American Rescue Plan Act – Key Changes For Businesses

The American Rescue Plan Act (ARPA) was signed into law on March 11, 2021. The new law will provide financial relief to individuals, businesses, not-for-profit organizations, and state and local governments during the pandemic. Here are some of the key ARPA provisions that will affect federal income taxes for some businesses in 2020 and 2021. 

Key Changes for Businesses 

The new law includes the following tax-related provisions for businesses and self-employed individuals:

Expanded Employee Retention Tax Credit

This credit has been extended through the end of 2021 (before the law, it had been scheduled to end on June 30). It's also been expanded to apply to recovery startup businesses that launched after February 15, 2020, and have average annual gross receipts under $1 million.

Increased exclusion for employer-provided dependent care assistance

The exclusion for assistance provided under a qualified dependent care assistance program has been increased to $10,500 ($5,250 for married people who filed separate returns) for 2021. 

Exclusion for EIDL advances

Eligible small businesses that receive targeted Economic Injury Disaster Loan (EIDL) advances may exclude the amounts received from gross income for federal tax purposes. Because these advances are treated as tax-exempt income, they will be allocated to partners or shareholders and increase their bases in their ownership interests. 

Exclusion for restaurant revitalization grants

Businesses that provide food or drinks — such as restaurants, food trucks and bars — may receive restaurant revitalization grants from the U.S. Small Business Administration. These grants are excluded from gross income for federal tax purposes. Because these amounts are treated as tax-exempt income, they will be allocated to partners or shareholders and increase their bases in their ownership interests.

Extension of limitation on excess business losses

Noncorporate taxpayers are currently subject to a limit on excess business losses of $250,000 ($500,000 for a married joint-filing couple). These limits are adjusted annually for inflation. Losses that are disallowed under this rule are carried forward to later tax years, then they can be deducted under the rules that apply to net operating losses. 

Previously, the CARES Act temporarily suspended the excess business loss rule for losses arising in tax years beginning in 2018 through 2020. This limitation comes back into play for 2021 and was scheduled to expire at the end of 2025. The ARPA pushes back the expiration date by one year to the end of 2026. 

Need Help?

The COVID-19 pandemic has affected every household and business in some way. This article only covers some of the provisions in the 628-page new law. If you or your business have suffered financial losses, contact your DWD tax advisor to discuss resources under the ARPA that may be available to help you with recovery. 

Contributed By: Mark Westerhausen, CPA | Director | DWD CPAs & Advisors