American business owners have faced no shortage of challenges in the past twelve months brought on largely by the changes from the COVID-19 global pandemic. Tax law has been no exception, as there have also been many tax changes recently, most notably from the passing of the American Rescue Plan Act (PL 117-2) on March 11, 2021. If you are like most business owners you may find yourself fatigued by the ever-changing and expanding set of rules you have to adhere to. Before you throw in the towel, this article highlights the tax changes for businesses brought about by the American Rescue Plan Act (ARPA) and tells you what you need to know.

To kick things off, the ARPA extends the period of relief for business owners seeking to deduct excess business losses. Owners of pass-through entities such as partnerships and S corporations may be aware that the limitation of deducting losses in excess of a certain thresholds was suspended for 2018, 2019 and 2020. ARPA extends this suspension for 2021 as well and allows that any excess loss that is not currently deductible becomes part of an owner's net operating loss. Under prior law, this cap on business loss deductions was scheduled to expire at the end of 2025, but has been extended to 2026.

Business owners may have also been aware that the ARPA provided additional funding for a variety of programs that had previously been enacted under the Coronavirus Aid, Relief, and Economic Security Act (CARES) of 2020, including an additional $15 billion in funding for the Economic Injury Disaster Loans (EIDL) as well as $7.25 billion in Paycheck Protection Program (PPP) funding. If you are one of the business owners who had applied for and received funds in this second round of PPP or EIDL funding, then you should know that the ARPA has extended the provisions of the Consolidated Appropriations Act (CAA) passed in 2020. This confirms that certain types of loan forgiveness will be nontaxable, while expenses will remain tax deductible to the extent otherwise allowed. ARPA applies this preferential tax treatment to PPP loans, EIDL loans up to $10,000, funding under the Shuttered Venue Operator Grant (SVOG), as well as targeted Economic Injury Disaster Loans to small businesses located in low-income communities, and the restaurant revitalization fund grants to small and independent restaurants. State tax treatment may vary, though it should be noted that New York State has adopted conformity to the federal rules regarding the taxability of forgiveness and the allowance of expenses.

The American Rescue Plan Act also extends the Employee Retention Credit (ERC) until December 31, 2021. The ERC is a refundable tax credit against certain employment taxes equal to 50% of the qualified wages an eligible employer pays their employees and is meant to help businesses that have kept their employees on their payroll. To be eligible, an employer must have a full or partial suspension of the operation of their trade or business during 2021 because of governmental orders due to COVID-19 or a decline in gross receipts in a calendar quarter in 2021 where the gross receipts of that calendar quarter are less than 80% of the gross receipts in the same calendar quarter of 2019. ARPA also extends the statute of limitations from three years to five years for the IRS to assess amounts related to the ERC.

ARPA has provided extensions for the Paid Sick Leave and Family Leave credits originally introduced by the CARES act and set to expire on March 31, 2021, through September 30, 2021. Unlike the CARES act however, paid sick leave is now voluntary instead of mandatory. Employers that choose to offer paid leave to eligible individuals have access to an increased credit of $12,000, up from $10,000 of wages per employee, which is limited to 10 days. These credits can be used as an offset to the employer's share of Medicare tax. If you are self-employed, you may still claim equivalent income tax credits for sick and family leave. As a reminder to self-employed individuals and employees, paid sick leave and paid family leave are treated as taxable compensation.

Employers need to be aware that ARPA also provides that individuals who have been involuntarily terminated or have seen reduced hours and opt for Consolidated Omnibus Budget Reconciliation Act (COBRA) coverage do not have to pay their premiums from April 1, 2021 through September 30, 2021. During this period, COBRA premiums must be paid by employers who can recoup their cost for this subsidy through a new tax credit against their Medicare taxes. This credit may be received on an advanced basis and penalties for failure to deposit Medicare taxes have been waived. It should be noted, however, that this credit is reduced by the ERC credit and paid leave credits claimed. Along those same lines, eligible employees can exclude from gross income up to $10,500 in salary reductions under a cafeteria plan or an employer's dependent care assistance program. Dollar limitations for these plans are subject to change and as an employer you need to amend your plans to reflect the new dollar limitations, which under ARPA apply only for 2021.

ARPA also brings about changes to defined benefit plans. Previously, defined benefit plans were required to amortize any short falls in funding over a seven-year period. Under ARPA, starting in 2022 any outstanding installments under the prior amortization rules will be reduced to zero and all shortfalls will be amortized over 15 years going forward. Plan sponsors may also elect under ARPA to apply this rule retroactively for years beginning in 2019, 2020 and 2021.

As the business climate in the United States continues to return to "normal", it is more important than ever that business owners stay up to date on the current tax law changes that may affect their business. Under the Biden administration, there are many additional tax law changes that are anticipated in the coming months and years so business owners will need to stay alert. If you have any questions about how the American Rescue Plan Act affects you or your business, please do not hesitate to contact your tax advisor at Dermody, Burke & Brown.

The information reflected in this article was current at the time of publication.  This article will not be modified or updated for any subsequent tax law changes, if any.