As an increasing number of governors plan to reopen state economies, Congress is under pressure to pass a fourth stimulus package to help businesses and individuals navigate economic recovery. This weekly newsletter outlines the latest developments in Washington, including major tax, small business and financial services developments related to CARES 4.0 negotiations and newly-issued regulatory guidance from various agencies.
What to Expect in the Next Package
With four COVID-19-related legislative packages totaling nearly $3 trillion already enacted into law, Congress is now gearing up for the next tranche, though a final bill is still likely weeks away from passage. Negotiations over this phase have been contentious, as congressional Democrats and Republicans are at odds on several issues, including whether to provide state and local governments with more funding; how to further improve the Paycheck Protection Program (PPP); and the best path forward to helping Americans. Further complicating matters is the potential misalignment between the White House and Senate Republicans on a number of issues, including a payroll tax holiday for businesses.
Priorities for the Next Stimulus Bill
Assistance for State and Local Governments. Federal assistance for state and local governments has emerged as a top priority for House Democrats and Speaker Nancy Pelosi (D-CA) in particular, who said, “There will not be a bill without state and local [aid.]” Pelosi has indicated that the caucus may push for upwards of $1 trillion in assistance for state and local governments, so they are not forced to slash funding for public services. So far, this has been a nonstarter with Republicans. Senate Majority Leader Mitch McConnell (R-KY) said he would like to pause more federal funding and see what is working and not working, with the $3 trillion in aid already approved. McConnell has noted that while there might be funding for states and localities in the next package, Congress must also include liability protections for businesses and employees. Many Democrats are firmly opposed to that idea.
Expansion of Refundable Tax Credits. Democrats have also prioritized the expansion of refundable tax credits, such as the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC). In an April 30 letter to McConnell and Senate Minority Leader Chuck Schumer (D-NY), a group of nearly 40 Democratic senators urged leadership to temporarily expand the EITC and CTC to help families facing financial hardship during the crisis. Specifically, the letter suggests expanding the EITC for workers without children, making it available for people starting at age 19 up to age 67, and allowing workers to draw a $500 advance payment on the credit so that families do not turn to payday lenders for quick access to cash. The letter also recommends making the CTC fully refundable and creating a young child tax credit to provide extra support to children aged five and under. This has also been a priority for House Ways and Means Committee Chair Richard Neal (D-MA), who is expected to advocate for an expansion of these credits in the next package.
GREEN Act. Congressional Democrats are expected to advocate for green energy tax credits – a push to likely include many of the provisions in Neal’s Growing Renewable Energy and Efficiency Now (GREEN) Act, which he introduced in November 2019. Finally, Democrats may look to expand unemployment insurance benefits and increase direct payments to individuals. Expansion to unemployment benefits has been strongly opposed by many Republicans, who believe such measures incentivize workers to not return to their jobs, and is unlikely to gain traction in the next stimulus package.
Liability Protection for Businesses. The top priority for McConnell and House Minority Leader Kevin McCarthy (R-CA) is providing liability protection for businesses as states begin to reopen their economies. Both have indicated they will not support another stimulus bill unless it contains protections for employers. According to McConnell, this will allow the economy to rebound more quickly, as it will avoid burdensome lawsuits. Legal experts note that businesses could face a range of lawsuits related to customers who become infected with the virus. Democrats remain cautious, noting that they will not support any language that potentially weakens protections for workers.
Oil Industry. There is a growing acknowledgement from some Senate Republicans that the oil industry – recently damaged due to low demand, overproduction and lack of storage space – may need congressional assistance. Other Senate Republicans continue to point to an infrastructure package as an option for long-term economic recovery, but the moment may not yet be ripe for such ideas.
Bipartisan Effort to Reverse IRS Guidance. On May 4, House Ways and Means Committee Chair Richard Neal (D-MA) teamed up with Senate Finance Committee Chair Chuck Grassley (R-IA) and Ranking Member Ron Wyden (D-OR) to urge the Internal Revenue Service (IRS) to change recent guidance that prevents businesses from claiming tax breaks if they continue to pay health benefits to furloughed workers, but not wages. In a letter to Treasury Secretary Steven Mnuchin, the lawmakers argued that the recent guidance related to the employee retention tax credit (ERTC) “runs directly counter to congressional intent.” They said that when drafting the Coronavirus Aid, Relief and Economic Security (CARES) Act (P.L.116-136), they explicitly expanded qualified wages to include health benefits so as to incentivize employers to continue providing these benefits to employees.
Again on May 5, the three lawmakers sent another letter, this time asking the IRS to reconsider guidance (Notice 2020-32) that prevents businesses from claiming certain tax breaks if they receive loan forgiveness under the PPP. In the letter to Mnuchin, the bipartisan trio argued that the guidance “ignores the overarching intent of the [Paycheck Protection Program], as well as the specific intent of Congress to allow deductions in the case of PPP loan recipients.” They claim section 1106(i) of the CARES Act was intended to exclude loan forgiveness from income because it would have otherwise been taxed, thereby providing economic relief to businesses amidst the pandemic. The letter also argues that the IRS incorrectly applied section 265(a) of the Internal Revenue Code, which states that deductions can be denied only if it is allocable to a class of income “wholly exempt from the taxes imposed by this subtitle.” The lawmakers posited that the deduction is not allocable to the exempt income from the loan forgiveness.
Ultimately, the tax writers urged Mnuchin to reconsider this guidance. Should the agency fail to do so, lawmakers will likely seek legislative clarification in the next package.
Trump Administration’s Priorities for the Next Stimulus Bill
President Trump continues to advocate for a payroll tax holiday – a priority he has been pursuing since the start of the pandemic. In a virtual town hall on April 3, President Trump said he would not sign any legislation that did not contain his requested payroll tax holiday, an indication he might demand its inclusion in exchange for the Democrats’ request of state and local funding.
On May 5, President Trump tweeted that “the elimination of Sanctuary Cities, Payroll Taxes, and perhaps Capital Gains Taxes” should also be included in the next package. However, many congressional Republicans reacted with lackluster support – if any. When given the opportunity to support the president’s proposal, McConnell said his top priority would be liability protection. Sens. John Thune (R-SD) and Roy Blunt (R-MO) opposed the idea more forcefully, with Thune saying “I’m not a particular fan of that,” and Blunt saying “I’m not persuaded that that’s the best way forward.”
Presidential advisor Kevin Hassett has been hinting the administration could seek additional individual payments, an area of possible agreement between the administration and congressional Democrats. Another deal could potentially be upended, however. According to Hassett, another package may not be necessary if the reopening effort continues without any major stumbling blocks.
Congressional Proposals
Lawmakers continue to develop ideas on how to help businesses and individuals cope with the effects of the pandemic. Below are proposals that have garnered significant attention:
- Patriot Pay Proposal. Sen. Mitt Romney (R-UT) released details of a proposal to compensate frontline workers that continued operations during the COVID-19 pandemic. Romney's "Patriot Pay" proposal would provide these essential workers $12 in hourly wages on top of their current earnings for May, June and July. Under the plan, the Department of Labor would be directed to establish a list of qualifying industries that includes hospitals, transportation, health manufacturers, and those in the food industry, amongst others.
Employers would receive a 75% refundable payroll tax credit for bonuses provided to workers earning less than $50,000 a year. Employers could receive a maximum credit of $1,440 per month for every employee, which would result in a maximum monthly bonus of $1,920 for each qualifying employee. In order to be eligible, employees must have worked at least 100 hours each month in which they receive the bonus.
For qualifying workers earning above this threshold, the credit would diminish by $24 for every $500 above $50,000 and completely phase out at $90,000.
- USA RISE. On April 28, Sen. Kelly Loeffler (R-GA) unveiled the USA Restoring and Igniting the Strength of our Economy (USA RISE) Plan, a framework for reopening the U.S. economy. The plan contains the following core principles:
- Made in the U.S.: Business, Supply Chains and Infrastructure. The plan would incentivize critical supply chains to return to the U.S. through a “Made in the USA” tax credit and accelerated expensing. It would also eliminate employer payroll taxes for 2020, improve trade agreements, include an infrastructure package and ensure all liquidity provided to employers under the CARES Act is implemented before May 31.
- Grown in the U.S.: Feeding, Clothing and Connecting Americans. The plan would seek to further support the national food supply, establish an Agricultural Alliance to remove regulatory burdens for farmers and grocers, enforce trade deals related to agriculture, protect domestic farmers from an oversupply of imports and aim to complete rural broadband expansion by 2023.
- Hiring in the U.S.: Sustaining Employment and Small Business. The plan would prevent further expansion of Unemployment Insurance, reduce regulatory burdens for certain businesses, allow businesses an extra month to rehire employees for loan forgiveness, make permanent the tax cuts for families enacted under the Tax Cuts and Jobs Act of 2017 (P.L.115-97), reduce business tax rates for two years, provide liability protections and incentives for students in certain health care-related disciplines who complete their education before 2025.
- Families in the U.S.: Supporting Healthy Lives and Families. The plan would provide relief for families directly impacted by the pandemic, increase funding for the Victims of Child Abuse Program and allow churches, food banks, YMCAs and civil society institutions to access Paycheck Protection Program funding.
- Workforce Training Programs. House Education and Labor Committee Chair Bobby Scott (D-VA) is pushing for $15 billion in workforce-training programs that includes $345 million in grants for unemployed individuals. The Relaunching America’s Workforce Act would allocate $10 billion to state and local workforce programs, such as career services and online skills training. It includes $1 billion for adult literacy programs, $1 billion for career and technical education for students and $2 billion for community college career training grant programs.
- Expanding Qualifying Dependents. Reps. Ron Kind (D-WI) and Jackie Walorski (R-IN) introduced legislation in late April that would allow college students and adult dependents above the age of 16 to be eligible for direct economic payments.
Implementation
As lawmakers rushed to enact legislation over the last couple of months, agency officials are attempting to keep up by quickly releasing regulations and other guidance. Below is a look at all COVID-19-related implementation guidance published during the previous week.
- Double Taxation Benefit Denied. The IRS issued Notice 2020-32 related to the tax treatment of Paycheck Protection Program loans. The guidance provides that to the extent a taxpayer has a PPP loan forgiven, they would be unable to claim some ordinary and necessary business tax deductions to the extent the expenditures are funded by the forgiven loan.
- Updated FAQ: ERTC. The IRS released an updated FAQ in which it answered a host of new questions related to the Employee Retention Tax Credit (ERTC), including guidance that employers who furlough workers without pay, but continue to pay the employer’s contribution towards health benefits, are not entitled to claim the credit. This is contrary to the Joint Committee on Taxation’s (JCT) April 23 release of a document describing the provisions in the CARES Act.
- REIT Liquidity Requirements. In Rev. Proc. 2020-19, the IRS allowed real estate investment trusts (REITs) and regulated investment companies (RICs) to reduce the amount on hand to distribute to shareholders from 20% to 10%.
- Form 941 Instructions. The IRS has released draft instructions for Form 941 that provide information on determining the tax credits for the employee retention tax credit within the CARES Act and the paid leave tax credits within the Families First Coronavirus Response Act (FFCRA, P.L.116-127).
- Updated FAQ: Amending Certain Forms. In an updated FAQ, the IRS added three responses that address how to file amended Form 1120-X/1040-X through hard copy or electronically, when taxpayers can expect refunds from a Form 1139 or 1045 that was faxed and whether or not taxpayers can use the temporary procedures to fax these forms to submit a tentative refund claim for either an NOL carryback or AMT credit.
- PLR Submissions. In Rev. Proc. 2020-29, the IRS updated the procedures through which private letter rulings, closing agreements, determination letters and information letters to allow for electronic submissions.
- Income Tax Exemptions. In Notice 2020-36, the IRS updated the procedures through which 501(c) organizations can obtain an exemption from federal income tax.
- PPP Interim Final Rule. On April 30, the Treasury Department established an alternative method for calculating the maximum PPP loan for seasonal employers.
For additional information or assistance with a particular issue, please contact a member of the Brownstein Tax Policy Group.
Information is changing daily and some of the content included in this alert may have changed or been updated since publication.
Click here to read more Brownstein alerts on the legal issues the coronavirus threat raises for businesses.
This document is intended to provide you with general information regarding economic updates related to coronavirus. The contents of this document are not intended to provide specific legal advice. If you have any questions about the contents of this document or if you need legal advice as to an issue, please contact the attorneys listed or your regular Brownstein Hyatt Farber Schreck, LLP attorney. This communication may be considered advertising in some jurisdictions.
As an increasing number of governors plan to reopen state economies, Congress is under pressure to pass a fourth stimulus package to help businesses and individuals navigate economic recovery. This weekly newsletter outlines the latest developments in Washington, including major tax, small business and financial services developments related to CARES 4.0 negotiations and newly-issued regulatory guidance from various agencies.
What to Expect in the Next Package
With four COVID-19-related legislative packages totaling nearly $3 trillion already enacted into law, Congress is now gearing up for the next tranche, though a final bill is still likely weeks away from passage. Negotiations over this phase have been contentious, as congressional Democrats and Republicans are at odds on several issues, including whether to provide state and local governments with more funding; how to further improve the Paycheck Protection Program (PPP); and the best path forward to helping Americans. Further complicating matters is the potential misalignment between the White House and Senate Republicans on a number of issues, including a payroll tax holiday for businesses.
Priorities for the Next Stimulus Bill
Assistance for State and Local Governments. Federal assistance for state and local governments has emerged as a top priority for House Democrats and Speaker Nancy Pelosi (D-CA) in particular, who said, “There will not be a bill without state and local [aid.]” Pelosi has indicated that the caucus may push for upwards of $1 trillion in assistance for state and local governments, so they are not forced to slash funding for public services. So far, this has been a nonstarter with Republicans. Senate Majority Leader Mitch McConnell (R-KY) said he would like to pause more federal funding and see what is working and not working, with the $3 trillion in aid already approved. McConnell has noted that while there might be funding for states and localities in the next package, Congress must also include liability protections for businesses and employees. Many Democrats are firmly opposed to that idea.
Expansion of Refundable Tax Credits. Democrats have also prioritized the expansion of refundable tax credits, such as the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC). In an April 30 letter to McConnell and Senate Minority Leader Chuck Schumer (D-NY), a group of nearly 40 Democratic senators urged leadership to temporarily expand the EITC and CTC to help families facing financial hardship during the crisis. Specifically, the letter suggests expanding the EITC for workers without children, making it available for people starting at age 19 up to age 67, and allowing workers to draw a $500 advance payment on the credit so that families do not turn to payday lenders for quick access to cash. The letter also recommends making the CTC fully refundable and creating a young child tax credit to provide extra support to children aged five and under. This has also been a priority for House Ways and Means Committee Chair Richard Neal (D-MA), who is expected to advocate for an expansion of these credits in the next package.
GREEN Act. Congressional Democrats are expected to advocate for green energy tax credits – a push to likely include many of the provisions in Neal’s Growing Renewable Energy and Efficiency Now (GREEN) Act, which he introduced in November 2019. Finally, Democrats may look to expand unemployment insurance benefits and increase direct payments to individuals. Expansion to unemployment benefits has been strongly opposed by many Republicans, who believe such measures incentivize workers to not return to their jobs, and is unlikely to gain traction in the next stimulus package.
Liability Protection for Businesses. The top priority for McConnell and House Minority Leader Kevin McCarthy (R-CA) is providing liability protection for businesses as states begin to reopen their economies. Both have indicated they will not support another stimulus bill unless it contains protections for employers. According to McConnell, this will allow the economy to rebound more quickly, as it will avoid burdensome lawsuits. Legal experts note that businesses could face a range of lawsuits related to customers who become infected with the virus. Democrats remain cautious, noting that they will not support any language that potentially weakens protections for workers.
Oil Industry. There is a growing acknowledgement from some Senate Republicans that the oil industry – recently damaged due to low demand, overproduction and lack of storage space – may need congressional assistance. Other Senate Republicans continue to point to an infrastructure package as an option for long-term economic recovery, but the moment may not yet be ripe for such ideas.
Bipartisan Effort to Reverse IRS Guidance. On May 4, House Ways and Means Committee Chair Richard Neal (D-MA) teamed up with Senate Finance Committee Chair Chuck Grassley (R-IA) and Ranking Member Ron Wyden (D-OR) to urge the Internal Revenue Service (IRS) to change recent guidance that prevents businesses from claiming tax breaks if they continue to pay health benefits to furloughed workers, but not wages. In a letter to Treasury Secretary Steven Mnuchin, the lawmakers argued that the recent guidance related to the employee retention tax credit (ERTC) “runs directly counter to congressional intent.” They said that when drafting the Coronavirus Aid, Relief and Economic Security (CARES) Act (P.L.116-136), they explicitly expanded qualified wages to include health benefits so as to incentivize employers to continue providing these benefits to employees.
Again on May 5, the three lawmakers sent another letter, this time asking the IRS to reconsider guidance (Notice 2020-32) that prevents businesses from claiming certain tax breaks if they receive loan forgiveness under the PPP. In the letter to Mnuchin, the bipartisan trio argued that the guidance “ignores the overarching intent of the [Paycheck Protection Program], as well as the specific intent of Congress to allow deductions in the case of PPP loan recipients.” They claim section 1106(i) of the CARES Act was intended to exclude loan forgiveness from income because it would have otherwise been taxed, thereby providing economic relief to businesses amidst the pandemic. The letter also argues that the IRS incorrectly applied section 265(a) of the Internal Revenue Code, which states that deductions can be denied only if it is allocable to a class of income “wholly exempt from the taxes imposed by this subtitle.” The lawmakers posited that the deduction is not allocable to the exempt income from the loan forgiveness.
Ultimately, the tax writers urged Mnuchin to reconsider this guidance. Should the agency fail to do so, lawmakers will likely seek legislative clarification in the next package.
Trump Administration’s Priorities for the Next Stimulus Bill
President Trump continues to advocate for a payroll tax holiday – a priority he has been pursuing since the start of the pandemic. In a virtual town hall on April 3, President Trump said he would not sign any legislation that did not contain his requested payroll tax holiday, an indication he might demand its inclusion in exchange for the Democrats’ request of state and local funding.
On May 5, President Trump tweeted that “the elimination of Sanctuary Cities, Payroll Taxes, and perhaps Capital Gains Taxes” should also be included in the next package. However, many congressional Republicans reacted with lackluster support – if any. When given the opportunity to support the president’s proposal, McConnell said his top priority would be liability protection. Sens. John Thune (R-SD) and Roy Blunt (R-MO) opposed the idea more forcefully, with Thune saying “I’m not a particular fan of that,” and Blunt saying “I’m not persuaded that that’s the best way forward.”
Presidential advisor Kevin Hassett has been hinting the administration could seek additional individual payments, an area of possible agreement between the administration and congressional Democrats. Another deal could potentially be upended, however. According to Hassett, another package may not be necessary if the reopening effort continues without any major stumbling blocks.
Congressional Proposals
Lawmakers continue to develop ideas on how to help businesses and individuals cope with the effects of the pandemic. Below are proposals that have garnered significant attention:
- Patriot Pay Proposal. Sen. Mitt Romney (R-UT) released details of a proposal to compensate frontline workers that continued operations during the COVID-19 pandemic. Romney's "Patriot Pay" proposal would provide these essential workers $12 in hourly wages on top of their current earnings for May, June and July. Under the plan, the Department of Labor would be directed to establish a list of qualifying industries that includes hospitals, transportation, health manufacturers, and those in the food industry, amongst others.
Employers would receive a 75% refundable payroll tax credit for bonuses provided to workers earning less than $50,000 a year. Employers could receive a maximum credit of $1,440 per month for every employee, which would result in a maximum monthly bonus of $1,920 for each qualifying employee. In order to be eligible, employees must have worked at least 100 hours each month in which they receive the bonus.
For qualifying workers earning above this threshold, the credit would diminish by $24 for every $500 above $50,000 and completely phase out at $90,000.
- USA RISE. On April 28, Sen. Kelly Loeffler (R-GA) unveiled the USA Restoring and Igniting the Strength of our Economy (USA RISE) Plan, a framework for reopening the U.S. economy. The plan contains the following core principles:
- Made in the U.S.: Business, Supply Chains and Infrastructure. The plan would incentivize critical supply chains to return to the U.S. through a “Made in the USA” tax credit and accelerated expensing. It would also eliminate employer payroll taxes for 2020, improve trade agreements, include an infrastructure package and ensure all liquidity provided to employers under the CARES Act is implemented before May 31.
- Grown in the U.S.: Feeding, Clothing and Connecting Americans. The plan would seek to further support the national food supply, establish an Agricultural Alliance to remove regulatory burdens for farmers and grocers, enforce trade deals related to agriculture, protect domestic farmers from an oversupply of imports and aim to complete rural broadband expansion by 2023.
- Hiring in the U.S.: Sustaining Employment and Small Business. The plan would prevent further expansion of Unemployment Insurance, reduce regulatory burdens for certain businesses, allow businesses an extra month to rehire employees for loan forgiveness, make permanent the tax cuts for families enacted under the Tax Cuts and Jobs Act of 2017 (P.L.115-97), reduce business tax rates for two years, provide liability protections and incentives for students in certain health care-related disciplines who complete their education before 2025.
- Families in the U.S.: Supporting Healthy Lives and Families. The plan would provide relief for families directly impacted by the pandemic, increase funding for the Victims of Child Abuse Program and allow churches, food banks, YMCAs and civil society institutions to access Paycheck Protection Program funding.
- Workforce Training Programs. House Education and Labor Committee Chair Bobby Scott (D-VA) is pushing for $15 billion in workforce-training programs that includes $345 million in grants for unemployed individuals. The Relaunching America’s Workforce Act would allocate $10 billion to state and local workforce programs, such as career services and online skills training. It includes $1 billion for adult literacy programs, $1 billion for career and technical education for students and $2 billion for community college career training grant programs.
- Expanding Qualifying Dependents. Reps. Ron Kind (D-WI) and Jackie Walorski (R-IN) introduced legislation in late April that would allow college students and adult dependents above the age of 16 to be eligible for direct economic payments.
Implementation
As lawmakers rushed to enact legislation over the last couple of months, agency officials are attempting to keep up by quickly releasing regulations and other guidance. Below is a look at all COVID-19-related implementation guidance published during the previous week.
- Double Taxation Benefit Denied. The IRS issued Notice 2020-32 related to the tax treatment of Paycheck Protection Program loans. The guidance provides that to the extent a taxpayer has a PPP loan forgiven, they would be unable to claim some ordinary and necessary business tax deductions to the extent the expenditures are funded by the forgiven loan.
- Updated FAQ: ERTC. The IRS released an updated FAQ in which it answered a host of new questions related to the Employee Retention Tax Credit (ERTC), including guidance that employers who furlough workers without pay, but continue to pay the employer’s contribution towards health benefits, are not entitled to claim the credit. This is contrary to the Joint Committee on Taxation’s (JCT) April 23 release of a document describing the provisions in the CARES Act.
- REIT Liquidity Requirements. In Rev. Proc. 2020-19, the IRS allowed real estate investment trusts (REITs) and regulated investment companies (RICs) to reduce the amount on hand to distribute to shareholders from 20% to 10%.
- Form 941 Instructions. The IRS has released draft instructions for Form 941 that provide information on determining the tax credits for the employee retention tax credit within the CARES Act and the paid leave tax credits within the Families First Coronavirus Response Act (FFCRA, P.L.116-127).
- Updated FAQ: Amending Certain Forms. In an updated FAQ, the IRS added three responses that address how to file amended Form 1120-X/1040-X through hard copy or electronically, when taxpayers can expect refunds from a Form 1139 or 1045 that was faxed and whether or not taxpayers can use the temporary procedures to fax these forms to submit a tentative refund claim for either an NOL carryback or AMT credit.
- PLR Submissions. In Rev. Proc. 2020-29, the IRS updated the procedures through which private letter rulings, closing agreements, determination letters and information letters to allow for electronic submissions.
- Income Tax Exemptions. In Notice 2020-36, the IRS updated the procedures through which 501(c) organizations can obtain an exemption from federal income tax.
- PPP Interim Final Rule. On April 30, the Treasury Department established an alternative method for calculating the maximum PPP loan for seasonal employers.
For additional information or assistance with a particular issue, please contact a member of the Brownstein Tax Policy Group.
Information is changing daily and some of the content included in this alert may have changed or been updated since publication.
Click here to read more Brownstein alerts on the legal issues the coronavirus threat raises for businesses.
This document is intended to provide you with general information regarding economic updates related to coronavirus. The contents of this document are not intended to provide specific legal advice. If you have any questions about the contents of this document or if you need legal advice as to an issue, please contact the attorneys listed or your regular Brownstein Hyatt Farber Schreck, LLP attorney. This communication may be considered advertising in some jurisdictions.