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New Funding for the Paycheck Protection Program, New IRS Guidance & Prospects for a 4th Phase of Federal Economic Relief in Response to the COVID-19 Crisis

By: Jason Carter John V. Aksak |

Legislation to provide additional funding to the paycheck protection program and the economic injury disaster loan program has been enacted with more money also being allocated to hospitals and virus testing.  Democrats and Republicans in the Congress and the White House have already begun planning for a “4th phase” of economic relief in response to the devastating impact on the US economy from the COVID-19 crisis.  Although the urgency to provide additional relief continues, there are some stakeholders who are arguing for a more measured approach to the next piece of legislation in an effort to assess what has already been enacted and determine next steps.

Treasury and the IRS continue to issue guidance intended to provide taxpayers with information needed to take advantage of the relief that has been provided to date covering issues such as the IRC § 163(j) business interest expense rules, depreciation for Qualified Improvement Property, deferral of payroll tax payments, FATCA filing deadlines, residency rules for travelers, payment of certain duties, and the relief fund for state and local governments.

Legislation with Additional Funding for the PPP and EIDL, Hospitals, and Virus Testing

Both the House and Senate have now approved legislation to provide additional funding for the Paycheck Protection Program (PPP) and the Economic Injury Disaster Loan Program (EIDL).  The President signed the bill into law on Friday, April 24th.  The bill includes:

  • $321 billion for the PPP with $60 billion set aside for lenders with less than $50 billion in assets (and $30 billion of that amount reserved for lenders with less than $10 billion of assets)
  • $10 billion for the EIDL program (included in $62 billion for the Small Business Administration)
  • $75 billion in crisis funding for hospitals
  • $25 billion for expanded virus testing

No tax provisions are included in the legislation, which passed by voice vote in the Senate and by a recorded vote in the House.  The legislation also does not include any new funding for state and local governments, which the Democrats wanted.  The Administration is reportedly supporting funding for state and local governments in the 4th phase legislation.

In response to complaints that certain groups such as women, minorities and rural businesses had trouble accessing the original $349 billion of PPP money, the funds were earmarked in this interim package for that group.  Whether this additional funding will be enough is unclear, since independent contractors, sole proprietors and self-employed workers had just started to apply when the fund ran out of money.

The $75 billion allocated to hospitals and health care providers builds on the $100 billion that was included in the Coronavirus Aid Relief and Economic Security Act (CARES Act).  The bill provides $25 billion to fund manufacturing and purchasing of tests for COVID-19, and it calls for the Trump Administration to create a national plan on testing.  $11 billion is allocated to states and localities to administer tests and conduct contact tracing, and the Centers for Disease Control will receive $1 billion for surveillance measures, including contact tracing.

CARES Act – Guidance from the Joint Committee on Taxation

The Joint Committee on Taxation (JCT) issued a report (JCX-12R-20) which describes the tax law changes in the CARES Act.  For each tax provision, the report includes a description of the law prior to enactment, a description of the change, and the effective date.  This document will be helpful in light of the fact that the legislation was drafted and approved with little debate in Congress and no legislative history from the tax-writing committees, which is generally utilized to explain the intent of the new provisions.

CARES Act  2.0 – Phase 4 of COVID-19 Relief

With Congress having completed work on the additional funding needed for the Federal loan programs, their focus now will be on legislation that will deal with issues that were not included in the CARES Act.

As summarized in past True Alerts, Congress has passed three major pieces of legislation to provide economic relief to the US economy and US taxpayers.  House Speaker Pelosi (D-CA) has made it clear since the CARES Act was passed that House Democrats want to work on a 4th phase of relief (4th Bill) to include various stimulus items that were not included in the already enacted legislation while also emphasizing that Congress needs to ensure that the funds in the CARES Act are being appropriately directed to states, cities, and small businesses.  House and Senate Republicans have voiced their interest in additional legislation, but they have indicated that they want to see the CARES Act fully implemented first.  Senate Majority Leader McConnell (R-KY) has said that he believes the next bill should focus on healthcare needs and addressing any shortcomings of the CARES Act, and he also stated after Senate approval of the interim package (discussed above) that he will not agree to approving the next bill by unanimous consent in the Senate.  He said, “We need to see how things are working, see what needs to be corrected, and I do think that the next time we pass a coronavirus rescue bill we need to have everyone here and everyone engaged.”

Speaker Pelosi has scaled back her early discussions about a major economic stimulus package focusing instead on building on the CARES Act by looking at additional direct payments to individuals, extending the availability of unemployment insurance benefits, providing additional money to state and local governments,  and directing more money to hospitals and health care workers.  She may be willing to defer issues such as infrastructure, a repeal or suspension of the state and local tax (SALT) deduction limit, and bigger write-offs for business meals and entertainment.

Democrats have stated that they want to include money to fund state vote-by-mail efforts, but there is significant opposition from Republicans on this issue, who believe that the states rather than the federal government should handle this issue.  The President has also voiced his opposition.

The first three bills were bipartisan efforts driven by the need to address the COVID-19 crisis quickly with the Speaker describing them as emergency and mitigation legislation.  The 4th Bill may be the subject of a more traditional partisan debate in both the House and the Senate and represent a “recovery” effort.   Republicans are not willing to sign on to the position that another bill is needed immediately, but instead would like to wait and see the effects of the already-enacted legislation and allow the implementation to proceed first.

White House Proposals

White House officials have discussed some of their own ideas for new recovery proposals including a payroll tax cut, a capital gains cut, expansion of the deductibility of business meals and entertainment, creating 50-year Treasury bonds to lock in low interest rates, fiscal aid to state and local governments, and a waiver that would clear businesses of liability from employees who contract the coronavirus on the job.  The President has also supported including an infrastructure package in a 4th Bill in some of his public comments in alignment with House Democrats, but collaboration on this issue has fallen apart in the past due to the challenges of figuring out how to pay for the proposals and the lack of enthusiasm on the part of Senate Republicans.

Take Responsibility for Workers and Families Act – Democratic Proposal

Prior to Senate passage of the CARES Act, Speaker Pelosi released the Take Responsibility for Workers and Families Act, which provides information on the priorities of House Democrats.  The package is based on submissions from the chairs of all relevant House committees.

Here is a list of some of the areas included:

  • Health care, including additional funding for hospitals and other providers (including rural providers), telehealth expansion, and enhanced federal Medicaid payments to states;
  • Emergency Health and Safety Regulations;
  • Expansion of Family and Medical Leave;
  • Transportation and Infrastructure issues including issues contained in the 5-year $760 billion infrastructure framework released earlier this year and other issues such as Buy America protections, increased rural broadband, and clean water infrastructure;
  • Telecommunication provisions;
  • Elections Security and Assistance including remote voting options/vote-by-mail;
  • Direct relief for individuals including increased direct cash payments;
  • Expansion of Refundable Tax Credits not included in the CARES Act (e.g. the Earned Income Tax Credit (EITC), Child Tax Credit (CTC), and the Child & Dependent Care Tax Credit (CDCTC));
  • State and local aid

Tax-Writing Committee Issues – Senate Finance Committee & the House Ways & Means Committee

  • Small business tax proposals: Both parties are considering additional tax proposals to give relief to small businesses covering issues such as expediting tax refunds, easing IRS deadlines, and providing incentives to cover basic needs like rent and mortgage payments.  Many members have said they want to see how some of the already enacted incentives like the Employee Retention Tax Credit are working before they move ahead on other ideas.
  • Tax extenders: A 4th Bill could possibly become a vehicle for dozens of individual and business tax provisions that expire in 2020 including credits for craft alcoholic beverages, electric vehicles, coal production and carbon sequestration, although these issues are unrelated to the COVID-19 issues.
  • Democrats may want to reconsider one tax provision in the CARES Act that loosened rules for pass-throughs with respect to net operating losses (NOLs), because of the data that shows that the benefit of this provision largely goes to wealthy taxpayers.
  • Proposals to assist seniors including:
    • Expansion of the temporary provision in the CARES Act that suspends for 2020 the requirement for people to take minimum distributions from qualified retirement accounts starting at age 72
    • Provide more flexibility for withdrawals of loans from qualified retirement accounts
    • Ease restrictions on outside earnings of Social Security recipients
    • Assistance for multiemployer pension plans

IRS Guidance

163(j) – Business Interest Expense

On April 10th, the IRS issued Revenue Procedure 2020-22, which provides guidance under IRC § 163(j) related to elections to be a real property or farming trade or business under the CARES Act.  This guidance also instructs on the procedure for making three elections under § 2306 of the CARES Act relating to the IRC § 163(j) limitation, including: (i) an election out of the increased § 163(j) limitation; (ii) an election to use the taxpayer’s 2019 adjusted taxable income (ATI) to calculate the limitation for 2020; and (iii) an election out of special rules for partnerships.

The IRS is still planning to issue final as well as additional proposed regulations under § 163(j) on the broader implementation of changes enacted as part of the Tax Cuts & Jobs Act (TCJA).  In December 2018, the IRS and Treasury issued proposed regulations which have not yet been finalized.  The revenue procedure states that it was issued because immediate transition guidance was needed for taxpayers who are affected by the provisions of the CARES Act.

TCJA and CARES Act provision:  The TCJA generally limited the deduction for business interest expense to the taxpayer’s business interest income plus a threshold amount of 30 percent of ATI. The CARES Act increases the 30% ATI limitation to 50% for tax years beginning in 2019 and 2020 for all businesses except part­nerships which have a special rule in 2019. The CARES Act also allows all taxpayers (including partnerships) to elect to use their 2019 ATI for the 2020 limitation.

A special rule excludes partnerships from the increased limitation based on 50% of ATI in tax year 2019. Instead, in 2020, partners may deduct 50% of their distributive share of the partnership’s excess business interest carried forward from 2019 without regard to the § 163(j) limitation.  The remaining 50% of the excess business interest from 2019 is included with 2020 business interest and subject to the increased limitation based on 50% of ATI.

The combined benefits from the new temporary 50% threshold and the ability to use 2019 ATI to compute the limitation in 2020 should increase interest deductions in 2019 and 2020 for taxpayers otherwise limited by § 163(j). These deductions may create or increase NOLs in 2019 or 2020 that now may be carried back to the previous 5 tax years.

IRS guidance:

Electing Real Property or Farming Business:  The guidance provides not only an extension of time for taxpayers to file an election to be treated as an electing real property or farming business for the 2018, 2019 and 2020 taxable years, but it also provides an opportunity for certain taxpayers to withdraw prior elections made to be treated as an electing real property or farming business.  When the TCJA was passed, certain companies elected to be treated as a real property or farming business with the benefit being the exclusion from the business interest deduction limitation of § 163(j).  The cost of the election, however, was the requirement to use ADS depreciation, which has longer recovery periods than MACRS depreciation and does not allow bonus depreciation.  With the technical correction for QIP (discussed below), bonus depreciation is now available on a broader range of assets, so taxpayers may want to reconsider those decisions.

Time and Manner for Making Elections: The IRS explains that this guidance “allows certain taxpayers to make a late election, or to withdraw an election, under Section 163(j)(7)(B) or 163(j)(7)(C), as applicable, on an amended Federal income tax return, an amended Form 1065, or an administrative adjustment request under Section 6227 of the Code.”

The revenue procedure outlines when and how certain elections can be made:

  • Election out of the 50 % ATI limitation for taxable years beginning in 2019 and 2020;
  • Election to use the taxpayer’s ATI for the last taxable year beginning in 2019 to calculate the taxpayer’s § 163(j) limitation for taxable year 2020;
  • Election out of deducting 50% of excess business interest expense (EBIE) for taxable years beginning in 2020 without limitation.

Depreciation for Qualified Improvement Property

On April 17th, the IRS issued Revenue Procedure 2020-25, which provides guidance related to the technical correction to the TCJA in the CARES Act clarifying that qualified improvement property (QIP) is classified as 15-year property.  The so-called “retail glitch” allows businesses to immediately expense the costs of most renovations to the interior portion of a nonresidential building.  An unintended provision in the TCJA had subjected such expenses to a 39-year recovery period rather than bonus depreciation.

The guidance instructs a taxpayer on how to change its depreciation under § 168 for QIP placed in service by the taxpayer after December 31, 2017, and before January 1, 2023.  The guidance clarifies that only improvements made by taxpayers themselves will qualify for the QIP provision meaning that the owner cannot benefit from bonus depreciation associated with improvements made by a previous owner of the property.

The guidance also allows taxpayers to make a late election, or to revoke or withdraw an election, under IRC Sections 168(g)(7), (k)(5), (k)(7), or (k)(10) for the taxpayer’s 2018, 2019, or 2020 taxable year.

Currently, taxpayers must file amended returns to get access to the refunds that could result from this change.  Industry representatives are lobbying Congress to allow retailers to file Form 1139, Corporation Application for Tentative Refund, to get the refunds.  Thus far, only claims allowed under the CARES Act relating to net operating losses (NOLs) and alternative minimum tax credits can be done through Forms 1139 and 1045, which now can be faxed to the IRS and are processed faster than amended returns.

Deferral of Payroll Tax Payments

On April 10th, the IRS issued guidance on the deferral of employment tax deposits and payments.  Under the CARES Act, employers and self-employed individuals can defer the employer share of the Social Security payroll tax through the end of 2020.  Deferred taxes are to be paid in two installments: the first by December 31, 2021, and the second by December 31, 2022.

This guidance was issued as 11 Q&As on the IRS website, and they will be updated and expanded periodically.

FATCA Information Returns Deadline

On April 16th, the IRS announced an extension for certain countries to report 2019 information under the Foreign Account Tax Compliance Act (FATCA).  The extension applies to countries that have signed information-sharing agreements with the US under the law, which requires financial institutions to report data such as the identity, address, and balance of US account holders to the US competent authority, or face withholding penalties for US currencies or bonds.  According to the guidance, Model 1 IGA jurisdictions now have a deadline of December 31, 2020 to provide their data for tax year 2019 to the US competent authority, although they are permitted to send the data prior to that deadline.

In March, the IRS extended the deadline for a Reporting Model 2 Foreign Financial Institution (FFI) or a Participating FFI to file FATCA Report (Form 8966) from March 31, 2020, to July 15, 2020.  Taxpayers do not have to file a Form 8809-I, Application for Extension of Time to File FATCA Form 8966, for this extension.  The IRS also issued a new FAQ on FATCA registration terminations.  Finally, the IRS Large Business & International (LB&I) Division issued a directive to its employees on procedures for FATCA certification event of default notices.

Residency for Travelers Disrupted by COVID-19

On April 21st, the IRS issued two revenue procedures that provide guidance for certain individuals and businesses who usually live and work outside the US but can’t leave the country because of travel disruptions due to COVID-19, and for US citizens who are based in a foreign country but left that jurisdiction due to the global spread of the virus. The IRS also issued new FAQ guidance for foreign businesses, stating that foreign individuals who don’t usually work in the US likely won’t trigger a taxable presence for their employers if they must stay in the US due to travel restrictions.

Revenue Procedure 2020-20 provides relief to certain nonresident individuals who, but for COVID-19 Emergency Travel Disruptions, would not have been in the United States long enough during 2020 to be considered resident aliens under the “substantial presence test” (“SPT”) or to be ineligible for treaty benefits on services income.  With respect to the relief provided under the SPT, this revenue procedure establishes procedures to apply the SPT’s medical condition exception to exclude up to 60 consecutive days spent in the United States during a time period starting on or after February 1, 2020 and on or before April 1, with the specific start date to be chosen by each individual (the “COVID-19 Emergency Period”).  It also provides procedures for an individual to exclude those days of presence in order to claim benefits under an income tax treaty with respect to services income.

Revenue Procedure 2020-27 provides that the Secretary of the Treasury has determined that the global health emergency caused by the outbreak of COVID-19 is an adverse condition that precludes the normal conduct of business globally.  Therefore, relief is being provided to any individual that reasonably expected to become a “qualified individual” for purposes of claiming the foreign earned income exclusion under IRC § 911 but left the foreign jurisdiction during the period described in the revenue procedure. 

90-Day Extension on the Payment of Certain Duties

The President signed an Executive Order that gives importers who have “suffered significant financial hardship” a 90-day extension on the payment of certain duties, taxes and fees.  The order, however, applies only to so-call most-favored national tariffs, which are codified in the standard US tariff schedule.  The 90-day exemption does not apply to anti-dumping and countervailing duties or to the national security duties on steel and aluminum.  In order to qualify, importers must show that their operations were fully or partially suspended in March or April due to lockdown orders resulting from COVID-19.

Relief Fund for State, Local, and Tribal Governments

Through the $150 billion Coronavirus Relief Fund (Fund), the CARES Act provides for payments to State, Local, and Tribal governments dealing with the impact of the COVID-19 crisis.  Treasury will make payments from the Fund to States and eligible units of local government; the District of Columbia, US Territories, and Tribal governments.

The CARES Act requires that the payments only be used to cover expenses that:

  • Are necessary expenditures incurred due to the public health emergency with respect to COVID-19;
  • Were not accounted for in the budget most recently approved as of March 27, 2020 (enactment date for the CARES Act) for the State or government; and
  • Were incurred during the period that begins on March 1, 2020 and ends on December 30, 2020.

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True Partners will continue to monitor jurisdictional updates and intends to release further True Alerts as additional information becomes available.  True Partners Consulting LLC assumes no responsibility for updating this summary with any future changes made by any jurisdiction(s).  As information may change rapidly in the current environment, relevant jurisdictional statutes and websites should be reviewed at the time of reporting to determine the current and relevant application of information and requirements to your company’s specific facts.