Overview of Tax Provisions in Senate’s Proposed HEALS Act

Thoughtware Alert Jul 28, 2020
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On July 27, 2020, the Senate Republicans released their version of COVID-19 Phase 4 stimulus legislation, collectively referred to as the Health, Economic Assistance, Liability Protection, and Schools Act (HEALS Act). In May, the House Democrats released their version of Phase 4 legislation, the Health and Economic Recovery Omnibus Emergency Solution Act (HEROES Act) (read our overview of the HEROES Act).

Although the HEALS Act in its current form is merely a starting point for congressional negotiations, below we’ll cover the proposed changes and additions for tax relief and cash flow assistance for businesses and individuals.

For purposes of this article, we refer to the overall Senate Republican legislation package as the HEALS Act, even though it was released in parts as drafted by various committees. For example, most of the tax provisions discussed below are included in the American Workers, Families, and Employers Assistance Act, as published by the Senate Finance Committee.

Tax Provisions

  • Employee Retention Credit – Under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), employers affected by COVID-19 are eligible for a refundable credit equal to 50 percent of qualified wages. The credit is limited to $10,000 of qualified wages (including allocable qualified health plan expenses) per employee for all calendar quarters, i.e., $5,000 maximum credit per employee. The proposed legislation increases the applicable percentage of qualified wages from 50 percent to 65 percent and raises the annual limitation to $30,000 per calendar year ($10,000 per employee per quarter).
    • Currently, one way to qualify for the Employee Retention Credit is if a business experiences a gross receipt decline of more than 50 percent when compared to the same quarter in the prior year. The HEALS Act changes the qualifying threshold to 25 percent.
    • In addition, under the CARES Act, the Employee Retention Credit can only be claimed for employee wages that compensate employees for not performing services for qualified employers with more than 100 employees. The HEALS Act would expand this threshold to 500 employees. This means qualified employers with 500 or fewer employees would be able to claim the Employee Retention Credit on all employee wages (subject to the annual $10,000 per employee per quarter limitation).
    • These changes would be effective as of the beginning of the calendar quarter in which the provision is enacted, which means that the updated Employee Retention Credit rules would likely only apply to the third and fourth quarters of 2020.
    • The HEALS Act also modifies the definition of gross receipts to include gross receipts of tax-exempt organizations and clarifies that group health plan expenses are considered qualified wages even when no other wages are paid to the employee, which is consistent with IRS guidance. These two changes would be effective retroactively as if originally included in the CARES Act.
    • The HEALS Act provides that companies may qualify for both the Employee Retention Credit and the U.S. Small Business Association (SBA) Paycheck Protection Program (PPP), with limitations to prevent overlapping benefit. In the current draft of the bill, payroll costs paid or incurred after June 30, 2020, will not fail to be treated as qualified wages for purposes of the Employee Retention Credit, to the extent those wages are not included in the forgiveness amount.
  • Work Opportunity Tax Credit (WOTC) – The WOTC would be expanded to provide up to $5,000 (50 percent of the first $10,000 of qualified first-year wages) for employers hiring individuals in a new qualified group, defined as 2020 qualified COVID-19 unemployment recipients.
    • To claim the WOTC, an employer must obtain certification of the employee’s eligibility from the appropriate state workforce agency. In this case, the certification would need to come from a local agency that certifies the employee received (or was approved to receive) unemployment compensation under state or federal law for the week of or immediately preceding the hiring date. To qualify, the employee must begin work after the date of the HEALS Act’s enactment and prior to January 1, 2021.
  • Safe & Healthy Workplace Tax Credit – The HEALS Act creates a new refundable payroll tax credit equal to 50 percent of an employer’s qualified employee protection expenses paid after March 12, 2020, and before January 1, 2021. Qualifying expenses, e.g., coronavirus testing, cleaning supplies, and protective equipment, are limited to $1,000 for each of the first 500 employees, plus $750 for each employee between 500 and 1,000 employees, and $500 for each employee over 1,000 employees.
  • State Tax Changes for Remote Workers – The HEALS Act modifies state income tax rules to provide that through 2024, employees who perform employment duties in multiple states would be subject to income tax only in their state of residence and any states in which they are present and performing employment duties for more than a limited time during the calendar year (a 90-day threshold). This rule would not apply to professional athletes, entertainers, or other types of highly compensated public figures.
    • Overall, the intent of this provision is to eliminate tax uncertainty facing remote workers, particularly front-line healthcare workers who may be working in multiple states due to the COVID-19 pandemic, by allowing employers to treat employees’ wages as earned at their normal work location until the earlier of when the employees return to such location or the end of the calendar year.
  • Full Deduction for Business Meals – Under current law, deductions for business meals are generally subject to a 50 percent threshold. However, the Supporting America’s Restaurant Workers Act (also part of the Senate Republican’s HEALS Act relief package) would temporarily allow a full deduction for business meals provided by a restaurant and paid or incurred after date of enactment through December 31, 2020.

SBA PPP Changes

In a press conference on July 27, Sen. Marco Rubio revealed the Continuing Small Business Recovery and Paycheck Protection Program Act, which is part of the HEALS Act package. This bill provides several changes to the PPP and introduces a new loan program. You can view a section-by-section summary of the proposed bill, but here are the main points you should know.

The proposed PPP bill:

  • Expands eligible expenses for forgiveness to include covered operations expenditures, e.g., payment for any software, cloud computing, and other HR and accounting needs, property damage costs, covered supplier costs, and covered worker protection expenses, e.g., personal protection equipment. Note that this bill does not change the 60 percent requirement for payroll costs.
  • Allows borrowers to select a covered period ending at the point of the borrower’s choosing between eight weeks after origination and December 31, 2020.
  • Simplifies the forgiveness application process for smaller loans, e.g., loans of less than $150,000 and loans between $150,000 and $2 million.
  • Expands PPP eligibility to include certain Section 501(c)(6) organizations, with 300 or fewer employees (excluding professional sports, political campaigns, and lobbying expenses).
  • Provides $190 billion of committed and appropriated funds to support PPP and PPP Second Draw Loans. Eligibility for PPP Second Draw Loans is limited to small businesses that meet the applicable SBA revenue size standard, have no more than 300 employees, and demonstrate at least a 50 percent reduction in gross receipts in the first or second quarter of 2020 compared to the same quarter in the prior year.
    • Note, $25 billion of these funds will be set aside for companies with 10 or fewer employees and $10 billion for loans made by community lenders. The PPP Second Draw Loans would equal two and a half times average total monthly payroll costs, up to $2 million, and the 60/40 cost allocation rule for payroll and nonpayroll costs would continue to apply. Businesses that received a PPP loan may not receive another PPP loan that aggregates to more than $10 million.
  • Authorizes a $100 billion loan program for recovery sector businesses, which include seasonal businesses and businesses located in low-income census tracts that meet the applicable SBA revenue size standard, have no more than 500 employees, and demonstrate a 50 percent decrease in gross receipts in the first or second quarter of 2020 compared to the same quarter in the prior year. These loans would be limited to up to twice the borrower’s annual revenues, not to exceed $10 million, with up to a 20-year maturity and 1 percent fixed interest rate. The loan may be used for working capital, acquisition of fixed assets, and refinancing existing indebtedness.

Other Provisions

The Senate Republican legislation package also includes several other notable provisions:

  • Liability protection – The Senate Republican stimulus packages includes the SAFE TO WORK Act, which limits lawsuits brought against healthcare providers, schools, and employers for exposure to COVID-19.
  • Additional recovery rebate checksThe proposed legislation would issue a second round of stimulus checks, structured identically to the first round under the CARES Act ($1,200 per individual and $2,400 for married filing jointly). However, this time, the $500 payment for each qualified dependent would be expanded to include all adult dependents, including those with no income (the CARES Act defined dependents as children under the age of 17). In addition, the HEALS Act excludes prisoners and anyone deceased prior to January 1, 2020, from receiving a stimulus check.
  • Unemployment Benefits – The CARES Act provided an additional $600 weekly payment for individuals receiving unemployment insurance benefits. These payments are due to expire July 31, 2020. Under the HEALS Act, this provision would be extended, but the payments would be lowered to $200 per week through September.
    • Starting in October, the payment would be replaced with a payment (up to $500) that, when combined with the state unemployment payment, would replace 70 percent of lost wages. This would be calculated using a formula provided in the bill or by an alternative method proposed by a state. States unable to provide a second payment tied to lost wages by October 5 could apply for a waiver from the U.S. Department of Labor to continue paying a fixed-dollar amount for up to two months. Finally, starting in October, the additional payment would count as income when determining eligibility for federal low-income programs in the same way as wages and regular state unemployment.
  • Investment Tax Credit for Qualifying Medical Personal Protective Equipment Manufacturing ProjectsThe Restoring Critical Supply Chains and Intellectual Property Act would provide a new qualified investment tax credit modeled after the §48C advanced manufacturing tax credit. This 30 percent refundable credit is intended to offset equipment costs for manufacturing personal protective equipment such as clothing, sanitizing supplies, and ancillary medical supplies (wipes, bedding, test swabs, etc.).

Now that House Democrats and Senate Republicans have each released their version of the next COVID-19 stimulus legislation, Congress is expected to enter negotiations to finalize a relief package that can pass both the House and the Senate and then get White House approval. We will continue to monitor COVID-19 legislation and keep you updated.

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