May 19, 2020
On May 15, 2020, the House of Representatives (the “House”) passed the Health and Economic Recovery Omnibus Emergency Solutions Act, H.R. 6800 (the “HEROES Act” or “Bill”). Although the Bill was passed only four days after being introduced in the House, its future in the Senate is uncertain given the critical Republican response to the Bill. On May 14, 2020, Senate Majority Leader Mitch McConnell spoke out against the Bill on the Senate floor calling it a “totally unserious effort.” In addition, the White House has published a Statement of Administrative Policy stating that the “Administration cannot support H.R. 6800 as currently drafted” and “[i]f H.R. 6800 were presented to the President, his advisors would recommend that he veto the bill.”
The HEROES Act proposes a number of changes to tax provisions enacted by the Coronavirus Aid, Relief, and Economic Security Act, Pub. L. 116-136, 134 Stat. 281 (the “CARES Act”), the Families First Coronavirus Response Act, Pub. L. 116-127 (the “Families First Act”), and 2017 Tax Cuts & Jobs Act (the “TCJA”) and suggests a few new business tax provisions, as summarized below.
Changes to the Tax Provisions in the CARES Act, the Families First Act, and the TCJA
The HEROES Act would limit the application of the NOL provisions in the CARES Act. If enacted, the HEROES Act would disallow NOL carrybacks to any tax year beginning before January 1, 2018. This change would limit the value of NOLs that benefit from the CARES Act provisions because it would prevent a taxpayer from carrying back NOLs to offset income that was taxable at the top corporate tax rate of 35 percent. In addition, the Bill would completely disallow NOL carrybacks for certain taxpayers, including taxpayers with excessive stock buybacks and dividends, taxpayers subject to limitations under Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”) (i.e., limits related to certain employee wages that exceed $1 million) and taxpayers subject to limitations under Code Section 280G (i.e., limits related to “golden parachute” payments to certain executives and other individuals). However, a taxpayer would still be permitted to use NOLs to fully offset taxable income in a 2018, 2019, or 2020 tax year.
The HEROES Act would retroactively reverse the CARES Act temporary suspension of the excess business loss limitation. In addition, the Bill would make the excess business loss limitation permanent (instead of allowing it to sunset after 2025, as provided in the TCJA).
The HEROES Act would expand the CARES Act employee retention credit through a few retroactive amendments. It would increase the employee retention tax credit to 80 percent of up to $15,000 in “qualified wages” paid per employee per quarter (up to $45,000 annually per employee). In addition, it would increase the employer limitation threshold for the credit from 100 full-time employees to employers with 1,500 full-time employees and gross receipts of more than $41.5 million during 2019. The Bill also would create a partial employee retention credit available to taxpayers whose gross receipts declined between 10 percent and 50 percent compared to the same quarter of the prior year.
The HEROES Act would make a number of changes to enhance the tax benefits of the PPP. The Bill would clarify that a taxpayer is eligible to defer payment of employer-side Social Security payroll taxes even if its PPP loan is ultimately forgiven. In addition, the Bill would expand “covered expenses” that can give rise to PPP loan forgiveness to include certain interest on debts incurred prior to the PPP covered period and expenses of providing personal protective equipment to employees. The HEROES Act also would confirm the deductibility of expenses funded by a forgiven PPP loan (overruling IRS Notice 2020-32, which concludes that such expenses are not deductible), as well as expenses funded by certain other CARES Act grant and loan programs.
The HEROES Act would expand the requirement to provide COVID-19 paid sick and family leave to all employers, regardless of size, until December 31, 2021. The Bill would extend the related payroll tax credits until December 31, 2021, increase the amount of credit that could be claimed per employee, and make the credit available to wages paid by certain governmental employers. However, the payroll tax credits would remain limited to employers with fewer than 500 employees (although this restriction would not apply to governmental employers).
The Bill would eliminate the limitation on the deduction for state and local taxes for 2020 and 2021. This change would apply to taxes paid or accrued in tax years beginning after December 31, 2019.
New Proposed Business Tax Provisions in the HEROES Act
The credit would apply against the employer-side Social Security payroll tax. For each quarter, qualified fixed expenses eligible for the credit would be limited to the least of (1) qualified fixed expenses paid by the eligible employer in the same calendar quarter of calendar year 2019, (2) $50,000, or (3) the greater of 25 percent of “qualified wages” (as defined in the CARES Act provisions related to the employee retention credit) or 6.25 percent of 2019 gross receipts.
The credit would apply against the employer-side Social Security payroll tax. For each quarter, an employer would be eligible for a payroll tax credit equal to 50 percent of expenses paid for the benefit of essential employees and 30 percent in all other cases. The credit would be limited to $5,000 in benefits paid per employee per calendar quarter.
Please reach out to us with any questions about the HEROES Act and its implications for the business tax provisions in the CARES Act and the TCJA.