The American Rescue Plan Act of 2021 (ARPA) allows employers with fewer than 500 employees to claim refundable tax credits to offset the cost of providing COVID-19-related paid sick and family leave to employees, including leave taken by employees to receive or recover from COVID-19 vaccinations. These tax credits, which in essence are an extension of the FFCRA credits first introduced in early 2020, are available to eligible employers that pay sick and family leave for leave from April 1, 2021 through September 30, 2021. On April 21, the IRS released a fact sheet describing these credits in greater detail.
The credits are available to eligible employers for wages paid for leave taken by employees who are not able to work or telework during the period April 1, 2021 through September 30, 2021 due to COVID-19-related reasons, including leave taken to receive COVID-19 vaccinations or to recover from any injury, disability, illness, or other condition relating to the vaccinations.
These credits are tax credits against the employer’s share of the Medicare payroll tax and are refundable to the employer if the credits exceed the employer’s Medicare payroll tax obligation. The amounts of the tax credits are as follows:
- The credit for sick leave wages is equal to 100% of the sick leave wages paid at an employee’s regular rate of pay for COVID-19-related reasons for up to 2 weeks, capped at $511 per day and $5,110 in the aggregate.
- The credit for family leave wages is equal to 2/3 of the family leave wages paid at an employee’s regular rate of pay for up to 12 weeks, capped at $200 per day and $12,000 in the aggregate.
The amount of the credits is increased (but not above the respective daily and total caps) by allocable health plan expenses, contributions for certain collectively bargained benefits, and the employer’s share of federal payroll taxes paid on the employee wages.
Employers can claim the credits on their quarterly Form 941 payroll tax filings and may retain amounts in anticipation of claiming the credits that they otherwise would be required to deposit. Some employers may be able to claim advance payment of the credits by filing a Form 7200 with the Internal Revenue Service (IRS).
Safe Harbor for Certain Taxpayers to Deduct PPP Loan-Paid 2020 Expenses on 2021 Tax Return
Furthermore, the IRS on April 22 released Revenue Procedure 2021-20, which provides a safe harbor for certain taxpayers that received a Paycheck Protection Program (PPP) loan and, based on IRS guidance issued before the enactment of the COVID Tax Relief Act on December 27, 2020, did not deduct PPP loan-paid expenses paid or incurred during the taxpayer’s taxable year ending after March 26, 2020, and on or before December 31, 2020, that resulted in, or were expected to result in, forgiveness of the PPP loan. Under this safe harbor, such taxpayers may elect to deduct these expenses on their timely filed federal income tax return for the taxpayer’s first taxable year following the 2020 taxable year (i.e., for most taxpayers, the 2021 taxable year), rather than filing an amended return or administrative adjustment request for the 2020 taxable year.
The safe harbor is applicable only to taxpayers that timely filed their 2020 tax return on or before December 27, 2020. The safe harbor does not apply with respect to expenses that became eligible PPP expenses as part of the December 27 law, nor does it apply to Second Draw PPP loans. There are procedural requirements for taxpayers to follow in order to obtain the benefit of the safe harbor, including attaching a specific statement to their tax returns that fulfills certain requirements set forth in the revenue procedure.
If you have any questions about the Paycheck Protection Program or tax credits available to you or your business under COVID-19-related relief legislation, please reach out to your Schiff Hardin contact for further information.