The American Rescue Plan Act provides tax relief to small business owners and their employees. Here are five of the tax changes:
- COBRA Assistance - Normally, employees that leave a company can choose to continue their health insurance coverage for a specified amount of time (usually, up to 18 months) under COBRA. The drawback is that the employees must pay the full amount (employers plus employees) and the employer may charge a 2% administrative fee to do the paperwork for you.
ARPA created a 100% subsidy for COBRA premiums from April 1, 2021, through September 30, 2021. And the subsidies are completely federal income tax free to employees. Plus, employers can recoup the cost through a payroll tax credit.
- Secure PPP Loans - Under the CARES Act, a business could qualify for a Paycheck Protection Program (PPP) loan, if certain requirements were met, and the loan could be forgiven without any tax liability to the borrower. (Loan forgiveness is normally taxable income.)
ARPA authorized additional funding for PPP loans. This also added enhancements for independent contractors and sole proprietors.
- Keep Employee Retention Credits - The CARES Act created the Employee Retention Credit (ERC) for employers that kept employees on the books during the pandemic. Although scheduled to expire at the end of 2020, the Consolidated Appropriations Act (CAA) extended it through June 30, 2021 and made some modifications, such as increasing the maximum credit from $5,000 to $14,000 per worker.
ARPA extended it again to December 31, 2021 and doubled the maximum credit to $28,000 per worker. It should be noted that an employer can claim the ERC and receive PPP proceeds, but the ERC cannot be claimed for payroll that is financed with proceeds from a forgiven PPP loan. That would be double dipping.
- Allow Paid Employee Leave - The Families First Coronavirus Response Act (FFCRA) created a tax credit for employers that provided paid family and sick leave in 2020 relating to the COVID-19 outbreak. This credit was extended through March 31, 2021. ARPA further extended it through September 30, 2021 with some modifications such as increasing the maximum credit from $10,000 to $12,000 per worker. Please note that this credit is only available for employers voluntarily offering qualified paid leave.
- Expand Dependent Care FSAs - Flexible spending account (FSAs) are set up to pay qualified healthcare or dependent care expenses. Contributions are made on a pre-tax basis within certain limits. ARPA increases the contribution limit for dependent care FSAs from $5,000 to $10,500 for 2021, however the contribution limit for healthcare FSAs remains at $2,750 for 2021.
Most of these COVID related laws only affect tax years 2020 and 2021, but could create quite an opportunity to keep things afloat for many small businesses. The drawback is the additional things that must be considered when doing your tax returns for 2021!