The $3 trillion stimulus package passed by the House on May 15 contains significant tax proposals, including provisions that would both enhance and reverse tax changes recently made by Coronavirus Aid, Relief, and Economic Security (CARES) Act.
The Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act (H.R. 6800) includes substantial funding for state and local governments and other relief programs, as well as a robust tax title. It was approved 208-199 in an extremely partisan vote and stands little chance of enactment in its current form. Democrats did not attempt to pare down the bill into something that would attract bipartisan support or that would stand a realistic chance of passage in the Senate. It is probably best viewed as a statement of Democratic priorities while negotiations on the next round of stimulus begin.
Major business tax provisions in the HEROES Act include:
- Repealing the five-year carryback in the CARES Act for NOLs arising in 2018, 2019 and 2020, and replacing it with a one-year carryback for losses in 2019 and 2020 with restrictions on compensation, dividends, and stock buybacks
- Increasing the employee retention credit from 50% to 80% of wages and increasing the wage cap from $10,000 to $15,000 per employee each quarter ($45,000 total), with other changes to expand eligibility
- Providing a 30% payroll tax credit for certain employee benefit expenses related to COVID-19
- Providing a 50% payroll tax credit for certain qualified fixed costs
- Providing a 90% self-employment income credit for certain reductions in self-employment income under adjusted gross income thresholds
- 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 Paycheck Protection Program (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
- Offering pension funding relief
- Reinstating and making permanent the Section 461(l) excess business loss limit
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 $1,200 each for up to three dependents with technical changes
- Suspending the $10,000 cap on the state and local tax deduction for 2020 and 2021
- Increasing the Earned Income Tax Credit (EITC) and expanding eligibility for 2020
- Raising the child tax credit to $3,600 for children under 6 and $3,000 otherwise for 2020
- Increasing the Child and Dependent Care Tax Credit to 50% and making it fully refundable, along with other enhancements for 2020
- Easing restrictions on Flexible Spending Arrangements for 2020
Lawmakers are expected to eventually agree on another stimulus and relief bill, but all signs point to a protracted partisan battle. It could be weeks or even months before anything is enacted. President Donald Trump and Senate Majority Leader Mitch McConnell (R-Ky.) have said they prefer to see how the current programs are running before rushing into more legislation, but rising unemployment or other bad economic news could put pressure on them to act more quickly.
There will be major policy differences to resolve regarding federal aid to states, the Postal Service and many other issues. McConnell is pushing for liability and litigation protections for businesses and employees while Trump has touted capital gains tax cuts and a payroll tax cut that has faced some resistance inside and outside his party.
The tax title of any bill will be a major source of contention and many of the tax provisions in the HEROES Act appear to have little chance of enactment. For example, it seems unlikely that Congress would retroactively reverse NOL and excess business loss rules only recently enacted by the CARES Act as taxpayers are even now filing for refunds. Suspending the $10,000 cap on state and local income tax deductions will also run into fierce opposition. Cost will certainly be an issue, with the bill’s $1.13 trillion in tax cuts offset only by the $254 billion in revenue generated from the proposed changes to the NOL and excess business loss rules.
However, some proposals could gain bipartisan traction. There is some support for expanding or enhancing the employee retention credit, though maybe not quite as generously as is proposed in the HEROES Act. There may also be widespread support to include corrections to CARES Act provisions to better reflect legislative intent. Several of the most significant business proposals in the HEROES Act are discussed in more detail below.
The HEROES Act would essentially gut a change to the treatment of NOLs made by the CARES Act, which among other things, allows taxpayers to carry back NOLs arising in 2018, 2019 or 2020 five years. The HEROES Act would allow only a one-year carryback and only for NOLs arising in 2019 and 2020. It would also create restrictions based on executive compensation and stock buybacks and dividends. It seems almost unimaginable that Congress would reverse a change it only recently enacted with overwhelming bipartisan support and claw back refunds that struggling businesses already filed based on the CARES Act. The administrative difficulty would pose problems and Republican opposition will be fierce. The heart of the Democratic objection appears to be based on the fact that taxpayers can carry back NOLs to years before 2018 with higher tax rates. Democrats could narrow their approach and try to impose some kind of rate “haircut,” but even that would be difficult to implement as the IRS has already begun paying refunds.
Business loss limitation
The bill would restore the Section 461(l) excess business loss limitation as originally enacted by the Tax Cuts and Jobs Act and make it permanent. The provision limits the deduction of businesses losses in excess of $250,000 (single) or $500,000 (joint), with the disallowed loss converted to an NOL that’s carried over to the following year. The CARES Act temporarily repealed Section 461(l) for 2018, 2019 and 2020. Democrats have objected to the change after several unfavorable press reports, but like the NOL change, it would seem unlikely for Congress to reverse a law only recently enacted with overwhelming bipartisan support while the IRS is even now paying refund claims based on the new law.
Employee retention credit
The legislation would significantly enhance the employee retention credit enacted by the CARES Act. It would raise the credit from 50% of wages up to $10,000 per employee to 80% of up to $15,000 per quarter ($45,000 overall). It also modifies the gross receipts test to allow more employers to qualify. Under the CARES Act, employers may be eligible for the employee retention credit if gross receipts decrease more than 50% compared to the same quarter in 2019. The HEROES Act allows the credit to be phased in gradually as gross receipts decline between 10% and 50% compared to the same quarter in 2019.
The bill raises the “100 full-time employee” threshold for determining which wages qualify. For employers with more than 100 full-time employees, the CARES Act limits qualifying wages to those paid only when the employee was not providing services. For employers with 100 or fewer full-time equivalent employees, any wages paid are eligible. The HEROES Act replaces the 100-employee threshold with a threshold of 1,500 full-time employees and gross receipts exceeding $41.5 million in 2019.
Employers of domestic workers would also become eligible for the credit under the HEROES Act, even though they are not engaged in a trade or business.
There is some bipartisan support for enhancing this credit, but the $160 billion cost could be an obstacle. Any enhancement of the credit in a final bill may not be as generous as proposed here.
Credit for qualified fixed costs
The HEROES Act would provide a 50% fully refundable credit against an employer’s 6.2% share of Social Security taxes for qualified fixed costs paid or accrued from March 12, 2020, through Dec. 31, 2020. These costs include rent, mortgage interest, utilities payments and other covered expenses defined in the CARES Act for purposes of PPP loan forgiveness.
The credit would be limited to least of 25% of qualified wages (as defined under the employee retention credit rules), 6.25% of 2019 gross receipts, or $50,000. To be eligible, employers may not have more than 1,500 full-time employees or gross receipts exceeding $41.5 million in 2019. In addition, employers must be fully or partially suspended due to a government order or experience a decline in revenue of at least 50% compared to the same quarter in 2019. However, the credit may be gradually phased in as gross receipts decline between 10% and 50% compared to the same quarter in 2019. Tax-exempt organizations may qualify under the business suspension test.
The credit appears to be aimed at providing tax benefits for fixed costs for taxpayers who do not qualify for PPP loan forgiveness in the same way the employee retention credit provides a tax benefit for wages for taxpayers that do not qualify for PPP.
Paid sick and family leave credits
The legislation would extend the refundable payroll tax credit for sick pay and paid family leave enacted by the FFCRA through 2021. It also retroactively raises the caps on the credit for employees taking leave to care for a child or family member, increasing the daily cap from $200 to $511 (matching the limit for employee sick pay) and the overall cap from $10,000 to $12,000. Although the HEROES Act expands the FFCRA’s paid sick and family leave requirements to employers with 500 employees or more, it prohibits them from taking the credit.
The HEROES Act is unlikely to pass in its current form, but taxpayers should continue to monitor the legislative process. Stimulus legislation is likely to be enacted at some point, and some of the tax provisions in the current bill could be retained. Taxpayers should continue to claim refunds based on the provisions in the CARES Act as currently provided, and should not rely on any proposed tax provision until and unless it is actually enacted.
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