On March 6, 2021, the Senate passed its version of the American Rescue Plan Act of 2021. This occurred just over a week after the House of Representatives first passed its version of the bill. The House and Senate versions differ in several respects, which must now be reconciled into a final bill. As we wait for the final legislation to take shape, here are some initial reactions.
Recent developments in Congress
On Feb. 27, 2021, the House of Representatives initially passed the American Rescue Plan. That bill included key programs for businesses and individual taxpayers. The business programs included modifications to the Paycheck Protection Program (PPP), expansion of employer payroll tax credits, and creation of new restaurant revitalization grants, among other things. For individual taxpayers, the bill provided direct payments (recovery rebates) and expanded the child tax credit, earned income tax credit, and child and dependent care tax credit. That bill also included a wide variety of provisions, such as funding for state and local governments, extension of unemployment benefits, expansion of Medicaid coverage, and rental assistance funding for qualified households.
The Senate began deliberation during the week of March 1, 2021, and several types of modifications have been considered. Some changes were first required under procedural rules in the Senate. For example, a provision in the House bill to increase the federal minimum wage to $15 was disallowed by the Senate Parliamentarian. Individual senators then offered perspectives on other amendments to the American Rescue Plan. Given the slim majority of the Democratic party in the Senate, individual senators had significant opportunities to influence the final legislation.
What’s in the Senate bill?
The vast majority of programs within the Senate version of the American Rescue Plan mirror those of the House version. However, the Senate version has scaled down some of the programs and made other alterations. Here are a few key changes.
Changes to rules for businesses
- Employee Retention Credit: The Senate bill would expand the employee retention credit to certain startup businesses. This would apply to businesses that began operations after Feb. 15, 2020, have less than $1 million in annualize gross receipts, and wouldn’t otherwise satisfy the employer eligibility tests. The credit for start-ups would be calculated under the normal retention credit rules based on per-employee amounts but would be capped at $50,000 per quarter per employer. This would provide a significant benefit to new businesses that began operations during the pandemic. The Senate version also includes a new rule applicable to businesses that suffered severe financial distress in a quarter (a 90% or greater decline in gross receipts as compared to the same quarter in 2019).
- Compensation deductions for publicly traded companies: The American Rescue Plan would extend rules limiting executive compensation deductions to publicly traded companies. Specifically, this would prohibit deductions in excess of $1 million for the five highest-compensated employees other than the CEO and CFO.
Changes to rules for individuals
Both the House and Senate versions of the American Rescue Plan would provide direct benefits to individuals through a combination of recovery rebate payments, expanded tax credits, and extension of unemployment benefits. However, the Senate bill includes three key changes:
- Recovery rebates: The Senate version would still provide additional direct payments of up to $1,400 for individual taxpayers, $2,800 for married couples filing jointly, and $1,400 for each qualifying child. However, the phaseout ranges, based on the adjusted gross income (AGI) of the taxpayer, would be decreased significantly. For a single taxpayer, the phaseout would begin at $75,000 of AGI and would be fully phased out at $80,000 (instead of $100,000 under the House bill). Similarly, married taxpayers filing jointly would be subject to a phaseout on AGI between $150,000 and $160,000 ($200,000 under the House bill). Narrowing the phaseout range would decrease the number of taxpayers that would be eligible for these rebates.
- Taxability of unemployment benefits: The Senate bill would allow taxpayers to exclude $10,200 in unemployment benefits from taxable income, subject to a phaseout. Depending on the specific terms of the final bill, it’s possible that taxpayers will be required to amend previously filed 2020 tax returns to exclude this income. Unemployment benefits set to expire on March 14, 2021 would also be extended through Sept. 6, 2021.
- Taxability of student loan discharge: The Senate bill would also exclude from taxable income student loan discharges that occur in 2021 through 2025. Under current law, there are limited income exclusions related to student loan forgiveness. The Senate bill would significantly expand this income exclusion during the five-year period.
The differences between the House and Senate versions of the American Rescue Plan will now need to be reconciled into a final bill. That process could be completed within a few days or could take additional time depending on the status of negotiations. However, it’s expected that the American Rescue Plan will be finalized in the short term.