COVID-19 legislation: Analysis of recent tax changes and what’s next
It’s been weeks since the last enactment of COVID-19-related tax legislation, so questions are being raised about what might be next. While it’s difficult to predict, an analysis of recent tax changes and a current bill in the House offer some insight.
Tax changes so far
So far, the most significant tax changes in response to COVID-19 have been the Families First Coronavirus Response Act (FFCRA) and the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The Treasury Department, IRS, and the Small Business Administration have also issued significant amounts of guidance, including an extension of certain tax filing and payment due dates from April 15, 2020 to July 15, 2020. While these tax changes continue to offer critical support for taxpayers, their form is instructive when considering the possibilities of what might be coming next.
Supporting employers through payroll tax incentives
One of the ways in which the FFCRA and CARES Act provided support to businesses was through the creation of new payroll tax incentive programs. See our comparison of those programs for more details, but the following is a summary:
- Employee retention credit: This credit is currently available up to a maximum of $5,000 per employee (50% of qualified wages up to $10,000) for employers that are either shut down due to government orders related to COVID-19 or that suffer significant declines in gross receipts. This is a refundable credit that can be claimed with quarterly payroll taxes or through an advanced refund claim.
- Credits for FFCRA paid sick leave and paid family leave: The FFCRA provided for limited amounts of required paid sick leave and paid family leave. Employers that were required to provide such paid leave are eligible for a refundable payroll credit of up to 100% of the required leave.
- Deferral of employer portion of payroll taxes: Employers are also eligible to defer the deposit of the employer’s 6.2% Social Security tax for wages paid between March 27, 2020 and Dec. 31, 2020. Half of the deferred deposits will be due on Dec. 31, 2021, and the remainder will be due on Dec. 31, 2022.
Direct support for businesses through the Paycheck Protection Program (PPP) and other loans
The CARES Act also included the creation of new business loan programs. The PPP has gotten considerable attention, and is a forgivable loan program intended to support the maintenance of employer payrolls. The forgiveness of these loans is nontaxable to the business, and there had been some questions about the deductibility of the associated expenses generating the forgiveness. However, the IRS recently clarified that deductions will be denied where they give rise to the forgiveness of a PPP loan.
Income tax changes to maximize deductions and use of losses
With the CARES Act, Congress took steps to actually change the federal tax code. These changes can be categorized as: increased deductions and faster conversion of tax attributes into cash. In the first category, changes were made to accelerate the availability of depreciation deductions for qualified improvement property. Adjustments were also made to expand business interest expense deductions and charitable contribution deductions. With respect to tax attributes, the CARES Act allows net operating losses to be carried back five years and removes a recent limitation on the utilization of business losses from flow-through entities. Finally, corporations with alternative minimum tax credits were permitted to claim accelerated refunds of such amounts carried forward from prior years. Overall, these changes allow taxpayers to more quickly access tax deductions or to obtain cash refunds based on losses and other attributes.
The Treasury Department and IRS have continued to issue a considerable amount of guidance. Much of this guidance provides administrative relief to taxpayers through the deferral of due dates, simplified filing procedures, and timely clarification of new programs. The use of informal, but expansive, frequently asked questions has been particularly helpful to taxpayers. Overall, the administrative guidance has provided relief, where possible, and suggests that the IRS may continue to find opportunities to accommodate taxpayers during this time.
What might be coming next
Since the enactment of the CARES Act on March 27 and its expansion enacted on April 24, there has been a considerable amount of speculation about a potential next phase of COVID-19 legislation. While the content of future legislation is difficult to predict, it appears that the process for the next phase will be slower than for earlier legislation.
On May 15, the House passed the Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act. That bill includes the following tax provisions, among others:
- Another round of rebate payments to individual taxpayers, structured similarly to the first round. Dependents would be eligible for $1,200 each, and certain dependents not eligible for rebates in the first round would be retroactively eligible. It would also expand the child tax credit, the earned income tax credit, and the dependent care credit for the 2020 tax year.
- Changes to the CARES Act so that NOLs would only be able to be carried back to taxable years beginning on or after Jan. 1, 2018. Similarly, this would restore the excess business loss limitation, which was deferred until 2021 under the CARES Act. However, the HEROES Act would also make this provision permanent. These changes would effectively overturn key tax provisions from the CARES Act and would impact refund claims that have already been filed by many taxpayers. Accordingly, this likely faces significant opposition.
- Although the IRS has ruled that certain expenses aren’t deductible under the PPP loan program, the HEROES Act would provide that companies may deduct these expenses.
- The employee retention credit enacted by the CARES Act would be increased from 50% to 80% of qualified wages, and the per-employee limit would be increased to $15,000 per qualified quarter. This would increase the maximum credit from $5,000 per employee to $36,000. More employers would be eligible for the version of the credit that covers all wages paid to employees rather than just wages paid for not providing services. In addition, employers that aren’t directly impacted by COVID-19 would become eligible. All of these changes would be retroactive to March 27, creating immediate refund opportunities.
- Additional refundable payroll tax credits would cover 50% of certain nonpayroll costs of employers that had to close as a result of the COVID-19 outbreak and 30% of certain amounts paid to employees to cover the employee’s COVID-19-related losses.
- Employers who have PPP loans forgiven would be eligible to continue to defer the employer 6.2% share of Social Security taxes on 2020 wages until 2021 and 2022.
- The legislation would suspend the state and local tax (SALT) cap of $10,000 that was enacted as part of the Tax Cuts and Jobs Act (TCJA). The suspension only applies to 2020 and 2021 so the cap would continue to apply to 2022 through 2025.
- The above-the-line deduction for certain elementary and secondary school teachers would be increased from $250 to $500. In addition, the following above-the-line deductions would be created: (1) $500 deduction for unreimbursed expenses of professional first responders related to the cost of uniforms or tuition and fees related to training; and (2) $500 deduction for uniforms, supplies, and equipment of first responders and COVID-19 ‘front-line’ employees.
Beyond its tax provisions, the HEROES Act would expand and clarify the PPP loan program, particularly surrounding how the forgiveness provisions operate. It would also provide substantial cash support to state and local governments.
What to expect going forward
The leadership in the Senate as well as the Trump administration have been quick to voice opposition to the HEROES Act as it’s currently written. Still, both groups are open to another round of legislation even though they haven’t unveiled any comprehensive plans. That said, there does appear to be some bipartisan support on areas including:
- Expansion of payroll tax incentives
- Expansion of or clarification of PPP loans
- Potential increases to certain deductions
- Cash grants to support employers & employees
Over the next few weeks we anticipate negotiations to continue on further COVID-19 legislation. In the meantime, businesses must decide how to react to the uncertainty of whether subsequent legislation will be enacted and what will be included. Fortunately, many of the provisions with likely bipartisan support would involve clarifications to or expansions of existing programs. For example, certain employers would become retroactively eligible for the retention credit under the HEROES Act that are not currently eligible. An expansion of the retention credit would also create opportunities for businesses to claim more refundable payroll tax credits. However, it’s also possible that alternative measures will be taken to support businesses.