COVID-19 stimulus in flux as election nears

Tax Hot Topics newsletter Lawmakers are working toward an agreement on the next round of COVID-19 stimulus, but the outlook for a deal is still uncertain.

Republicans and Democrats appeared to be inching toward a deal last week as talks ramped up between Treasury Secretary Steven Mnuchin and House Speaker Nancy Pelosi (D-Calif.). Mnuchin presented a new, $1.62 trillion proposal that sought to meet Democrats closer to their $2.2 trillion ask, but major disagreements remain between the two sides, including over the tax title.

President Donald Trump urged lawmakers to get a deal done over the weekend, possibly providing a boost to the prospects of a compromise bill. However, on Monday, White House Chief of Staff Mark Meadows again raised the possibility of taking a piecemeal approach. Democrats have so far resisted these efforts but could soften their stance for select issues such as airline relief. Even if a deal materializes, the road to enactment is complicated by COVID-19. The Senate is not planning to meet until Oct. 19 due to the recent outbreak of COVID-19 among lawmakers.

House Democrats last week advanced a revised, pared-down version of their Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act that shows a shift in their negotiating position over the tax title. The vote was largely about messaging as the Senate will not take it up, but it offers insight into the Democrats’ shifting tax priorities.

The new HEROES Act costs $2.2 trillion, roughly $1 trillion less than its predecessor, but still retains several significant business tax benefits, including:

  • 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.
  • Extending the sick pay and paid family leave credits enacted by the Families First Coronavirus Relief Act through 2021 and making other enhancements
  • Reversing IRS guidance denying deductions after PPP loan forgiveness that’s excluded from gross income
  • Offering pension funding relief

It cuts the following business tax benefits from the original HEROES Act:

  • A 30% payroll tax credit for certain employee benefit expenses related to COVID-19
  • A 50% payroll tax credit for certain qualified fixed costs
  • A 90% self-employment income credit for certain reductions in self-employment income under adjusted gross income thresholds
  • The continued deferral of payroll taxes after a Paycheck Protection Program loan is forgiven

Individual tax provisions kept in the new bill include:

  • Suspending the $10,000 cap on the state and local tax (SALT) deduction for 2020 and 2021
  • Increasing the Earned Income Tax Credit and expanding eligibility for 2020
  • Increasing the Child and Dependent Care Tax Credit to 50% and making it fully refundable, along with other enhancements for 2020

The bill includes another round of $1,200 stimulus checks to individuals, but adopts Senate Republicans’ proposal, which provides $500 for each dependent. The original HEROES Act provided $1,200 for up to three dependents. The new bill also makes the child tax credit fully refundable for 2020 but does not provide for increases in the credits included in the original HEROES Act.

The bill also retains two revenue raisers that are unlikely to be popular among Republicans. It repeals the five-year carryback in the CARES Act for net operating losses (NOLs) arising in 2018, 2019 and 2020, replacing it with a one-year carryback for losses in 2019 and 2020 with restrictions on compensation, dividends, and stock buybacks. It also reinstates and makes permanent the Section 461(l) excess business loss limit, which was temporarily repealed by the CARES Act for 2018, 2019 and 2020. The NOL rollback was initially considered a messaging position for Democrats, but Pelosi indicated it is among the issues being negotiated.

Dustin Stamper
Managing Director
Washington National Tax Office 
T +1 202 861 4144

Omair Taher
Washington National Tax Office 
T +1 202 861 4143

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