On May 12, 2020, House Democrats introduced the Health and Economic Recovery Omnibus Emergency Solutions Act (the “HEROES Act”) (H.R. ___), a $3 trillion stimulus bill that would provide additional relief in response to the COVID-19 pandemic and resulting economic downturn. The HEROES Act would eliminate the limitation on the deduction for state and local taxes for 2020 and 2021 and enhance and expand the earlier Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) (H.R. 748) and the Families First Coronavirus Response Act (the “FFCRA”) (H.R. 6201). However, the HEROES Act would also reverse some of the changes in the CARES Act by paring back the ability of a corporate taxpayer to carry back net operating losses and restoring the limitations on excess business losses for a noncorporate taxpayer. Republicans have dismissed many provisions in the HEROES Act, and there are no immediate plans for it to be considered by the Senate.[1] This blog summarizes some of the most important tax provisions in the bill.[2]
I. Changes to the CARES Act
Changes to the Employee Retention Tax Credit.[3]
Credit increased to 80% of qualified wages and cap on credit increased to $36,000. 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 HEROES 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.[4] Accordingly, the HEROES Act would increase the maximum amount of credit from $5,000 (under the CARES Act) to $36,000.
PPP borrowers may receive the tax credit. The CARES Act denies the employee retention tax credit to any employer that receives a loan under the Small Business Administration’s (“SBA”) Paycheck Protection Program (the “PPP”). The HEROES Act would permit an employer that receives a PPP loan to receive the employee retention tax credit.[5] However, under the HEROES Act, to prevent any double-dipping, an employer would have the choice to exclude qualified wages from “payroll costs” for purposes of determining its loan forgiveness under the PPP, 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 HEROES Act would apply this rule only to an employer with more than 1,500 full-time employees and gross receipts of more than $41.5 million in calendar year 2019 (a “large employer”).[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 HEROES Act, an employer could qualify for the period beginning in a calendar quarter in which the employer’s gross receipts are less than 90% (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 90% (instead of 80%) for the same calendar quarter of 2019 (the “90% gross receipts test”).[8] However, under the HEROES Act, if an employer (i) is eligible under the 90% 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 90%, 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 40%.[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 HEROES Act, the employer would qualify for employee retention tax credit because its second quarter 2020 gross receipts are less than 90% of its second quarter 2019 gross receipts. However, the employer would receive a reduced credit of $30 (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 1/4, which is the ratio of the excess gross receipts percentage point amount of 10% (i.e., 60% over 50%) to 40%.
Tax-exempt organizations and governmental entities. The HEROES Act would provide that, for purposes of the employee retention tax credit, the term “gross receipts” of a section 501(c) tax-exempt organization means the amounts the organization receives during its annual accounting period from all sources without subtracting any costs or expenses.[10]
Under the CARES Act, federal, state or local government (and their agencies) are not eligible for the credit. The HEROES Act would permit state and local governments (and their agencies), Indian tribal governments (and their agencies) and federal credit unions to receive the employee retention tax credit if they are engaged in a trade or business and meet the suspension test.[11]
Health plan expenses. The HEROES 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.[12]
Deductibility of Expenses Related to PPP Loan Forgiveness. The CARES Act included a loan forgiveness program under the PPP. Under the CARES Act, any cancellation of debt income under the PPP is tax-free (i.e., excluded from income), and did 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.[13] The HEROES Act would reverse this rule and permit taxpayers whose PPP loans are forgiven to deduct their expenses relating to the PPP loan.[14] In other words, a taxpayer whose loan is forgiven under the PPP would not result in loss of a deduction for otherwise ordinary business expenses.
Borrowers with PPP Loan Forgiveness Eligible for Payroll Tax Deferral. The CARES Act permits employers to delay payment of the 6.2% employer share of the social security tax and pay half of the deferred tax on December 31, 2021 and the other half on December 31, 2022. However, under the CARES Act, an employer that receives a PPP loan is not eligible to defer social security tax deposits that are due after it receives notice from a lender that the loan was forgiven. The HEROES Act would permit an employer to defer these deposits even after its loan is forgiven under the PPP.[15]
Paring Back of the CARES Act NOL Carryback Provision. The CARES Act allowed a corporation’s losses from 2018, 2019, and 2020 to be carried back for five years.[16] This provision temporarily reversed changes made by the Tax Cuts and Jobs Act (the “TCJA”). The HEROES Act would permit a corporation’s losses from 2019 and 2020 only to be carried back to taxable years beginning on or after January 1, 2018, instead of for five years, but only if (i) the corporation is not denied deductions in those years under sections 162(m) and 280G of the U.S. Internal Revenue Code (the “Code”) for excessive executive compensation, or (ii) the corporation’s total distributions to shareholders (including redemptions) made in taxable years ending after 2017 do not exceed the sum of (x) the fair market value of the corporation’s stock (as of the issue date of the stock) that is issued in taxable years ending after 2017 in exchange for money or property other than the corporation’s stock, and (y) 5% of the fair market value of the corporation’s stock as of the last day of the applicable taxable year (a “specified corporation”).[17] A corporation that is denied deductions under sections 162(m) and 280G, or that is a specified corporation, in 2019 or 2020 would not be permitted to carry back losses in those years at all.
Limitations on Excess Business Losses Restored. The CARES Act also retroactively suspended the excess business loss provision of section 461(l)(1) of the Code (which disallows business losses in excess of $250,000 for a single taxpayer and $500,000 for a married couple filing jointly) for 2018 through 2020. The HEROES Act would lift this suspension and restore the limitation for these years.[18]
II. Additional Relief Under the HEROES Act
Elimination of 2020 and 2021 Limitation on Deduction for State and Local Taxes. The TCJA imposed a $10,000 cap on the itemized deduction of state and local taxes for taxable years beginning in 2018 through 2025.[19] The HEROES Act would eliminate this cap for taxable years beginning in 2020 and 2021.[20]
Payroll Credit for COVID-19-Related Employee Benefit Expenses. The HEROES Act would generally provide an employer with a refundable payroll tax credit equal to 30% of certain qualified expenses (of up to $5,000/employee each calendar quarter) that are reimbursed or paid for the benefit of an employee after March 12, 2020 and before January 1, 2021 and incurred as a result of a federally declared disaster related to the COVID-19 pandemic.[21] The credit would increase to 50% in the case of qualified expenses paid with respect to an “essential employee”.[22] Qualified expenses are reasonable and necessary personal, family, living or funeral expenses that arise from the COVID-19 disaster and therefore are excluded from an employee’s gross income by reason of being a qualified disaster relief payment under section 139(b)(1) of the Code.[23] While not explicitly stated in the HEROES Act, similar to the employee retention tax credit, we would expect the credit to be available to offset all federal payroll taxes, including federal withholding tax, and the employer’s and employee’s share of social security tax and Medicare, but not the federal unemployment tax (“FUTA”). The credit would be disallowed if qualified expenses are provided by an employer in a manner that discriminates in favor of highly compensated employees. Furthermore, to prevent double-dipping, no other deductions or credits would be allowed with respect to qualified expenses if an employer receives a credit in respect of those expenses, but an employer may elect to exclude qualified expenses for purposes of calculating the credit.[24]
Payroll Credit for Certain Fixed Expenses. The HEROES Act would expand the employee retention tax credit for an employer that is not “large employer” (as described above under “Changes to the Employee Retention Tax Credit—Large Employer Threshold”) to include 50% of qualified fixed expenses paid or incurred by the employer in each calendar quarter.[25] Qualified fixed expenses generally include mortgage obligations, rent, and utilities incurred in the ordinary course of an employer’s trade or business. For a calendar quarter, the amount of qualified fixed expenses taken into account for purposes of calculating the credit could not exceed the least of (i) the qualified fixed expenses paid by the employer in the same calendar quarter in 2019, (ii) $50,000, or (iii) the greater of (A) 25% of the wages (including certain health plan expenses) paid with respect to all employees in the calendar quarter or (B) 6.25% of the gross receipts in 2019. This expanded credit is not available for an employer that is a “large employer”. Otherwise, the eligibility requirements for this credit would be similar to those of the employee retention tax credit under the HEROES Act.[26] Also, like the employee retention tax credit, all persons treated as a single employer under section 52(a) or (b) or section 414(m) or (o) of the Code would be treated as one employer for all purposes of the credit.[27] Furthermore, like the employee retention tax credit, there would be a phase-out of the credit for an employer that experiences a reduction in gross receipts of less than 50%, but otherwise qualifies for the credit.[28] While not explicitly stated in the HEROES Act, similar to the employee retention tax credit, we would expect the credit to be available to offset all federal payroll taxes, including federal withholding tax, and the employer’s and employee’s share of social security tax and Medicare, but not the FUTA. Eligible employers could elect not to receive the credit.
EIDL Grants Not Included in Gross Income. In addition to the loans available under the PPP, the CARES Act expands the SBA’s Economic Injury Disaster Loan (“EIDL”) program through December 31, 2020 to help small businesses cover payroll and operating expenses that could have been paid had the COVID-19 pandemic not occurred. The CARES Act provides that while a business’ application for an EIDL is pending, the business may receive an advance on the loan of up to $10,000. This advance is not required to be repaid even if the business is ultimately denied an EIDL. The HEROES Act provides that these advances are excluded from the gross income of the business.[29] Furthermore, the HEROES Act permits a business to deduct the expenses paid with an EIDL advance.[30]
III. Changes to the FFCRA
Extension of Paid Leave Tax Credits. The FFCRA provides an eligible employer[31] with refundable payroll tax credits to cover wages paid to employees while they take time off under new paid sick and family leave programs between April 1, 2020 and December 31, 2020.[32] The HEROES Act would extend the paid sick and family leave tax credits through December 31, 2021.[33]
Increase in Tax Credits for Paid Sick Leave. An employer that is required to provide an employee with paid sick leave under the FFCRA is eligible for a refundable payroll tax credit of (i) up to $511/day (or $5,110 total) if the employee is unable to work because of COVID-19-related (self-)quarantine or because the employee has COVID-19 symptoms and is seeking medical help, or (ii) up to $200/day or $2,000 total if the employee takes time off to care for a family member that is in (self-)quarantine because of COVID-19 or child whose school has closed. The HEROES Act would increase the amount of the credit for leave described in clause (ii) to $511/day or $5,110 that is taken on or after the enactment of the HEROES Act.[34]
Increase in Limitations on Tax Credits for Paid Family Leave. An employer that is required to provide an employee with paid family leave under the FFCRA is eligible for a refundable payroll tax credit of up to $200/day or $10,000 total if the employee is unable to work because the employee needs to care for a child. The HEROES Act would increase the limitation on this credit to $12,000.[35]
Limitations on FFCRA Tax Credits for Employers with More than 500 Full-Time Employees. The tax credits for paid sick and family leave under the FFCRA are generally available only to private employers or nonprofit organizations with fewer than 500 employees because only private employers and nonprofit organizations below this threshold are obligated to provide the paid sick and family leave that give rise to the credits. However, the FFCRA does not specify how to count employees for purposes of this threshold in the context of a group of related companies or businesses. The HEROES Act would specify that the tax credits for paid sick and family leave under the FFCRA are only available to private employers and nonprofit organizations that did not have an average of 500 or more full-time employees (“applicable large employers”) during the calendar year prior to the year in which the credit is being sought.[36] For purposes of this definition, all persons treated as a single employer under sections 414(b), (c), (m) or (o) of the Code are treated as one employer.[37]
[1] Jeanna Smialek, Jim Tankersley & Emily Cochrane, “Fed Chair Warns the Economy May Need More as Congress Hesitates,” N.Y. Times (May 13, 2020).
[2] Other provisions of the HEROES Act not discussed here would provide additional tax relief, including the expansion and enhancement of existing credits (such as the earned income tax credit and child tax credit), additional recovery payments for individuals, changes to pension plans and tax-favored retirement accounts, and a new business interruption credit for self-employed individuals.
[3] These changes are similar to those proposed by a bipartisan group of Representatives in the Jumpstarting Our Businesses’ Success Credit Act (the “JOBS Credit Act”) (H.R. ___) on May 8, 2020. For more information on those proposals, please see our blog post on the JOBS Credit Act.
[4] Section 20211(a)-(b). All section references are to the HEROES Act or the Internal Revenue Code (the “Code”) or Treasury Regulations promulgated thereunder.
[5] Section 90005.
[6] Section 90005(b).
[7] Section 20211(c).
[8] Section 20211(d)(1). The changes under the HEROES Act would be more favorable than those proposed under the JOBS Credit Act, which would require that the period begin in the calendar quarter in which the gross receipts were less than 80% 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.
[9] Section 20211(d)(2). 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 90% 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] Section 20211(d)(3); Treas. Reg. section 1.6033-2(g)(4).
[11] Section 20211(g). The 90% gross receipts test would not apply to these governmental entities.
[12] Section 20211(f).
[13] Notice 2020-32.
[14] Section 20235. Tax basis is also unaffected by the forgiveness.
This provision is identical to that proposed by Senators Chuck Grassley (R. Iowa) and Ron Wyden (D. Ore.), the Chair and Ranking Member of the Senate Finance Committee, in the introduced the Small Business Expense Protection Act of 2020 (S. ___) on May 6, 2020. For more information on this proposal, please see our blog post on the Small Business Expense Protection Act.
[15] Section 20231.
[16] A REIT is not permitted to carry back losses under the CARES Act.
[17] Section 20302(b). For purposes of this rule, distributions are disregarded with respect to certain nonconvertible, nonvoting stock that is limited and preferred as to dividends and does not participate in corporate growth to any significant extent and has redemption and liquidation rights which do not exceed the issue price of such stock (except for a reasonable redemption or liquidation premium). See section 1504(a)(4).
[18] Section 20301.
[19] Section 164(b)(6).
[20] Section 20161.
[21] Section 20204. A federally declared disaster includes a disaster or emergency declared under the Stafford Disaster Relief and Emergency Assistance Act, Pub. L. 100-107 (the “Stafford Act”). Rev. Rul. 2003-29. On March 13, 2020, the President issued a letter declaring an “emergency” under the Stafford Act and has subsequently declared a disaster in every state. Jason Hoffman, “For the first time in US history, every state is under a disaster declaration simultaneously,” CNN (Apr. 11, 2020).
[22] Section 20204(c)-(d). An employee is an essential employee if a substantial portion of the services that the employee performs are considered “essential work” as defined in Section 170101 except without regard to the time period during which the work is performed.
[23] Section 20204(c). Qualified expenses would not include an employee’s normal living expenses, like housing and food costs that arise without regard to the COVID-19 disaster.
[24] Section 20204(c), (e).
[25] Section 20212.
[26] Section 20212(c). In other words, an employer must be engaged in the operation of a trade or business in 2020 that meets the suspension test or the 90% gross receipts test and cannot be a large employer (each as described above). In addition, the employer must employ at least one employee on at least one day in 2020. Id.
[27] For more on this requirement, please see our blog post on the employee retention tax credit, which includes the same aggregation rule.
[28] Section 20212(c).
[29] Section 20233(b).
[30] Section 20235. Tax basis is also unaffected by the exclusion from gross income.
[31] Eligible employer generally means a private employer or nonprofit organization with fewer than 500 employees that is required to provide paid sick and family leave under the new paid leave programs established by the FFCRA under the Emergency Paid Sick Leave Act (“EPSLA”) and the Emergency Family and Medical Leave Expansion Act (“Emergency FMLA”).
[32] For more information about these tax credits, please see our blog post on the FFCRA.
[33] Section 20221.
[34] Section 20222. Note that this section refers to the “COVID-19 Tax Relief Act”. This is likely a drafting error and should refer to the HEROES Act.
[35] Section 20223.
[36] Section 20227; see also section 4980H(c) of the Code.
[37] Section 4980H(c)(1)(C). Members of a “controlled group” are treated as a single employer. A controlled group exists where there is (1) one or more chains of corporations that are connected through stock ownership with a common parent corporation; more than 80% (by vote or value) of each corporation, except the common parent, is owned by one or more corporations in the group, and the parent corporation owns more than 80% (by vote or value) of at least one other corporation; (2) a group of two or more corporations, in which five or fewer common owners (an individual, a trust, or an estate) own directly or indirectly own at least 80% (by vote or value) of the stock of each corporation and have identical ownership of more than 50% of vote or value of each corporation; or (3) a group of three or more corporations that are members of a group described in (1) or (2) above, and at least one of the group members is the parent corporation of a group described in (1) and a member of a group described in (2). Chains of organizations (whether or not incorporated) conducting trades or businesses may also be treated as one employer if they are under common control. The specifics of the regulations governing common control are complicated, but they contain rules similar to those described above for controlled groups, but applied in the context of all businesses whether or not incorporated. Finally, members of an “affiliated service group” may also be treated as one employer.