Business Tax Effects of New Covid Stimulus Law, American Rescue Plan Act
Author ...
Publisher CPA Practice Advisor
Date Published 03.12.2021

In addition to the $1,400 stimulus payments to many Americans, the American Rescue Plan Act provides many other relief measures, and also some new business tax measures, that should be noted.

The American Rescue Plan Act of 2021 (ARPA), enacted by President Joe Biden on Thursday, is an approximately $1.9 trillion COVID-19 relief, funding and tax bill that has received a lot of attention for the inclusion of $1,400 direct payments to individuals.

What else does it do?

The ARPA also:

The ARPA contains several revenue-raising provisions, including

The ARPA does not include federally proposed so-called Mobile Workforce provisions or COVID-19-related liability protections, and most believe those proposals are unlikely to be enacted in 2021. The ARPA also contains no restrictions on the Section 461(l) loss limitation suspension for 2018-2020 pursuant to prior COVID-19 relief legislation and also does not prevent net operating losses generated in 2018-2020 from being carried back even if not yet carried back in filed tax returns.

Portions of the ARPA are supplemental in certain respects to the Dec. 27, 2020, Consolidated Appropriations Act, 2021 (CAA); the March 27, 2020, Coronavirus Aid, Relief, and Economic Security (CARES) Act; the March 18, 2020, Families First Coronavirus Response Act (FFCRA); and the March 6, 2020, Coronavirus Preparedness and Response Supplemental Appropriations Act. Prior alerts addressing those relief bills are available here.

I. Details of Certain Corporate Tax Provisions

A. Repeal of IRC Section 864(f) Worldwide Interest Allocation Rules IRC Section 864(f), enacted in 2004 with a delayed effective date, would have allowed taxpayers to elect to allocate and apportion interest expense on a worldwide basis. The provision has been repeatedly delayed by legislation but was finally scheduled to be effective in 2021. The ARPA permanently repeals the provision. The repeal is scored as raising $22 billion to help lower the cost of the ARPA.

B. Increase in Number of Employees Subject to IRC Section 162(m)’s Limitation on Deductions of Executive Compensation IRC Section 162(m) generally prohibits tax deductions by publicly traded corporations for so-called covered employees to the extent annual compensation of those employees exceeds $1 million. Section 162(m) generally applies to the CEO, the CFO and the three next-highest-compensated individuals. For tax years beginning in 2027, the ARPA requires corporations to also include the five next-highest-compensated individuals, so that the total number of covered individuals will be at least 10. Once an individual is subject to Section 162(m) under pre-ARPA law, the individual continues to be covered by Section 162(m) even if not among the five highest-compensated employees. With respect to the five next-highest-compensated individuals, the ARPA does not provide for continuing coverage by Section 162)(m) if they later fall outside the ARPA-expanded group. The expansion of Section 162(m) is scored as raising $6 billion to help lower the cost of the ARPA.

II. Details of Certain Tax and Related Provisions Relevant to Noncorporate Businesses and Individuals

A. Extension of IRC Section 461(l)’s Limitation on Excess Business Losses of Noncorporate Taxpayers IRC Section 162(l) generally disallows use of noncorporate losses in excess of $250,000 ($500,000 for joint filers). The CARES Act removed the Section 461(l) limitation for tax years 2018-2020. The ARPA pushes out the current expiration of Section 461(l) from 2026 to 2027. The ARPA does not remove or change CARES Act provisions relating to Section 461(l).

B. Recovery Rebate PaymentsThe ARPA provides for additional recovery rebates of up to $1,400 for most individual U.S. residents. The rebates begin to phase out for individuals with earnings in excess of $75,000 ($150,000 for joint filers), with rebates being unavailable to individuals with earnings in excess of $80,000 ($160,000 for joint filers). The rebate, which will be delivered via direct deposit when possible, is not taxable income; it is an advance payment of a refundable tax credit on the taxpayer’s 2021 federal income tax return.

III. Additional Infrastructure Spending and Very Significant Tax Changes Are Forthcoming

With passage of the ARPA, the focus in Washington, D.C., now shifts to a second budget reconciliation bill – Biden administration tax changes, expected to be joined with infrastructure spending. The tax changes are expected to be substantial and far-reaching and to include corporate, individual and capital gains tax rate increases; international tax changes; and estate and gift tax changes.

President Biden’s fiscal year 2022 budget is expected to be released in mid- to late April, at which point the House and then the Senate will craft and approve a budget resolution to serve as the vehicle for the next reconciliation process. Most expect committee action to begin in the next few months, with ultimate enactment in the fall. Only 51 votes are needed to pass budget reconciliation legislation in the Senate.

The effective dates of the newly enacted provisions generally are expected to be Jan. 1, 2022, but certain provisions may have proposed effective dates tied to committee action or the date of enactment (for example, capital gains tax rate increases may be proposed to apply to sales occurring after the date of committee action in early October or the date of enactment of the legislation later in the fall). The effective dates of certain provisions may be phased in over time, and certain provisions may be enacted on a temporary basis to help keep the scored cost of the legislation within acceptable parameters.