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Coronavirus Economic Response Update: PPP Reform and Phase Four Talks

Brownstein Client Alert, June 4, 2020

The Senate has unanimously approved the House’s bill to improve the Payment Protection Program (PPP) as both parties continue to disagree over Phase Four priorities. Sticking points include state and local funding and legal liability protections. This weekly newsletter outlines the latest developments in Washington, including major tax, small-business and financial services developments related to Phase Four negotiations, as well as updates on regulatory guidance from federal agencies.

What To Expect in Next Economic Recovery Package

Payment Protection Program Adjustments Pass Senate. After the House passed the Paycheck Protection Program Flexibility Act (H.R.7010) 417-1 on May 28, the Senate approved the measure by unanimous consent on June 3. If enacted into law by President Trump, the bill would:

Extend forgiveness for expenses incurred beyond the current eight-week covered period to 24 weeks after a loan is issued or through Dec. 31, whichever comes first.
Amend the current requirement that 75% of the forgivable loan be used for payroll expenses such that:
- 60% must be used for payroll expenses; and
- 40% may be used for the interest on any mortgage obligation, rent or utility payments (i.e. qualified non-payroll expenses).
Extend the loan maturity period to five years, instead of the current two-year deadline for repayment set by the Small Business Administration (SBA).
Ensure businesses accepting PPP loans have full access to payroll tax deferment.
Expand the availability of loan forgiveness for businesses that are unable to rehire workers who were employed as of Feb. 15 or find similarly qualified workers to fill positions. Companies that are unable to resume pre-COVID-19 operational levels would still qualify for loan forgiveness if they comply with guidance from the Department of Health and Human Services (HHS), the Centers for Disease Control and Prevention (CDC), and the Occupational Safety and Health Administration (OSHA).
Extend the deferral period for principal and interest payments on PPP loans until the SBA has compensated lenders for forgiven amounts. Businesses that do not apply for loan forgiveness within 10 months of the last day of the covered period have at least 10 months after the last day of the covered period to start making payments.

Read the full Brownstein National Tax Policy Group breakdown here.

Phase Four: Wait and See Continues. Republicans, unlike their House Democrat counterparts, who passed the Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act (H.R.6800) on May 15, are taking a wait-and-see approach to the next COVID-19 relief legislation. Although there is a growing chorus of Senate Republicans pushing for swift action, the majority of the caucus expects legislation to move in late June or early July.

This thinking was underscored last week by Mark Warren, chief tax counsel for Senate Finance Committee Republicans, who said that “[u]nless one of the funds starts to completely run out in a very unexpected way, which is what drove the fourth bill, it doesn’t seem like we have a ‘has to be done by next Friday’-type event on the horizon.”

In addition to Republicans’ hesitancy to allocate trillions more in funding, slowing the debate has been the stalemate on negotiations with regard to state and local funding and legal liability.

Activity This Week

Congressional committees are returning to a semblance of normalcy and are holding regular virtual hearings. Below is a brief discussion on select hearings for the tax and financial services committees.

House Financial Services Subcommittee on Consumer Protection and Financial Institutions. On June 3, the subcommittee held a hearing entitled, “Promoting Inclusive Lending During the Pandemic: Community Development Financial Institutions and Minority Depository Institutions.” The following witnesses testified:

Lisa Mensah, President and Chief Executive Officer, Opportunity Finance Network;
Michael Pugh, President, Chief Executive Officer and Board Member, Carver Federal Savings Bank;
Samuel Scott, Chair, Black Chicago Tomorrow, and Co-Chair, American Business Immigration Coalition; and
James Sills III, President and Chief Executive Officer, M&F Bank, on behalf of the Independent Community Bankers of America.

The discussion focused on potential funding increases for Community Development Financial Institutions (CDFI) and Minority Depository Institutions (MDI). The witnesses urged lawmakers to provide more funding for both CDFI and MDI to ensure that communities at the edge of the economy would have adequate assistance. The witnesses specifically asked for $1 billion in additional funding to assist local communities.

Senate Banking Committee Hearing on CARES Act Implementation. On June 2, the committee held a hearing entitled, “Implementation of Title IV of the CARES Act.” The following witnesses testified:

Thomas Quaadman, Executive Vice President, U.S. Chamber, Center for Capital Markets Competitiveness;
Douglas Holtz-Eakin, President, American Action Forum; and
Heidi Shierholz, Senior Economist and Director of Policy, Economic Policy Institute.

During the discussion, in addition to exploring the Treasury Department’s Section 13(3) lending facilities, senators deviated from the topic and discussed the contours of the forthcoming Phase Four package, such as aid to state and local governments, in addition to reviewing the CARES Act’s impact on the workforce. There was relatively widespread agreement that state and local governments will require more funding—a position for which Democrats have advocated.

For a comprehensive summary of either of these hearings, please contact a member of the Brownstein National Tax Policy Group.

Phase Four Proposals

As lawmakers debate Phase Four legislation, members continue to introduce legislation and proposals for possible inclusion in the final package. Below are significant proposals introduced last week.

Bipartisan Proposals

Clean Start.A bipartisan group of lawmakers introduced the Clean Start: Back to Work Tax Credit Act. The legislation, introduced by Reps. Stephanie Murphy (D-FL) and Darin LaHood (R-IL), creates a credit for businesses to apply toward the expense of industry-recognized training and certification, contracting a cleaning company and/or the purchase of necessary cleaning products, tools, machinery, personal protective equipment and other sanitary-related equipment needed to help ensure a safe and sanitary environment.

Each business entity, including but not limited to franchisors or franchisees and commercial property owners and management companies, will be eligible for a 50% tax credit of up to $25,000, per location, up to a maximum of $250,000 per business entity.

The credit would cover expenses through March 31, 2021, to help offset increased expenses associated with a potential “second wave” during the fall or winter.

Republican Proposals

Coronavirus Relief Fund. House Ways and Means Committee Ranking Member Kevin Brady (R-TX) introduced legislation that would require states to distribute to cities the funds they have received from the Coronavirus Relief Fund (CRF). The bill would require states to inform the Treasury Department by June 12 of their plans for issuing funds to local governments, including rural areas. States failing to do so will have 25% of the funds clawed back. Thus far, 32 states have withheld federal funds from local governments contrary to the intent of Congress.

Brady also introduced a second bill, the Reopening America by Supporting Workers and Businesses Act (H.R.7066), that would provide a hiring bonus of up to $1,200—or two weeks of the increased unemployment benefits enacted under the CARES Act (P.L.116-136)—for employees that were laid off. The proposal was met with opposition from his Senate Democrat counterpart, Senate Finance Committee Ranking Member Ron Wyden (D-OR), who suggested the proposal should include pay for those battling the virus on the front lines.

The Week in Rewind

Much of the focus last week was on the legislation to amend the PPP. Below is an update on select activities that occurred last week.

Congressional Action

TRUTH Act Fails. The House failed 269-147 to approve the Small Business Transparency and Reporting for the Underbanked and Taxpayers at Home (TRUTH) Act (H.R.6782) on May 28. The legislation would have required the SBA to make the following information publicly available:

The recipients of a grant or loan passed under the CARES Act or the Payroll Protection Program and Health Care Enhancement Act;
The number of employees of the businesses receiving the aid;
When the funds were distributed;
The financial institution that administered the funding; and
The amount of funding provided to small businesses owned by women and veterans in addition to those who are socially and economically disadvantaged.

The bill was not approved because it failed to obtain the two-thirds majority necessary for passage under suspension of the rules in the House.

JCT Revises HEROES Act Estimate. The Joint Committee on Taxation (JCT) updated its revenue estimate for the HEROES Act. The JCT originally estimated the bill would reduce tax receipts by $883 billion, but the new analysis revises that estimate to $922.5 billion over a decade—a $39 billion increase.

Originally, the JCT was unable to estimate the following provisions within the bill due to lack of information:

PROVISION	ABOUT	REVISED ESTIMATE
DIVISION C—PRIVATE INSURANCE
COBRA Continuation Coverage	Premium assistance for COBRA continuation coverage and furloughed continuation coverage for individuals and their families through Jan. 31, 2021.	$98 billion (Reduced from $106 billion)
DIVISION D—RETIREMENT PROVISIONS
Relief for MEPs	Repeals benefit suspensions and temporarily extends funding improvement and rehabilitation periods for MEPs in declining status and PBGC guarantee for participants in MEPs.	$57.9 billion
Relief for Single Employer Pension Plans	Extends amortization and pension funding stabilization percentages for single employer plans.	$17.1 billion (Revenue Raiser)
Waiver of RMD for 2019	Suspends the RMD requirement for 2019 and 2020. (Estimate includes waiver of 60-day rule in case of rollover of otherwise RMD in 2019 or 2020.)	$3.2 billion
Employee Certification as to Eligibility for Increased CARES Act Loan Limits from Employer Plans	Allows a qualified employer plan to be able to rely on a participant’s self-certification that the participant is a “coronavirus affected individual.”	Negligible Effect
Exclusion of Benefits Provided to Volunteer Firefighters and Emergency Medical Responders Made Permanent	Permanently reinstates the exclusion from gross income of “qualified state or local tax benefits” and “qualified reimbursement payments” provided to members of qualified volunteer emergency response organizations.	$753 million
Application of Special Rules to Money Purchase Pension Plans	Clarifies that the coronavirus-related distribution and loan provisions provided under §2202 of the CARES Act also applies to money purchase pension plans.	$75 million
Modification of Special Rules for Minimum Funding Standards for Community Newspaper Plans	Expands the minimum funding relief provided under §115 of the SECURE Act to additional types of community newspapers.	$455 million (Revenue Raiser)
Minimum Rate of Interest for Certain Determinations Related to Life Insurance Contracts	Revises the interest rate assumptions for determining whether permanent life insurance policies qualify as a life insurance contract for tax purposes. Ties the interest rates to either a floating rate prescribed in the National Association of Insurance Commissioners’ Standard Valuation Law or a floating rate based on the average applicable federal midterm rates over a 60-month period.	$3.3 billion

For a full explanation of the provisions within the HEROES Act, read the Brownstein National Tax Policy Group’s comprehensive analysis.

Administrative Action

IRS Workforce Slowly Returns. The Internal Revenue Service (IRS) called on employees in three key states—Kentucky, Utah and Texas—to return to work on June 1, which affected about 11,000 workers. Employees in these three states process a significant amount of the agency’s mail and paper returns, so recalling employees in these offices will allow the agency to begin reducing the backlog of work that cannot be done remotely. As of May 16, the IRS had about 4.7 million tax returns to process and 10 million pieces of unopened mail.

IRS Commissioner Charles Rettig said the agency has cleaned offices, provided face coverings and hand sanitizer, and reorganized work spaces so as to allow for social distancing. Despite these assurances, House Ways and Means Committee Chair Richard Neal (D-MA) said the committee will be closely monitoring the agency’s employees' transition back to work with an eye toward whether or not additional precautions should be taken.

Economic Impact Payments. After the IRS announced some taxpayers would be receiving their Economic Impact Payments (EIPs) on prepaid debit cards, the agency released a statement warning that the payments could be sent in plain envelopes in an attempt to prevent recipients from inadvertently throwing them away. According to the IRS, the nearly 4 million people receiving the stimulus payments on debit cards will receive them in a plain envelope from the “Money Network Cardholder Services.”

In response to a continuing onslaught of constituent questions regarding the payments, Chair Neal and Oversight Subcommittee Chair John Lewis (D-GA) sent a letter to Treasury Secretary Steven Mnuchin and Commissioner Rettig in which they asked for a report from the administration every Friday before 3:00 p.m. on the status of the payments.

The duo requested the administration include the following information in each weekly report:

The total number of EIPs and total dollar amount sent to the Bureau of the Fiscal Service (BFS) for payment the following week;
The number of EIPs by paper check, the date of mailing, and total dollar amount;
The number of EIPs by debit card, the date of mailing, and total dollar amount;
The number of EIPs by electronic payment, the date the banks will receive the deposit for posting in taxpayer accounts, and total dollar amount;
For electronic payments, the number by direct deposit or Direct Express separately, and the total dollar amount for each method;
A description of the taxpayers who were covered in the total number of payments sent by the IRS to BFS that week;
The number of payments returned to the Treasury Department, and the total dollar amount of such payments by payment type, for the week ending the immediate Thursday before the Friday report;
The total number of letters mailed out to taxpayers during the week ending the immediate Thursday before the Friday report; and

A running total, from the start of the program, of the number of EIPs issued and the total dollar amount paid (net of returned amounts), broken out by week and by payment method.

Implementation

After lawmakers rushed to enact legislation, agencies are now attempting to keep up by quickly releasing regulations and other guidance. A look at select COVID-19-related implementation guidance and non-COVID-19-related guidance released during the previous week will be published here by the Brownstein National Tax Policy Group.

Premium Tax Credit. The IRS released proposed regulationsunder section 36B and 6011 that state a taxpayer’s ability to receive the premium tax credit would not be affected even if the reduction of the personal exemption is reduced to zero between Dec. 31, 2017, and Jan. 1, 2026. The regulations state that the comment period will close on July 27, 2020.
Economic Impact Payments. The IRS noted on May 26 that some EIPs will come in the form of a debit card and not a paper check. Taxpayers may use the prepaid debit card to make purchases where Visa is accepted, receive cash from ATMs, transfer funds to their bank account, and check their balance online.
Qualified Mortgage Bonds. The IRS released guidancethat states when computing income requirements described in section 143(f), area median gross income figures are to be used by issuers of qualified mortgage bonds and issues of mortgage credit certificates.
Tax-Exempt Organizations. The IRS published final rulesthat state reporting requirements for certain tax-exempt organizations. The regulations include statutory amendments and reporting relief to help tax-exempt organizations find the requirements in one place.
Renewable Energy Projects. The IRS released Notice 2020-41that extends the four-year safe harbor and extra year due to the COVID-19 pandemic. The safe harbor applies to energy facilities under section 45 (the production tax credit) and section 48 (the investment tax credit) facing supply chain issues.
Employer Paid Leave.On May 28, the IRS released information on how employers can grant paid leave for employees during the COVID-19 pandemic to help care for family members. Under the Families First Coronavirus Response Act, the two credits enacted to provide relief were paid sick leave for workers and paid family leave to care for a child.
Form 1040-X Electronic Filing. The IRS announced that taxpayers will be able to file Form 1040-X online for the first time ever. Currently, taxpayers are required to submit amended returns through the mail. Allowing taxpayers to file online will be faster and contain fewer errors.
Administrative Relief. The IRS postponed deadlines for specific time-sensitive actions with regard to employment taxes, employee benefit plans, exempt organizations, and Coverdell education savings accounts. Notice 2020-35also provides a temporary waiver for Certified Professional Employer Organizations (CPEO) to file employment tax returns.

Carbon Capture. The IRS published proposed regulations regarding two new credits for carbon captured using equipment placed in service after Feb. 9, 2018. The credits allow for $50 per metric ton of qualified carbon oxide for permanent sequestration and up to $35 for Enhanced Oil Recovery purposes.