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Overview of Tax Provisions in the Proposed HEROES Act – COVID-19 Legislation Phase 4
On May 12, 2020, House Democrats unveiled their version of the phase 4 stimulus legislation, the Health and Economic Recovery Omnibus Emergency Solution Act (HEROES Act). The estimated cost of this proposed COVID-19 relief package is $3 trillion and provides funding for a wide range of groups, more stimulus checks for individuals, funding for state and local governments, rent and mortgage assistance, more funding for coronavirus testing, emergency relief for the U.S. Postal Service and provisions to facilitate voting by mail.
In this article, we’ll cover the proposed changes and additions for tax relief and cash flow assistance for businesses.
This proposed legislation makes several changes to existing payroll tax credits made available under previous phases of COVID-19 relief, including:
- Employee Retention Credit – Under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), employers affected by COVID-19 are eligible for a refundable credit equal to 50 percent of qualified wages. The credit is limited to $10,000 of qualified wages (including allocable qualified health plan expenses) per employee for all calendar quarters. The HEROES Act proposes to increase the applicable percentage of qualified wages to 80 percent and increase the limit on wages taken into account per employee from $10,000 for the year to $15,000 per quarter (capped at $45,000 for the calendar year). In other words, the maximum credit per employee would increase from $5,000 to $36,000.
The proposed bill language also would replace the 100-employee threshold for determining the relevant qualified wage base with a new definition of a large employer. A large employer would be defined as an employer with greater than 1,500 full-time employees and gross receipts of greater than $41.5 million in 2019. This credit also would be available to state and local governments. Changes would be retroactive to the effective date of the CARES Act.
- Paid sick and family leave credits – Phase 2 of the COVID-19 legislation provided paid sick and family leave for up to 12 weeks for employees unable to work or telework due to COVID-19-related reasons. Small and midsize employers mandated by the Families First Coronavirus Response Act (FFCRA) to provide this type of leave are eligible for payroll tax credits to help cover these costs through December 31, 2020. The HEROES Act would extend the availability of these payroll tax credits through the end of 2021.
The proposed legislation also changes the maximum daily amounts allowed for paid sick leave for caregivers of someone subject to a coronavirus-related stay-at-home order or for children whose schools or day cares were closed. The limit would increase from $200 per day to $511 per day, effective at the enactment of the HEROES Act. For paid family leave under the expanded FMLA rules, the total refundable credit amount would increase from $10,000 to $12,000, and individuals would be allowed to claim the credit for a maximum of 60 days, rather than 50 days as provided for in the FFCRA.
Currently, public employers are mandated to provide the paid sick leave and family leave but aren’t allowed the corresponding payroll tax credits. The HEROES Act would allow these credits for federal, state and local governments. However, employers with more than 500 employees also would be required to provide the FFCRA paid sick and family leave, but they would not be eligible for the tax credits. Currently, private employers with 500 or more employees aren’t subject to the FFCRA. Furthermore, the legislation would retroactively repeal the authority given under the CARES Act to the Secretary of Labor to exempt employers with fewer than 50 employees or exempt healthcare providers and emergency responders from the right to paid leave.
The HEROES Act also introduces new tax credits to help businesses and self-employed individuals with business interruption and loss of revenue during the COVID-19 pandemic:
- Payroll credit for certain fixed expenses of employers subject to closure by reason of COVID-19 – The HEROES Act adds a new 50 percent refundable payroll tax credit for qualified fixed costs such as rent obligations, mortgage obligations and utility payments. This credit would be available to employers with no more than 1,500 full-time equivalent employees or no more than $41.5 million in gross receipts in 2019.
Similar to the Employee Retention Credit, to be eligible, employers must be subject to a full or partial suspension due to the COVID-19 government order or have a decline in gross receipts of at least 20 percent compared to the same calendar quarter of the preceding year. This credit phases in for employers with a decline in gross receipts between 10 percent and 50 percent. For each eligible quarter, qualified expenses are limited to 25 percent of qualified wages or 6.25 percent of 2019 gross receipts, with a maximum credit of $50,000. The credit would apply to expenses paid or accrued from March 12, 2020, until December 31, 2020.
- Business interruption credit for self-employed individuals – This proposed legislation also adds a new credit for self-employed individuals experiencing a significant loss of income. This 90 percent refundable credit may be claimed on qualified self-employment income, which is defined as a loss in gross income for self-employment that exceeds a 10 percent reduction from 2019 to 2020. The amount of qualified income is capped at $45,000, and the credit phases out at $60,000 of adjusted gross income ($120,000 for married filing jointly) at a rate of $50 for every $100 of income.
The proposed phase 4 legislation amends the CARES Act provision that suspended the excess business loss limitation applicable to noncorporate taxpayers for tax years 2018 through 2020. The proposed legislation wouldn’t only restore the limitation but would make the limitation on excess business losses of noncorporate taxpayers permanent.
The HEROES Act also would amend the provisions of the CARES Act that provide for net operating loss (NOL) carrybacks by limiting carrybacks to taxable years beginning on or after January 1, 2018. Effectively, this change would prevent taxpayers from taking advantage of carrying NOLs back to pre-2018 tax years to offset income taxed at potentially higher rates, which is currently a valuable tax planning opportunity from a cash tax perspective. Taxpayers with excessive executive compensation or excessive stock buybacks and dividends also would be prohibited from carrying back losses.
SBA Paycheck Protection Program (PPP)
The CARES Act initially authorized $349 billion in funding for small business loans. This PPP funding ran out in less than two weeks, and at the end of April, Congress passed the Paycheck Protection Program and Health Care Enhancement Act, which allocated an additional $310 billion for the SBA PPP.
The CARES Act provides for loan forgiveness for the sum of SBA PPP proceeds used to pay for documented payroll costs, covered mortgage interest payments, covered rent payments and covered utilities. However, no more than 25 percent of the forgiven amount may be for nonpayroll costs. The forgiven amount isn’t required to be added back to taxable income; however, the U.S. Department of the Treasury and IRS recently concluded that businesses receiving PPP loan forgiveness can’t also deduct the associated payroll and nonpayroll costs used in calculating the forgiveness amount. SBA PPP participants also aren’t eligible, after the date of lender decision to forgive the loan, to take advantage of the CARES Act payroll tax deferral provisions (see a summary of these provisions here).
To address these issues, the HEROES Act would allow deductions for expenses paid or incurred with proceeds from the PPP loans that are ultimately forgiven and would allow SBA PPP loan participants to defer payment of eligible payroll taxes, even after the date of forgiveness. In addition, all nonprofits would be eligible for SBA PPP loans (currently, only 501(c)(3), (19) and tribal organizations are eligible).
On the loan forgiveness side, this proposed bill would extend the covered period from eight weeks to 24 weeks, and from June 30, 2020, to December 31, 2020. The current requirements established by the SBA that no more than 25 percent of the forgiven amount may be for nonpayroll costs would be eliminated, increasing flexibility for participants to use the loan proceeds for nonpayroll costs.
Finally, the HEROES Act would carve out 25 percent of existing funds on the date of enactment to be used for small business with 10 or fewer employees, 25 percent for nonprofits (with at least half this amount going to nonprofits under the 500-employee threshold) and the lesser of 25 percent or $10 billion for community financial institutions. Note, as of May 13, the SBA indicated it has approved $192.6 billion of the $310 billion of the second round of PPP funding.
- Repeal of the state and local tax deduction for 2020 and 2021 – In 2017, the Tax Cuts and Jobs Act imposed a $10,000 cap on the state and local taxes that filers can deduct on their federal tax returns. The HEROES Act would eliminate this provision for taxable years beginning on or after January 1, 2020, and on or before December 31, 2021.
- Funding for state and local governments – The proposed legislation includes nearly $1 trillion in funding for state, local, territorial and tribal governments. These funds are generally intended to help governments pay essential workers, such as first responders, healthcare workers and teachers, and not to replace lost revenues.
- More stimulus money for individuals – Under the HEROES Act, individuals would receive a second round of recovery rebates: $1,200 for singles ($2,400 married filing jointly) and $1,200 for each dependent up to three dependents with phaseouts at the same thresholds as under the CARES Act. However, unlike under the CARES Act, which excluded dependents above the age of 17, the HEROES Act would make all dependents eligible, including full-time students below age 24. In addition, individuals with a taxpayer identification number would be eligible for recovery rebates. Currently, under the CARES Act, only individuals with a Social Security number are eligible.
- Extended unemployment benefits – The proposed legislation extends the weekly $600 federal unemployment payments provided by the CARES Act through January 31, 2021. Currently, this benefit ends July 31, 2020.
- Mortgage and rent assistance – The bill provides $175 billion in funding to assist renters and homeowners make monthly rent, mortgage and utility payments and other housing-related costs.
This proposed bill is expected to go up for a vote on the House floor later this week. However, even if the legislation is passed by the House, it’s highly unlikely to make it through the Senate in its current form. The general expectation of Congress is to have a final version of a phase 4 stimulus bill done by early to mid-June. We’ll continue to monitor and keep our clients and BKD Thoughtware®subscribers updated on the progress of pending COVID-19 legislation.
As with most topics related to COVID-19, changes are being made rapidly. Please note that this information is current as of the date of publication. For more information, contact your BKD Trusted Advisor™ or use the Contact Us form below.