean energy tax credits. Developers were given another year to take advantage of the production tax credit, while a deadline for the investment tax credit was delayed for projects that break ground on construction prior to the end of 2022.
Carbon capture projects that begin construction by the end of 2025 (rather than 2023) will also qualify for a Carbon Oxide Sequestration Credit. The inclusion of a 30% offshore wind investment tax credit for projects that began construction by 2017 through the end of 2025 was applauded by the industry association.
If you have any questions about the information in this True Alert, please contact a member of your TPC engagement team.