Coronavirus Stimulus Legislation: Tax Credits and Other Business Programs
A Primer on Phase 5 Negotiations – Part IV
This final alert in our four-part series on coronavirus stimulus legislation covers the various other significant stimulus proposals focused on businesses contained in the Democrat’s Health and Economic Recovery Omnibus Emergency Solutions Act (HEROES Act) and the Republican’s “HEALS Act,” which, as discussed in our previous alert, is actually eight different pieces of legislation. Given the number of proposals and the differences between them, we hope this overview, at a minimum, allows businesses to plan for what tax and other stimulus proposals may make it into the final legislation.
Expansion of Employee Retention Tax Credits
As part of the CARES Act, eligible employers are permitted to receive a refundable employee retention tax credit (ERTC) equal to 50% of certain qualifying wages paid. This credit is against the employer’s portion of the 6.2% Social Security tax (technically known as the “Old-Age, Survivors, and Disability Insurance program), and it is intended to be an incentive to encourage employers to keep employees on the payroll. Employers, including tax-exempt organizations, are currently eligible to participate in the ERTC program if they did not receive a Paycheck Protection Program (PPP) loan and either of the following conditions are satisfied: (1) its operations were fully or partially suspended as a result of COVID-19, or (2) its gross receipts during any calendar quarter in 2020 have declined by more than 50% when compared to the same quarter in 2019. If an employer averaged more than 100 full-time employees during 2019, qualified wages are generally those paid to employees who are not providing services because operations were suspended or due to a decline in the employer’s gross receipts. However, if an employer averaged 100 or fewer full-time employees during 2019, qualified wages include such wages paid to an employee during the period of suspension or decline in gross receipts, regardless of whether or not the employer’s employees are providing services. The current ERTC is capped at $10,000 of qualifying wages per employee.
The material changes in the HEALS Act include expanding the existing program by allowing employers to receive 65% of the qualifying reimbursed wages as an ERTC and expanding eligibility to employers with more than a 25% decline in gross receipts when compared to the same quarter in 2019. The ERTC would be increased to $10,000 of qualifying wages per employee per quarter (but capped at $30,000 per year). The HEALS Act further expands the ERTC that can be claimed for employee wages that compensate employees regardless of providing services to employers with up to 500 employees, up from the 100 employee threshold in the CARES Act.
The HEROES Act also contains an ERTC program, but the per employee cap is increased to $15,000 per calendar quarter ($45,000 per year), the credit is increased to 80%, and the gross receipts threshold begins to phase in when employers are down by 10% when compared to the same quarter in 2019. In addition, there are other proposals by Democrats in the House and Senate that would expand the ERTC program.
Given the bi-partisan support for the program, it seems very likely the final legislation will include some form of an expansion of the ERTC.
Tax Credits for Critical Supply Chains and Manufacturing
The HEALS Act includes a requirement that the Department of Health and Human Services (HHS) will be required to purchase substantially all of its personal protective equipment (PPE) and other medical supplies and equipment for the strategic national stockpile from domestic manufacturers as soon as possible, but in no event later than five years after enactment of this legislation.
In addition, manufacturers of PPE would be eligible to receive a tax credit of up to 30% of qualified infrastructure investments during an applicable tax year. This credit is similar to the 48C Advanced Manufacturing Tax Credit for manufacturers of renewable energy equipment and the legislation allocates $7.5 billion towards the program.
There have been a number of programs aimed at incentivizing businesses to increase PPE production and re-shore critical manufacturing (see our alert on the DFC-DPA Loan Program for one example). The primary concern these proposals are meant to address is that a significant portion of PPE is manufactured overseas and, as a result of the coronavirus pandemic, many Republicans and Democrats in Congress and the Executive Branch have determined it is in the national interest to ensure as much of this production as possible is in the USA.
Tax Credit for PPE and Other Employee Protection Expenses
It is expected that any new legislation will include a tax credit (or deduction) for the purchase by employers of PPE and other safety equipment for their employees. The HEALS Act includes a 50% credit on eligible expenses with per employee caps of between $500 and $1,000 depending on the number of employees. This concept is not in the HEROES Act, but we would expect something similar in the final legislation.
Expansion of the Work Opportunity Tax Credit (WOTC)
The existing WOTC would be expanded under the HEALS Act to include anyone who received unemployment insurance immediately prior to their hiring date, as well as members of the other nine eligible employee groups participating in the program. Under the existing WOTC, employers claim a tax credit of 40% of the first $6,000 in employee wages. The eligible WOTC would be expanded for these employees to a 50% credit on the employee’s first $10,000 in wages.
The HEROES Act does not contain a similar provision.
Extension of the Eviction Moratorium
As discussed in our previous alerts (here and here), the CARES Act included a ban on late fees and a moratorium on evictions on properties backed by federal mortgage programs (e.g., Fannie Mae) or that receive federal funds from HUD or other federal agencies. The ban on late fees ended on July 25 and the eviction moratorium terminated on August 24.
While neither a moratorium nor other tenant protections are included in the HEALS Act, the HEROES Act would expand the late fee protections to cover almost all rental property and extends the moratorium through March 27, 2021.
In addition, in response to the White House’s recent “Executive Order on Fighting the Spread of COVID-19 by Providing Assistance to Renters and Homeowners” the Centers for Disease Control and Prevention issued an Agency Order titled “Temporary Halt in Residential Evictions to Prevent the Further Spread of COVID-19,” which, among other things, seeks to impose a moratorium on certain evictions at the national level. The Agency Order contains several eligibility criteria, all of which must be certified by the tenant, including the following:
The tenant (i) expects to earn no more than $99,000 in 2020 (or no more than $198,000 if filing a joint tax return); (ii) was not required to report any income in 2019 to the IRS; or (ii) received an Economic Impact Payment (stimulus check) pursuant to Section 2201 of the CARES Act;
The tenant is unable to pay rent; and
An eviction would likely render the tenant homeless or force the individual to move into a shared living space.
We expect the Agency Order to face legal challenge, including a challenge to the constitutionality of the Order. The Agency Order potentially suspends eviction proceedings that courts (now open or soon to be open for such proceedings) would have allowed – it does not eliminate the tenant’s obligation to pay rent or any late fees that may be accruing. Given the above restrictions and limitations (including what interpretations of “forced” to be homeless or cohabitate means if alternative housing is available), the Agency Order appears to assist only the most distressed tenants and only temporarily, which is why it seems likely a more robust eviction moratorium and potentially late fee and other tenant protections will be included in the final legislation.
COVID-19 Liability Protections for Businesses
Neither the CARES Act nor the HEROES Act include COVID-19 exposure-related liability protection for employers. However, Senate Republicans are pushing for limitations of liability in the HEALS Act. Under the Republican proposal, to qualify, an employer must (1) have made reasonable efforts to comply with applicable health guidelines, and (2) not have engaged in willful misconduct or grossly negligent behavior. The proposed legislation would cover a five-year period from December 1, 2019, until October 1, 2024. It is unclear if some version of the proposed limitation would make it into the final text, but Republicans have indicated this is a “red line” issue for them.
Expansion of the Business Meal Tax Deduction
The HEALS Act increases the tax deduction for certain business-related meal expenses from 50% to 100%, as long as the claimed food or beverage expenses are (1) provided by a restaurant, and (2) paid or incurred between the date the legislation is enacted and December 31, 2021.
This concept is not included in the HEROES Act.
Incentives for Expanding Manufacturing and Microelectronic Infrastructure
The HEALS Act includes an existing bi-partisan proposal known as the Creating Helpful Incentives to Produce Semiconductors (CHIPS) for America Act, which is aimed at expanding the USA’s semiconductor manufacturing and microelectronic infrastructures. Participating businesses would be eligible to receive a 40% refundable tax credit for certain semiconductor manufacturing investments and other microelectronic expenditures through 2024. The proposal also allocates funds towards a federal match program that matches state and local incentive programs aimed at incentivizing businesses to build or expand semiconductor manufacturing plants in the USA.
Deduction for Expenses Related to Forgiven PPP Loans
An additional proposal included in the HEROES Act (but not the HEALS Act) is legislation addressing the issue that the CARES Act only provides for the tax-free cancellation of debt income under the PPP and not whether borrowers are permitted to deduct expenses relating to forgiven PPP loans. The IRS recently issued Notice 2020-32, which states these expenses are not deductible, and only Congress can override this decision. The HEROES Act would specifically authorize these deductions and since this approach appears to have bi-partisan support in Congress, it is expected that any new legislation would include similar language.
Economic Injury Disaster Loan (EIDL) Program
The HEROES Act includes additional funding for the Small Business Administration’s EIDL program, as expanded under the CARES Act, but the HEALS Act does not. The EIDL program and the PPP were the only funding options available for many small businesses over the past six months, and it would be somewhat surprising if the EIDL program does not receive additional funding in the next round.