Tax Changes in COVID-19 Relief Legislation

President Biden signed a $1.9 trillion COVID-19 relief package into law on March 11, 2021.

In addition to providing stimulus checks, increased unemployment assistance, funding for vaccine distribution and COVID-19 testing and research, and aid to state and local governments, the American Rescue Plan Act makes several important changes to the tax code:

  • It increases for one year the child tax credit 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 Cuts and Jobs Act (TCJA) had made the child tax credit refundable up to $1,400 per child for taxable years 2018-2025.)
  • For 2021, it increases the earned income tax credit from a maximum of $538 to $1,500, and expands eligibility for the credit to all childless taxpayers over age 19, with the exception of full-time students between the ages of 19 and 25. Previously, only childless taxpayers between the ages of 25 and 65 could claim this credit.
    • Democrats have already announced plans to make these expansions of the child tax credit and earned income tax credit permanent.
  • It repeals the Section 864(f) election to allocate an affiliated group’s interest expense on a worldwide basis. The repeal of the taxpayer-favorable one-time election, which allows multinational groups with U.S. corporate members to allocate and apportion their interest expense on a group basis, is projected to raise tax revenues by $22 billion over 10 years.
  • It expands the Section 162(m) limitation on the deductibility of compensation for the highest-paid employees of publicly traded companies. The TCJA had limited the deductibility to corporations of the salaries of the CEO, CFO, and three highest compensated officers earning over $1 million, and the American Rescue Plan Act expands this limitation to the top five highest compensated employees earning over $1 million. The expansion of this limitation, beginning in 2027, is projected to raise $6 billion in revenue.
  • It extends the limitation on excess business losses of noncorporate taxpayers. The TCJA had limited the amount of losses of certain taxpayers owning unincorporated “pass-through” businesses to $500,000 per year through 2025. The extension of this provision until 2026 is projected to raise $31 billion in revenue.
 

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