Tax Adjustments in COVID-19 Reduction Laws Cadwalader, Wickersham & Taft LLP

President Biden signed a $ 1.9 trillion aid package to COVID-19 on March 11, 2021.

In addition to providing stimulus checks, increasing unemployment benefits, funding vaccine distribution and COVID-19 testing and research, and helping states and local authorities, the American Rescue Plan Act includes some key changes to tax law:

  • It increases the child tax credit for one year from $ 2,000 to $ 3,000 per child (and $ 3,600 per child under six) and makes the credit fully refundable for 2021. (The Tax Cut and Jobs Act (TCJA) had made the child tax credit refundable up to $ 1,400 per child for the 2018-2025 tax years.)
  • In 2021, the earned income tax credit will increase from a maximum of $ 538 to $ 1,500 and will expand the tax credit eligibility for all childless taxpayers over 19 years of age, excluding full-time students 19-25. Only childless taxpayers between the ages of 25 and 65 can apply for this credit.
    • Democrats have already announced plans to make these child tax credit and earned income tax credit extensions permanent.
  • It removes the option under Section 864 (f) to apportion the interest expense of an affiliated group worldwide. The repeal of the fiscally-favored one-time option, which allows multinationals with U.S. corporate members to split and apportion their interest expense on a group basis, is expected to increase tax revenue by $ 22 billion over a 10-year period.
  • It extends the limitation of Section 162 (m) to the deductibility of compensation for the best-paid employees of publicly traded companies. The TCJA had restricted the deductibility of the salaries of the CEO, CFO, and the three highest-paid officials who earned more than $ 1 million to corporations, and the American Rescue Plan Act extended that limit to the five most highly paid employees who make more than $ 1 million. Extending this restriction from 2027 is expected to bring sales of $ 6 billion.
  • It extends the limitation of excessive business losses by non-corporate taxpayers. The TCJA had capped losses on certain taxpayers who own unincorporated “pass-through” businesses to $ 500,000 per year through 2025. Extending this provision through 2026 is expected to generate $ 31 billion in revenue.