Tax Issues Addressed by COVID-19 Emergency Legislation and Government Proposals
In response to the COVID-19 crisis, government officials in Washington DC have taken a number of actions related to the economic effects of the crisis including legislation, regulatory action, and government agency action. The immediate focus has been on immediate, “crisis-specific” proposals, but there will also be discussion of longer-term actions that will be necessary to deal with the economic consequences of the virus crisis.
Prior to the crisis, it was expected that 2020 would be a relatively quiet year with respect to tax issues in light of the November Presidential and Congressional elections. Now that tax issues will be considered as part of any future stimulus package, the other tax issues that are outstanding, such as tax extenders, technical corrections, additional retirement legislation, green energy, expansion of the Earned Income Tax Credit (EITC), and infrastructure legislation, may be included in discussions on tax legislation.
The November elections will have a significant impact on whether any unfinished tax business is dealt with in a lame-duck session and what the tax agenda will be in early 2021. The COVID-19 crisis has already had an impact on the elections by delaying some primaries, and the potential impact on voting in November is uncertain as well as the party conventions and debates.
IRS Defers Federal Tax Payment and Filing Date for 90 days
In Notice 2020-17, the IRS announced that individuals can defer tax payments up to $1 million for 90 days and corporations can defer tax payments up to $10 million for the same period. The $1 million limit is intended to cover small businesses and pass-through entities.
In an announcement on March 20th, Treasury Secretary Mnuchin said that the IRS would also delay the tax filing deadline until July 15, 2020, stating “All taxpayers and businesses will have this additional time to file and make payments without interest or penalties.” An IRS official announcement and guidance is expected to be released soon that will hopefully clarify the status of estimated payments and rules on the normal 6-month extension. Secretary Mnuchin encouraged those taxpayers who expect a refund to file by the April 15th date.
Interest and penalties on deferred payments up to the applicable limitation will begin to accrue on July 16, 2020. However, interest and penalties for amounts exceeding the applicable limitations will begin to accrue on April 16, 2020.
Treasury Secretary Mnuchin stated that the deferred tax payment estimated at $300 billion was intended to provide “an enormous amount of liquidity in the system.” The Treasury Department and IRS utilized the full power of the Stafford Act (which was triggered by the President’s declaration of a COVID-19 national emergency) to provide payment extensions to business and individual taxpayers and could cover filing extensions should the Treasury Department decide to implement them.
Congressional Action – Economic Relief
To date, Congress has currently passed two pieces of legislation designed to address the economic effects of the global coronavirus outbreak, and a third bill is under consideration. Several members of Congress have now either tested positive for the virus or are self-quarantining after contact, which may complicate voting on additional legislation. The possibility of allowing remote voting by members of Congress is being explored, but there could be challenges to allowing that procedure.
COVID-19 Funding Bill
An $8.3 billion COVID-19 public health funding bill was enacted on March 6th. This bill included funding for response efforts at the Department of Health and Human Services, the US Agency for International Development, the State Department, and the Small Business Administration, and it covered the development of a new vaccine.
Families First Coronavirus Response Act (HR 6021)
The Families First Coronavirus Response Act (HR 6201)(“Response Act”) was signed into law by President Trump on March 19th after passage in the Senate by a vote of 90 to 8 and a vote in the House of 363 to 40.
The Joint Committee on Taxation has estimated the cost of the business tax credits included in the bill at $104.9 billion for 2020 and 2021. This legislation was written as emergency spending, and it does not include spending or tax offsets. It is possible that additional economic relief legislation will also not be paid for, which means that the federal deficit continues to increase.
The Response Act does the following:
- Guarantees free coronavirus testing to anyone who has doctor approval for a test and provides funding for the COVID-19 medical tests
- Provides for new refundable business tax credits for certain mandated employer-provided paid sick leave and paid family and medical leave
- Provides funding for expanded unemployment compensation and food assistance for certain individuals
- Mandates two weeks (10 days) of paid sick leave for most employees and three months of paid emergency family and medical leave (covering at least two-thirds of an employee’s wages) throughout the coronavirus crisis
- Provides more than $1 billion in nutrition aid
- Allows closed schools to continue providing free and reduced-cost meals to eligible students
- Adds flexibility for the food stamp program
- Increases the portion of Medicaid spending paid by the federal government (as opposed to the states)
Business Tax Credits
Under the legislation, 100% refundable tax credits are provided to private-sector employers with fewer than 500 employees that are required to provide paid sick leave and paid family leave benefits.
The credit for employers with fewer than 500 employees would be claimed against the employer-share of payroll tax liability, with any excess refunded to the employer. Payments to employees would be taxable income to the employees and subject to employee payroll taxes, but not subject to the employer portion of payroll taxes. There are special rules for certain credit limitations and the refundability of certain excess credit amounts.
The employer must include the amount of the tax credits as taxable income, but employers have the right to waive the tax credits. The new business tax credits are effective only for qualifying wages paid during a period beginning on a date to be selected by the Treasury Secretary, which is during the 15-day period beginning on the date of enactment and ending on December 31, 2020.
Before sending the legislation to the Senate, the House approved technical corrections to the original approved bill that included modifications to certain provisions on a new business tax credit for certain employers with fewer than 500 employees to provide paid sick leave and paid family and medical leave through the end of 2020.
The technical corrections bill included the following:
- Provides an option for employers with fewer than 50 employees to be exempted if the requirement to provide paid sick leave or paid family leave would jeopardize the going concern of the business. The original version of the legislation would have permitted an exemption only from the paid family leave requirement for such employers.
- Revised the definition of payroll taxes eligible to be offset by the new business credits to include payroll taxes paid by railroad workers under the Railroad Retirement Tax Act (such employees are exempt from Social Security payroll taxes).
The Joint Committee on Taxation released a technical explanation of the new business tax credits, but this document does not address several key issues including the definition of covered employers, the applicability of the legislation’s mandates, and eligibility for the refundable credits. It is expected that these issues will be addressed when Treasury issues regulations pursuant to the legislation.
The legislation does not define how to apply the 500-employee threshold, specifically whether it is applied on a separate entity basis or whether an integrated employer test is used. Also, it is unclear whether the test will be applied on a specific date in time or as an average headcount over a period of time.
With respect to Health Savings Accounts (HSAs), the IRS did provide guidance that these plans could provide coverage for testing and treatment, but some tax professionals have suggested that more clarity is needed on the definition of treatment.
Additional Economic Stimulus Legislation – “Phase 3”
On March 19th, Senate GOP leaders released the legislative text of a bill called the “Coronavirus Aid, Relief, and Economic Security Act” (CARES Act), which provides economic support for businesses and workers affected by the coronavirus. Senate Majority Leader McConnell (R-KY) stated that this legislation will not be the last economic package Congress will consider as they will next turn to the “bipartisan appropriations process.”
A Treasury memorandum that has been made public includes proposals for a $1 trillion stimulus plan, many of which are covered in the new Senate bill. Senate Majority Leader McConnell has been working with the White House on this package, and he now plans to consult with Senate Democrats to develop a bipartisan package.
After release of this bill, House Speaker Pelosi (D-CA) and Senate Democratic Leader Schumer (D-NY) issued a joint statement that said they “look forward to working in a bipartisan way to deliver for the American people as soon as humanly possible,” but they will undoubtedly be looking to make changes to this proposal.
The Majority Leader has stated that the Senate will remain in session until this third bill is passed. The House is currently in recess and scheduled to return on March 23rd.
Despite the fact that the intention is to move this bill quickly, it is likely there will be changes to it as negotiations begin. Since it is tax policy bill, the House is constitutionally mandated to act first, unless a procedural maneuver becomes possible without violating the Constitution.
The bill covers, in part, the following issues:
- Delay of estimated tax payments for corporations
- Delay of payment of employer payroll taxes
- Net operating losses (NOLs) – carryback allowed
- Relaxation of excess business loss rules
- Enhanced refundability of previously generated AMT credit
- Enhanced interest deductibility
- Technical amendments to the TCJA for qualified improvement property, NOLS, repatriation tax, and downward attribution
- Aviation excise taxes
Proposals for Individuals
- Direct cash relief to individual taxpayers in the form of “recovery rebate” checks
- $1200 for single taxpayers and $2400 for joint filers with an additional $500 for each child
- Relief amounts begin to phase out when adjusted gross income (AGI) exceeds $75,000 for single taxpayers and $150,000 for joint filers with payments reduced by $5 for each $100 by which a taxpayer’s AGI exceeds the phase-out threshold up to $99,000 of AGI for single taxpayers and $198,000 for joint filers
- AGI will be based on the 2018 federal tax return
- Taxpayers with little or no income tax liability, but at least $2500 of qualifying income, would be eligible for a minimum rebate check of $600 ($1200 joint). Qualifying income includes earned income as well as Social Security retirement benefits and certain compensation and pension benefits paid to veterans.
- Delayed tax filing deadline to July 15th to align with the delayed payment due date
- Estimated tax payments postponed until October 15th (beyond the delay to July 15th already provided for in IRS Notice 2020-17) with no cap on the amount of tax payments postponed
- Increased access to retirement funds
- Waiver of the 10% early withdrawal penalty for distributions up to $100,000 related to the coronavirus
- Income tax on the distributions would be payable over 3 years and withdrawn amounts could be recontributed within the 3 years without regard to that year’s contribution cap
- Relaxes the rules for loans from retirement plans for qualified relief
- There are specific rules defining a coronavirus-related distribution
- Expanded rules for charitable deductions
- The 50% of AGI limitation would be suspended for 2020 for individuals
- For corporations, the 10% limitation would be increased to 25% of taxable income
- Limit on deductions for contributions of food inventory would be increased from 15% to 25%.
- Allows a partial above-the-line deduction of up to $300 for nonitemizers who make charitable contributions in 2020
- Health care related tax provisions – expands the flexibility of various tax-preferred health care savings vehicles that are linked to high-deductible insurance plans
Senate Democratic Leader Schumer (D-NY) released a $750 billion package of Democratic economic relief proposals on March 17th. This package includes:
- $400 billion in emergency appropriations for a range of COVID-19 relief measures, including supporting public health agencies and programs, funding for medical services and equipment, child care costs for families affected by school and daycare closures (especially for health care workers), and expanding broadband Internet access
- $300 billion in benefit increases and measures intended to improve federal safety net programs including enhancing unemployment insurance benefits (beyond what has already just been enacted), providing relief to student loan borrowers, and providing immediate loan forbearance for federally backed mortgages
- Calls for employers receiving federal assistance to provide a $15 minimum wage and proposes that such employers should be subject to “strict requirements to keep workers in their jobs and not cut their benefits”
Some Senate Democrats have also called for limits on executive bonuses and stock buybacks for companies receiving federal assistance.
Democratic support will be needed to pass this 3rd bill in order to clear procedural hurdles in the Senate such as the filibuster.
Additional House proposals
House Speaker Pelosi (D-CA) released a statement that the House Democrats are also working on additional proposals for another stimulus package with issues collected from a number of different House committees. Their package could cover the following issues:
- Expanded unemployment insurance payments
- Expanded Medicaid coverage
- Relief for homeowners and renters
- Additional food security proposals
- Expansion of the refundable paid-leave tax credits to address the needs of self-employed individuals, workers in the gig economy, and others with nontraditional employment arrangements
- Ensuring that sick workers can access long term leave if short- and medium-term leave is exhausted
- Expanding the scope of allowable uses of family and medical leave
- Assistance for the airline industry
The Administration proposals include:
- $50 billion appropriation to the Exchange Stabilization Fund to provide secured loans or loan guarantees to US passenger and cargo air carriers and $150 billion in secured loans “to assist other critical sectors of the US economy experiencing severe financial distress due to the COVID-10 outbreak”; passenger and cargo air carriers would have to put up collateral and agree to continue a level of service while accepting limits on raises for executives until the loans were repaid
- $500 billion for “economic impact” payments (i.e., two equal rounds of direct payments to individuals, based on income and family size, to be issued beginning April 6 and May 18). There has been discussion that subjecting these payments to restrictions will delay the payments, so an alternative proposal is to send the checks to all taxpayers and then claw back the payment for those who pay at the top rate in the 2021 tax season. Treasury is working on a plan to deliver the money to taxpayers by direct deposit when possible.
- $300 billion for creation of a small business interruption loan program covering businesses with up to 500 employees. This would cover up to six weeks of total payroll expenses with a maximum of $1540 per employee per week. Companies who take the loans would have to keep paying all employees for at least eight weeks after receiving the loans.
- Stabilization of the money market mutual fund industry by temporarily suspending the statutory limitation on the use of the Exchange Stabilization Fund for guarantee programs for the US money market mutual fund industry
There is no inclusion of a payroll tax holiday, and it appears that the direct cash payments are intended to have replaced that idea. That program will be administered by the IRS and the Bureau of the Fiscal Service. It is unclear how long it would take for the government to determine the amount a taxpayer would be entitled to based on income and family size and then process the checks.
Additional Future Economic Relief Legislation
Senate Majority Leader McConnell announced the formation of three Republican task forces to develop specific stimulus proposals. They include:
- Small business liquidity (led by Small Business Committee Chairman Rubio (R-FL), and Banking Committee Chairman Crapo (R-ID);
- Financial assistance to individuals and businesses (led by Finance Committee Chairman Grassley (R-IA);
- Aviation assistance (led by Commerce Committee Chairman Wicker (R-MS)
OMB Supplemental Budget Request
The Office of Management and Budget sent a supplemental budget request to Congress that asks for an increase in appropriations for federal departments and agencies of more than $48 billion to “ensure that resource needs created by the pandemic response are met.” Additional funding would go to the Department of Health and Human Services and the Centers for Disease Control. This request includes an additional $241 million for the IRS “to improve taxpayer services for the extended filing season and new tax credit questions, provide taxpayers with new forms and information online for new credits, implement a manual process for the proposed paid-leave tax credit, and enhance IRS information technology capacity to respond and interact with taxpayers.”
What is the Tax Legislative Landscape Now for 2020 and Beyond?
The COVID-19 crisis has fundamentally changed the tax legislative landscape for 2020 with the legislation already enacted and additional proposals likely to be considered as part of additional economic stimulus packages. The ability of the two parties to work in a bipartisan manner on crisis legislation may allow for the potential of additional tax legislation, but that is not a given either.
Taxpayers will have to stay engaged and knowledgeable about what proposals are advancing in Congress and with respect to the Treasury Department in order to address risks and take advantage of opportunities.
Any issues not completed prior to the November elections could be dealt with in a lame-duck session or be part of the new agenda in 2021.