On May 6, 2020, Senators Chuck Grassley (R. Iowa) and Ron Wyden (D. Ore.), the Chair and Ranking Member of the Senate Finance Committee, introduced the Small Business Expense Protection Act of 2020 (S. ___),[1] which would reverse a recent Internal Revenue Service (“IRS”) Notice and permit deductions for expenses that relate to loan forgiveness under the Small Business Administration’s Paycheck Protection Program (the “PPP”). On May 8, 2020, a bipartisan group of Representatives introduced the Jumpstarting Our Businesses’ Success Credit Act (the “JOBS Credit Act”) (H.R. ___), which would expand the employee retention tax credit available under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) (H.R. 748). [2] This blog summarizes these bills.
Small Business Expense Protection Act: Deductibility of Expenses Paid with PPP Loans
The CARES Act includes a loan forgiveness program under the PPP. Any cancellation of debt income under the PPP is tax-free (i.e., excluded from income), and does not result in a loss of tax attributes. However, the CARES Act did not specify whether a borrower under the PPP may deduct expenses that relate to the forgiven amount (i.e., the eight weeks of wages, employee benefits, interest, rent, and utilities that determined the forgiven amount). The IRS held that these expenses are not deductible.[3] The Small Business Expense Protection Act would reverse this rule and permit small businesses to deduct the expenses paid with a PPP loan even if the loan is forgiven. In other words, receiving loan forgiveness under the PPP would not result in loss of a deduction for otherwise ordinary business expenses.
JOBS Credit Act: Changes to the Employee Retention Tax Credit
Credit increased to 80% of qualified wages and cap on credit increased. The CARES Act provides for a refundable tax credit of 50% of certain “qualified wages”, capped at $5,000/employee (50% of up to $10,000 of qualified wages for all calendar quarters). The JOBS Credit Act would increase the credit from 50% to 80% of “qualified wages” and increase the cap from $5,000 for all calendar quarters to $12,000 (80% of $15,000) for each calendar quarter for up to three calendar quarters. Accordingly, the JOBS Credit Act would increase the maximum amount of credit from $5,000 (under the CARES Act) to $36,000.
PPP borrowers may receive credit. The CARES Act denies the employee retention tax credit to any employer that receives a PPP loan. The JOBS Credit Act would permit an employer that receives a PPP loan to receive the employee retention tax credit.[4] However, under the JOBS Credit Act, to prevent any double-dipping, an employer would have the choice to exclude qualified wages from “payroll costs” for purposes of determining a its loan forgiveness under the PPP,[5] or to exclude qualified wages for purposes of calculating the employee retention tax credit so that the wages may be included as “payroll costs” for purposes of determining its loan forgiveness under the PPP.[6]
Large employer threshold. For an employer with more than 100 full-time employees, the CARES Act provides that the employee retention tax credit is available only with respect to wages paid to an employee who is not providing services due to (i) the employer’s trade or business being fully or partially suspended due to a governmental order related to COVID-19 (the “suspension test”) or (ii) the employer experiencing a significant decline in gross receipts (the “gross receipts test”). The JOBS Credit Act would apply this rule only to an employer with more than 1,500 full-time employees or gross receipts of more than $41.5 million in calendar year 2019.[7]
Lower reduction required by gross receipts test. Under the CARES Act, an employer qualifies for the credit under the gross receipts test for the period beginning with the first calendar quarter for which gross receipts for the employer’s trade or business are less than 50% of gross receipts for the same calendar quarter of 2019 and ending at the end of the first subsequent quarter in which gross receipts are more than 80% for the same calendar quarter of 2019. Under the JOBS Credit Act, an employer could qualify for the period beginning in a calendar quarter in which the employer’s gross receipts were less than 80% (instead of 50%) of gross receipts for the same calendar quarter of 2019 and ending at the end of the first subsequent quarter in which gross receipts are more than 80% for the same calendar quarter of 2019 (the “80% gross receipts test”).[8] However, under the JOBS Credit Act, if an employer (i) is eligible under the 80% gross receipts test, but not under the current gross receipts test (i.e., the employer’s gross receipts in a calendar quarter are less than 80%, but not less than 50%, of its gross receipts in same calendar quarter in 2019) and (ii) does not otherwise satisfy the suspension test, the employer’s credit would be reduced by an amount equal to the full credit multiplied by the ratio of the “excess gross receipts percentage point amount” to 30%.[9]
For example, assume an employer had gross receipts from its trade or business of $100 in the second quarter of 2019, but has $60 of gross receipts and $50 of qualified wages in the second quarter of 2020, and does not satisfy the suspension test. Under the CARES Act, the employer would not qualify for the employee retention tax credit because its second quarter 2020 receipts are not less than 50% of its second quarter 2019 gross receipts. Under the JOBS Credit Act, the employer would qualify for employee retention tax credit because its second quarter 2020 gross receipts are less than 80% of its second quarter 2019 gross receipts. However, the employer would receive a reduced credit of about $26.67 (rather than $40 [80% * $50]), calculated by reducing the full credit of $40 by an amount equal to the full credit of $40 multiplied by 1/3, which is the ratio of the excess gross receipts percentage point amount of 10% (i.e., 60% over 50%) to 30%.[10]
Tax-exempt organizations and governmental entities. The JOBS Credit Act would provide that, for purposes of the employee retention tax credit, the term “gross receipts” of a section 501(c)(3) tax-exempt organization would have the same meaning as the term as it is defined for purposes of rules addressing the organization’s annual return.[11]
The CARES Act denies the employee retention tax credit to governmental entities, but the JOBS Credit Act would allow certain governmental entities, including certain state and local governments and federal credit unions, to receive the credit.[12]
Health plan expenses. The JOBS Credit Act would include health plan expenses in the definition of “qualified wages” for purposes of the employee retention tax credit, including in cases where an employer furloughs employees but continues to provide health benefits to them.[13]
[1] The sponsors were Senators Chuck Grassley (R. Iowa), Ron Wyden (D. Ore.), John Cornyn (R. Tex.), Marco Rubio (R. Fl.), and Tom Carper (D. Del.).
[2] The sponsors were Rep. Stephanie Murphy (D. Fl.), Suzan DelBene (D. Wash.), John Katco (R. N.Y.), Brian Fitzpatrick (R. Pa.), and Chris Pappas (D. N.H.). Reps. Murphy and DelBene sit on the House Ways and Means Committee.
[3] Notice 2020-32.
[4] Section 3. All section references are to the JOBS Credit Act unless otherwise specified.
[5] Section 3(a).
[6] Section 3(b).
[7] Section 2(c).
[8] Section 2(d)(1).
[9] The excess gross receipts percentage point amount is equal to the excess of (i) the lowest of the “gross percentage point amounts” with respect to any calendar quarter during the period ending with such calendar quarter and beginning with the first calendar quarter during the period when the employer meets the 80% gross receipts test, over (ii) 50%. The gross receipts percentage point amount is equal to the gross receipts in a calendar quarter divided by the gross receipts in the same calendar quarter in 2019 (expressed as a percentage point).
[10] The reduction is calculated using the lowest excess gross receipts percentage point amount calculated for a calendar quarter during the period in which the employer meets the 80% gross receipts test.
[11] Section 2(d)(3).
[12] Section 2(g).
[13] Section 2(f).