05/14/2020

House of Representatives Releases Proposal for Phase IV – The HEROES Act

Provided to OSAE by Strategic Partner Clark Schaefer Hackett

Summary of Proposed H.R. 6800 – aka “Phase IV” Coronavirus Stimulus Response

Coming on the heels of the historic CARES Act, the Democrat-led House of Representatives released its proposed text of H.R. 6800, The HEROES Act (aka “Phase IV” Coronavirus Stimulus Response). This estimated $3 trillion package would modify, expand, extend and enhance many existing programs passed under the Families First Coronavirus Response Act and the Coronavirus Aid, Relief and Economic Security Act (CARES Act). Below are a few of the highlights related to specific tax/non-tax measures included in the HEROES Act.

This list is not all-inclusive; significant funding for first responders, state/local governments and other fiscal support has been omitted from this brief summary of the 1800+ page bill. The appetite for this significant legislation is unclear; however, it does provide some guidance regarding discussions in Congress about potential forthcoming changes. We will continue to monitor this legislation and provide updates as they become available.

Individual Considerations

Additional Economic Stimulus Payments

Provides a $1,200 refundable tax credit for each family member that shall be paid out in advance payments, similar to the economic impact payments in the CARES Act. The credit is $1,200 for a single taxpayer ($2,400 for joint filers), in addition to $1,200 per dependent up to a maximum of three dependents. The credit phases out starting at $75,000 of modified adjusted gross income ($112,500 for head-of-household filers and $150,000 for joint filers) at a rate of $5 per $100 of income.

Elimination of SALT Deduction Cap

Eliminates the limitation on the deduction for state and local taxes for taxable years beginning on or after January 1, 2020, and on or before December 31, 2021.

Business Considerations

Updates to the Employee Retention Tax Credit under the CARES Act

• Allows a borrower of PPP funds to also benefit from the employee retention credit.
• Increases the applicable percentage of qualified wages reimbursed through the employee retention credit from 50% to 80%.
• Modifies the gross receipts requirement to allow a partial credit, phased in for a decline in gross receipts between 10% and 50% compared to the same calendar quarter of the previous year.
• Increases the limit on wages taken into account per employee from $10,000 for the year to $15,000 per quarter (limited to $45,000 for the calendar year).
• Replaces the 100-employee delineation for determining the relevant qualified wage base with a definition of large employer. A large employer is an employer with greater than 1,500 full-time employees and gross receipts of greater than $41,500,000 in 2019.
• Allows state and local governments and certain federal instrumentalities to claim the credit in the event they are paying wages to employees while their operations are fully or partially shut down.
• Clarifies that group health plan expenses can be considered qualified wages even when no other wages are paid to the employee, consistent with recent revisions to IRS guidance on this issue.
• This provision also clarifies that wages paid by an employer for lost tips will not trigger the wage limitation in section 2301(c)(3)(B) of the CARES Act. All provisions apply retroactively to the effective date included in Section 2301 of the CARES Act.

Payroll Credit for Fixed Expenses of Employers

• Provides a 50% refundable payroll tax credit for qualified fixed costs.
• Qualified fixed costs include covered rent obligations, covered mortgage obligations and covered utility payments. These terms have the same definitions as the definitions provided in Section 1106 of the CARES Act, relating to forgiveness of Paycheck Protection Program loans.
• For each quarter, qualified expenses eligible for this credit are limited to 25% of qualified wages (as defined in the employee retention credit) or 6.25% of 2019 gross receipts (which annualizes to 25%), with a maximum of $50,000. This credit is limited to employers with no more than 1,500 full-time equivalent employees or no more than $41,500,000 in gross receipts in 2019.
• Additionally, employers must be subject to a full or partial suspension due to a Covid-19 government order or have a decline in gross receipts of at least 20% compared to the same calendar quarter of the preceding year.
• This credit is phased in for employers, with a decline in gross receipts between 10% and 50%. The Social Security Equivalent Benefit Account is held harmless under this provision, through a General Fund transfer of lost receipts as a result of this credit.
• The section applies to qualified fixed expenses paid or accrued from March 12, 2020, until December 31, 2020.

Self-Employed Business Interruption Credit

Provides a 90% refundable individual income tax credit for certain self-employed individuals who have experienced a significant loss of income. The credit may be claimed on “qualified self-employment income,” which is the loss in gross income for self-employment that exceeds a 10% reduction from 2019 to 2020, scaled using the ratio of net earnings from self-employment to gross income from self-employment in 2019. The amount of qualified self-employment income taken into account cannot exceed the reduction in adjusted gross income from 2019 to 2020, and is capped at $45,000. The credit phases out starting at $60,000 of adjusted gross income ($120,000 for married filing jointly) at a rate of $50 for every $100 of income.

Extension and Expansion of PFML and EPML under FFCRA

• Extends the refundable payroll tax credits for paid sick and family leave, enacted in the Families First Coronavirus Response Act (FFCRA), through the end of 2021. This provision is effective as if included in FFCRA.
• Coordinates changes made to the requirement to provide paid sick time to allow employers to claim up to $511 per day, rather than $200 per day for leave for caregivers of individuals subject to a coronavirus-related stay-at-home order and parents providing for children affected by a coronavirus-related school closure. This provision applies to days on or after the date of enactment of this Act.
• Coordinates changes made to the requirement to provide emergency paid family and medical leave to allow employers to claim up to $12,000 in refundable payroll tax credits, rather than $10,000. Allows individuals to claim the credit for a maximum of 60 days (corresponding to the $12,000 amount) rather than 50 days. This provision is effective as if included in FFCRA.

Expansion of Employer FICA Deferral

Allows businesses receiving Paycheck Protection Program loan forgiveness to defer payment of payroll taxes under Section 2302 of the CARES Act.

Allowance of Deduction of Expenses under PPP Loan Forgiveness

Clarifies that expenses paid or incurred with proceeds from Payment Protection Program loans that are forgiven pursuant to Section 1106(b) of the CARES Act and certain loan forgiveness by the Small Business Administration, emergency EIDL grants, and certain loan payments that are not included in gross income under Section 333 of this Act do not result in a denial of any deduction or basis of any asset for federal tax purposes. This provision also clarifies the order in which Section 1106(i) of the CARES Act and relevant provisions of the Internal Revenue Code apply.

Limitation on Excess Business Losses of Non-Corporate Taxpayers Restored and Made Permanent

Amends changes made by the CARES Act to Section 461(l) of the Code, which provides that an excess business loss of a taxpayer (other than a corporation) is not allowed for a taxable year. Excess business losses are treated as net operating losses in the next succeeding taxable year. An excess business loss exists if taxpayer’s total deductions from all trades or businesses exceed all income from such trades or businesses, plus $250,000 ($500,000 for joint filers). The CARES Act suspended this provision for taxable years beginning in 2018, 2019 and 2020. Under current law (as amended by CARES), this provision applies for taxable years beginning on or after January 1, 2021, and beginning before December 31, 2025. This section amends current law to apply the provision to taxable years beginning on or after January 1, 2018, as was the case before CARES passed. In addition, this section makes the provision permanent, and repeals Sction 461(j) of the Code as a deadwood provision. This provision is made effective retroactive to the date of enactment of the CARES Act.

Limitation on NOL Carryback Period

Amends the CARES Act changes to Section 172 of the Code. Under current law (as amended by CARES), taxpayers with a loss in 2018, 2019 or 2020 may apply those losses to the preceding five taxable years. This section amends the provisions of CARES that provide for net operating loss carrybacks by limiting carrybacks to taxable years beginning on or after January 1, 2018. In addition, this provision prohibits taxpayers with excessive executive compensation or excessive stock buybacks and dividends from carrying back losses. This provision is made effective retroactive to the date of enactment of the CARES Act.

Amendments to Paycheck Protection Program (PPP) under the CARES Act

• Extension of the covered period from June 30 to December 31.
• Extends eligibility to all nonprofits of all sizes and clarifies the eligibility of housing cooperatives.
• Clarifies the inclusion of small, local news broadcast entities.
• Clarifies that loan terms extend through the end of the covered period.
• Establishes a minimum maturity on PPP loans of five years to enable borrowers to amortize loans over a longer period of time, which lowers monthly payments.
• Adds flexibility in the covered period for borrowers by extending the eight-week period to twenty-four weeks and extends the covered period from June 30 to December 31.
• Mandates forgiveness data collection and reporting.
• Creates a safe harbor for borrowers who cannot rehire in the prescribed time frame.
• Eliminates the 75/25 rule on use of loan proceeds.
• Clarifies the coordination between the Employee Retention Tax Credit and the PPP loans to ensure borrowers can take advantage of both types of assistance.

For more information, please reach out to OSAE Strategic Partner Clark Schaefer Hackett (select this link to contact then directly).