With the imminent expiration of the expanded unemployment benefits in the Coronavirus Aid, Recovery, and Economic Security (CARES) Act, Senate Republicans released on July 27 their $1 trillion proposal for the next phase of coronavirus relief legislation. The proposal includes a bevy of nine separate bills that are collectively referred to as the Health, Economic Assistance, Liability Protection and Schools (HEALS) Act. The timing and nature of this legislation stands in contrast to the House legislation — the Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act — which was released in May as a single $3 trillion bill. Although the HEROES Act is not likely to be considered formally in the Senate, the HEALS Act in many regards is a counterproposal that borrows similar proposals. As Congress debates the HEALS Act proposals, its key provisions would ultimately represent the fourth phase of emergency legislation in response to the coronavirus pandemic. The details for each of the separate bills under the HEALS Act are summarized below.
Additional Paycheck Protection Program Funds
For businesses, the centerpiece of the CARES Act was the Paycheck Protection Program (PPP). The PPP provides forgivable loans to small businesses in an effort to stem job losses. Under the Continuing Small Business Recovery and Paycheck Protection Program Act (S. 4321), the PPP is expanded by adding $60 billion in available federal loans. However, the bill more narrowly defines eligibility criteria, where eligible entities must:
- Meet the SBA’s revenue size standard, if applicable;
- Employ fewer than 300 employees; and
- Demonstrate at least a 50% reduction in gross receipts in the first or second quarter of 2020 relative to the same 2019 quarter.
The bill allows certain not-for-profits and trade associations to apply for PPP loans, while adding a new category of ineligible entities that includes publicly-traded businesses, organizations affiliated with entities in the People’s Republic of China, and others.
Notably, the bill does not alter the prior rule that denies deductions for expenditures made from PPP loan proceeds.
Even though it is anticipated fewer businesses will qualify under these revised terms, those that do will find a streamlined application process when seeking forgiveness of their loans. For loans under $150,000, a borrower may simply certify that they made a good faith effort to comply with the forgiveness rules and retain relevant records for three years. For loans between $150,000 and $2 million, borrowers also do not have to submit the full suite of documentation required by the CARES Act, but they do need to complete the certification requirement and retain relevant worksheets and records for three years.
Businesses that qualify under the new PPP loan program are also more freely able to spend the funds on non-payroll costs, including:
- Software, cloud computing, and other human resources and accounting needs
- Costs related to property damage due to public disturbances that occurred during 2020 that are not covered by insurance
- Expenditures to a supplier pursuant to a contract for goods in effect prior to Feb. 15, 2020 that are essential to the recipient’s current operations
- Personal protective equipment and other health safety costs
In addition to these changes under the PPP, the bill creates a new $100 billion federal low-cost lending program available to “recovery sector” businesses that demonstrate at least a 50% reduction in revenues.
Major Tax Provisions
The American Workers, Families, and Employers Assistance Act (S. 4318) provides most of the major tax provisions in the Senate legislation. These major tax provisions under this bill include the following:
Expansion of the Employee Retention Credit
The credit amount is increased from 50% to 65% of qualified wages. Eligible wages for each employee are increased from $10,000 per year to $10,000 per quarter (capped at $30,000), and qualified wages formally now include group health plan expenses. Under the CARES Act, employers were eligible for the credit if:
- Their operations were fully or partially suspended due to a COVID-19-related shut-down order, or
- Their gross receipts declined by more than 50% when compared to the same quarter in the prior year.
The bill eases the gross receipts test from a 50% decline to a 25% decline. The bill also allows tax-exempt organizations to claim the credit if the organization meets the gross receipts test. Additionally, the bill lifts the restriction against claiming the credit when the business also receives PPP loan proceeds, provided that the benefits of each program do not overlap (i.e., the same wages cannot be used for both a PPP loan and the retention credit).
Further, a larger population of businesses otherwise eligible for the credit can treat as qualified wages any wages paid to employees (i.e., employees of such businesses do not have to stop working as a result of a shutdown order). The threshold for this treatment is increased to 500 full-time employees or fewer, up from 100 full-time employees or fewer. Businesses with employees in excess of this threshold must identify only those wages paid to employees that stopped working as a result of a shutdown order.
Safe and Healthy Workplace Tax Credit
A new refundable payroll tax credit is created for “qualified employee protection expenses.” These expenses include testing for COVID-19, protective personal equipment, cleaning supplies and services, qualified workplace reconfiguration expenses, and qualified workplace technology expenses such as contactless point-of-sale systems and other technology to track employee interactions with customers. Expenses are limited based on the employer’s average number of employees per quarter. The cap is equal to $1,000 for each of the first 500 employees, plus $750 for each employee between 500 and 1000, plus $500 for each employee that exceeds 1,000. Costs must be incurred after March 12, 2020 and before Jan. 1, 2021.
Expansion of the Work Opportunity Tax Credit (WOTC)
The bill expands the WOTC by adding qualified COVID-19 unemployment recipients as a qualified group. A 2020 qualified COVID-19 unemployment recipient generally is an individual who received (or was approved to receive) unemployment compensation and who begins work after the date of enactment and prior to Jan. 1, 2021. Generally, the maximum credit per employee is 50% of the first $10,000 in first-year wages.
Additional Recovery Rebate Payments
The bill provides another round of recovery rebate checks to eligible individuals. An additional one-time $1,200 cash payment for eligible individuals ($2,400 for married couples) is provided, with additional cash payments of $500 per dependent.
Similar to the CARES Act, an individual is eligible for the full amount of the cash payment to the extent adjusted gross income (AGI) does not exceed $75,000 ($150,000 for married couples filing joint returns, and $112,500 for head of household filers).
There are a few changes to these payments that are retroactively applied to the CARES Act payments as well. First, the additional $500 is not limited to dependents under the age of 17. Also, the recovery rebate payments are not subject to any garnishment or levy by private creditors or debt collectors. Further, individuals who passed away prior to Jan. 1, 2020 are ineligible for payments, and estates and trusts are also ineligible. And finally, individuals in prison are not eligible for the recovery rebate payment.
Extends Unemployment Benefits at Lower Levels
The federal pandemic unemployment assistance (PUA) benefits are extended through Dec. 31, 2020, but have been scaled back under the bill. The bill provides that the federal PUA benefits will be reduced from $600 to $200 per week for two months. Thereafter, the federal benefit generally will be changed to a payment (up to $500) that, when combined with the state UI payment, would replace 70% of lost wages.
Other Tax Provisions Under S. 4318
S. 4318 allows independent contractors to receive certain tax-free benefits from their hiring businesses, including financial support for lost business, health care expenses, testing expenses, and other health safety expenses. Further, 2020 contributions to Flexible Spending Accounts can be rolled into 2021 if unused. And, the list of eligible medical expenditures for Health Savings Accounts is expanded to include employer on-site clinics.
Limiting State Taxation of Remote Workers
Under the Remote and Mobile Worker Relief Act of 2020 (S. 3995), the ability of states to tax remote and mobile workers is limited. Under the bill a state (and local jurisdictions within a state) would only be able to tax its residents and workers who are physically present and performing employment duties in the state for more than 30 days during the year. “Frontline workers” who perform pandemic-related duties would be permitted to use a higher 90-day rule. This rule would apply on a temporary basis from 2020 through 2024. The effect of this bill would prevent an out-of-state worker from being subject to a particular state’s income taxes for work performed out of state under the 30- or 90-day criteria. The bill does not apply to professional athletes, entertainers, certain film and television production employees, and other public figures such as those who speak at events for a fee.
Temporary Full Deduction for Business Meals
The Supporting America’s Restaurant Workers Act (S. 4319) temporarily allows a full deduction for all business meals. This provision reinstates the deduction for these meals provided that the food and beverage was provided by a restaurant and was paid or incurred after the date of enactment and before Jan. 1, 2021.
Investment Tax Credit for Manufacture of Personal Protective Equipment
The Restoring Critical Supply Chains and Intellectual Property Act (S. 4324) creates a new investment tax credit equal to 30% of equipment costs associated with the domestic manufacture of personal protective equipment (up to $7.5 billion in total federal credits available). The bill also allows non-domestic intellectual property associated with such manufacturing to be repatriated without taxable gain.
Other Nontax Provisions
A notable nontax provision is provided under the Safeguarding America’s Frontline Employees to Offer Work Opportunities Required to Kickstart the Economy Act (S. 4317). This bill limits liability for employers, schools, and health-care providers for claims related to exposure to the coronavirus. These liability protections are for pandemic-related lawsuits through Oct. 1, 2024, provided reasonable efforts are made to follow public health guidelines (gross negligence or intentional misconduct is not covered). Under the Safely Back to School and Back to Work Act (S. 4322), student borrowers are given a delay for loan repayments, and also a cap on loan payments at 10% of the student’s income (net of housing costs). Finally, under the Coronavirus Response Additional Supplemental Appropriations Act (S. 4320), additional funding is provided for a variety of measures, including:
- $105 billion to schools, colleges and universities, two-thirds of which is contingent upon the institution of reopening plans;
- $20 billion to help agricultural industries offset losses associated with the pandemic;
- $16 billion to help states with testing and contact tracing services; and
- $2 billion in special IRS appropriations for business systems modernization.
Items Not Included
The Act does not include the payroll tax holiday requested by President Trump. It also does not include additional funding for state and local governments. But there is additional flexibility provided to state and local governments to spend existing funds. Hazard pay for essential employees is not included, nor is a continuation of the eviction moratorium.
Conservative Republican Senators such as Rand Paul (R –TN) have indicated opposition to any further federal coronavirus spending. On the other hand Democrats, including Senate Minority Leader Charles Schumer (D-NY) and Speaker of the House Nancy Pelosi (D-CA) have indicated that the legislation does not go far enough. This sets up an interesting challenge for Senate Majority Leader Mitch McConnell (R-KY) who must minimize defections from his own party while obtaining enough votes from Democrats to obtain passage of any coronavirus relief legislation. For more information on the provisions of the HEALS Act, the HEROES Act, and previously passed coronavirus relief legislation please contact your local CBIZ tax professional.
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