Senate Republicans made their opening bid for the next round of COVID-19 stimulus legislation on July 27, proposing a $1 trillion package that includes their major tax priorities as lawmakers look to strike a deal within the week.
The legislation was unveiled as series of separate bills that Senate Majority Leader Mitch McConnell (R-Ky.) said are intended to be combined into a package entitled the Health Economic Assistance Liability Protection & Schools (HEALS) Act. The HEALS Act shares some overlapping tax priorities with the Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act, the stimulus bill passed by House Democrats in May, such as expanding the employee retention credit and providing additional direct payments to individuals. However, the HEALS Act is generally more limited in size and scope.
Major business tax provisions in the HEALS Act include:
- Increasing the employee retention credit from 50% to 65% of wages and increasing the wage cap to $10,000 per employee each quarter ($30,000 total), with other changes to expand eligibility
- Providing a temporary new category of Work Opportunity Tax Credit (WOTC) of up to $5,000 for employers who hire workers unemployed during the pandemic
- Providing a refundable 50% payroll tax credit for certain expenses related to protecting employees from COVID-19
- Allowing businesses to provide certain benefits to independent contractors or “gig” workers without affecting their worker classification
- Allowing the full deduction of all business meals from the date of enactment through the end of the year
- Creating a $7.5 billion allocation of tax credits for investing in domestic facilities for manufacturing medical personal protective equipment (PPE)
- Allowing the repatriation of certain intellectual property used in PPE production without taxable gain
- Permitting farmers to waive application of certain net operating loss (NOL) modifications provided by the CARES Act
Major provisions for individuals include:
- Issuing a second round of $1,200 refund checks for each filing adult (with the same income phaseouts provided in the CARES Act) plus $500 for each dependent (not limited to minors)
- Exempting workers who cross state lines from state income tax outside of their state of residence or any state in which they work more than 30 days annually through 2024
- Easing rules for COVID-19-related withdrawals from certain retirement plans
- Allowing unused Flexible Spending Account (FSA) contributions for 2020 to be rolled into the 2021 plan year
- Making care provided in an employer on-site clinic eligible as a Health Savings Account (HSA) expense through Dec. 31, 2021
Republicans and Democrats are now expected to begin negotiating over a compromise package. The biggest sticking points are not likely to be fought over the tax title. Cost will be an issue from the onset. The Trump administration and McConnell are seeking to limit the bill to $1 trillion, while Democrats are eyeing a much larger stimulus package in line with the $3 trillion HEROES Act. Democrats and Republicans will also need to resolve major differences in state aid, unemployment benefits, and liability protection for businesses. Although the two sides appear fairly close on individual tax rebates and an enhanced employee retention credit, there are also major differences in other aspects of the tax title.
While these challenges are significant, Congress is hoping to overcome them quickly. Lawmakers are under a tight deadline to reach an agreement with unemployment benefits provided by the CARES Act set to expire at the end of the month and the Trump administration pushing for a bill before Congress departs for its August recess. It’s possible lawmakers separately address the unemployment benefits and other issues this week and push off a broader agreement until the fall, but Democratic leaders and many Republicans oppose this piecemeal approach.
Employee retention credit
The HEALS Act would make significant enhancements to the employee retention credit enacted by the CARES Act that are similar to the Democratic proposal in the HEROES Act.
The CARES Act provides a 50% credit against up to $10,000 in wages paid while a business is suspended under government order or if gross receipts decrease more than 50% compared to the same quarter in 2019. The Senate bill would increase the credit to 65% of up to $10,000 wages per quarter (capped at $30,000) total for a maximum credit of $19,500 per employee. The House bill was slightly more generous, with a credit of 80% against up to 15,000 in wages per quarter (capped at $45,000) for a maximum credit of $36,000 per employee. Both bills would lower the gross receipts threshold, with the Senate offering the credit for a 25% reduction in gross receipts and the House offering a sliding credit from 10% through a 50% reduction. The Senate bill also makes tax-exempt entities eligible under the gross receipts test.
Both bills would also modify the “100 full-time employee” threshold for determining which wages qualify. The CARES Act allows any wages paid by employers with 100 or fewer employees to be eligible for the credit. However, for employers with more than 100 full-time employees, it limits qualifying wages to those paid only when the employee was not providing services. The HEALS Act increases the 100-employee threshold to 500 employees, while the HEROES Act would increase the threshold to 1,500.
The Senate bill also codifies IRS guidance that allows group health plan expenses to be considered qualified wages even when no other wages are paid. More importantly, the HEALS Act allows employers to be eligible for both the employee retention credit and the loan forgiveness under the Paycheck Protection Program, with certain limits to prevent double benefits. Democrats may be open to this, as the HEROES Act included a 50% refundable payroll tax credit that appeared targeted at the expenses specifically excluded from PPP forgiveness.
An improved employee retention credit is all but guaranteed in a final package. While the enhancements made by the HEALS Act aren’t as generous as those included in the HEROES Act, the two proposals appear close enough to put a compromise within reach.
Work Opportunity Tax Credit
The legislation creates a new targeted group for purposes of the WOTC that is comprised of individuals that are “qualified COVID-19 unemployment recipients” in 2020. Employers who hire members of this broadly defined group are eligible for an increased WOTC up to 50% of the first $10,000 in qualified first-year wages paid. Qualified individuals include those who begin work by Jan. 1, 2021 and are certified by the designated local agency as being approved to receive unemployment compensation under state or federal law for the week immediately preceding the date they are hired. The credit appears to be available for hiring almost any unemployed worker, but wages cannot count toward both this credit and the employee retention credit.
State tax relief
The Senate bill includes a temporary version of popular legislation on state tax jurisdiction that has been held up in Congress for years. The version in the HEALS Act would exempt nonresident individuals from state tax in any states they work less than 30 days annually from 2020 through 2024. The 30-day threshold is increased to 90 days for frontline workers who earned out-of-state income due to COVID-19. The bill also includes relief for employees forced to work remotely during the pandemic, allowing employers to treat their wages as earned at their normal workplace until they return or through the end of 2020, whichever comes first. Professional athletes, entertainers and other highly compensated public figures would not be eligible for any state tax relief.
The desire to provide relief for workers who are displaced because of COVID-19 is providing long-time supporters of similar legislation a boost in their efforts, but this provision may still face an uphill battle. Lawmakers from New York, including Senate Minority Leader Chuck Schumer (D-N.Y.), have successfully stymied many efforts to advance these types of bills in the past out of fear of lost revenue for their home state.
Safe workplace incentives
The HEALS Act would create a 50% fully refundable credit against an employer’s 6.2% share of Social Security taxes for “qualified employee protection expenses” incurred after March 12, 2020, and before Jan. 1, 2021. Such expenses include COVID-19 testing, PPE, cleaning supplies and qualified workplace technology and workplace reconfiguration expenses. The credit is based on the average number of employees and is limited to $1,000 for each of the first 500 employees, $750 for each employee between 500-1,000 and $500 for each employee over 1,000. The credit is also available to self-employed individuals but is limited to $1,000.
The Democratic HEROES Act has somewhat similar provisions offering a 30% payroll tax credit for certain employee benefit expenses related to COVID-19.
The Senate version also provides a safe harbor that allows companies to provide COVID-19 related assistance to independent contractors, including gig workers, without compromising their independent contractor classification for federal tax purposes. Eligible benefits must be provided after March 12, 2020, and before Jan. 1, 2021, and include financial support due to lost businesses and assistance with expenses for health care, COVID-19 testing, PPE, cleaning supplies or COVID-19 training. Benefits other than cash payments received by the independent contractor are treated as “qualified disaster relief payments” under Section 139 and are thus excluded from taxable income.
PPE manufacturing credits
The Senate legislation would create a new 30% credit for investing in facilities that will manufacture certain medical personal protective equipment. The credit is modeled after the Section 48C advanced energy project credit and would require taxpayers to apply to Treasury and Health and Human Services (HHS) to compete for a portion of the limited $7.5 billion allocation. The facilities and equipment must be used to produce qualifying medical PPE items already in the Strategic National Stockpile or any other textile products for medical applications as defined by the secretaries of the Treasury and HHS. Items not associated with medical PPE, including electronics, are not eligible.
Under the provision, intangible property relating to PPE or used to manufacture PPE may be repatriated to the United States without taxable gain. Any built-in gain is preserved and subsequently realized when the taxpayer sells or transfers the property.
The Senate legislation would allow taxpayers a 100% deduction of business meals from the date of enactment through the end of the year. The provision would apply to all business meals, not just the select category of meals that were previously eligible for a 100% deduction before the Tax Cuts of Jobs Act repealed their exception from the general 50% rule. This provision was pushed by President Donald Trump but is unpopular with many Democrats and even some Republicans. It was notably left off of the Senate Finance Committee tax title and was instead offered as part of a separate stand-alone bill.
The HEALS Act does not include the payroll tax cut pushed by Trump for several months. The administration appeared to concede on this point late last week in favor of rebate checks, but the White House could continue to push for the provision separately as part of future bill. The HEALS Act also would not make any general business credits refundable, a proposal popular with many Republican tax writers.
The HEALS Act also omits many Democratic tax priorities from the HEROES Act, including:
- Extending the sick pay and paid family leave credits enacted by the Families First Coronavirus Relief Act
(FFCRA) through 2021 and making other enhancements
- Allowing PPP loan recipients to continue deferring payroll taxes after a loan is forgiven
- Reversing IRS guidance denying deductions after PPP loan forgiveness that’s excluded from gross income
- Suspending the $10,000 cap on the state and local tax deduction for 2020 and 2021
- Enhancing many low-income credits
With cost on the overall bill an issue, Democrats may concede to a smaller tax title more in line with the Senate bill in exchange for other priorities. The Senate also often has more leverage because Senate rules require broader consensus. However, reversing IRS guidance on deduction after PPP loan forgiveness and allowing payroll tax deferral after forgiveness are both popular in the Senate. Republicans could also seek to swap refundable business credits for the low-income tax credit enhancements Democrats favor, although cost would be a major hurdle.
The HEALS Act is meant to kick-start negotiations with Democrats and a final package will likely be a compromise between Republican and Democratic proposals. Lawmakers are aiming to enact stimulus legislation before Congress leaves for its August recess, leaving less than a week to reach an agreement. Congress is often most efficient under a deadline, but the tax provisions could still evolve significantly, and taxpayers should not rely on any proposed tax provision until and a final stimulus package is actually enacted.
For more information contact:
Partner, Washington National Tax Office
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