The American Rescue Plan Act of 2021 (ARPA), signed into law by President Biden on March 11, 2021, provides additional major relief to individuals and businesses that continue to be impacted by the COVID-19 pandemic.
The ARPA includes the following provisions related to individual taxpayers:
• Additional recovery rebate credit
• Unemployment compensation received in 2020 partially excluded from gross income
• Child tax credit expanded for 2021
• Child and dependent care credit enhanced and refundable
• Student loan discharges excluded from gross income
5 TAX ACCOUNTING METHOD CHANGES THAT CAN GENERATE SAVINGS AND CASH FLOW
Cash flow preservation remains an important focus for many companies as the COVID-19 pandemic continues to create uncertainty for businesses. Accounting method changes provide a valuable opportunity for taxpayers to reduce their current tax expense and increase cash flow by accelerating deductions and/or deferring income. Changing to an optimal method of accounting often results in a taxpayer claiming a favorable “catch-up” adjustment on the federal tax return for the year of the change, which can significantly reduce taxable income or generate a net operating loss that can be carried back to higher tax rate years.
Whether it makes sense to change a method of accounting depends on the taxpayer’s tax posture, future company performance and goals. Taxpayers should keep in mind that current tax proposals would raise tax rates and make other changes to the federal income tax system for corporations and individuals. These proposals should be monitored and their potential effects considered when evaluating the short- and long-term benefits of a tax accounting method change.
AMERICAN FAMILIES PLAN TO INVEST IN EDUCATION, CHILDCARE AND FAMILY PROGRAMS
On April 28, 2021, President Biden introduced the American Families Plan to a joint session of Congress. The plan confirms previous statements from the Biden administration, indicating that it would propose tax increases on wealthy households and tax breaks for low- and middle-income families.
The $1.8 trillion plan consists of $1 trillion in investments and $800 billion in tax cuts. It proposes investments in education, including free universal preschool, two years of free community college and programs to address teacher shortages. The plan also addresses direct support for childcare, school-related nutrition programs and a national paid family and medical leave program.
The plan further proposes the following tax breaks for low- and middle-income families.
PLR INTERPRETS BROKERAGE SERVICES FOR SECTION 1202 QUALIFIED TRADE OR BUSINESS REQUIREMENT
On April 9, 2021, the Internal Revenue Service (IRS) issued Private Letter Ruling (PLR) 202114002, concluding that a company in the business of obtaining insurance for its customers (Company) is not performing “brokerage services” for purposes of whether it meets the qualified trade or business requirement under the rules for exclusion of gain on sales of qualified small business stock (QSBS). The QSBS rules, which are highly complex, are governed by Internal Revenue Code Section 1202.
“FREE” COBRA GROUP HEALTH CARE FOR UP TO SIX MONTHS FOR INVOLUNTARILY TERMINATED (OR REDUCED HOURS) EMPLOYEES
The American Rescue Plan Act of 2021 (ARP), enacted on March 11, 2021, creates a requirement that employers treat the total payment for Consolidated Omnibus Budget Reconciliation Act (COBRA) continuation coverage due from certain eligible individuals as being “paid in full” for April 1 through September 30, 2021 (Subsidy Period). The eligible individuals with COBRA coverage will not receive the subsidy directly from the government; rather, they will have a premium holiday during which time the employer pays 100% of the applicable COBRA premium. The employer will be reimbursed in full through refundable payroll tax credits.