The HEROES Act Proposes Changes to the CARES Act, the Families First Act and the TCJA and Suggests New Business Tax Provisions

On May 15, 2020, the House of Representatives (the “House”) passed the Health and Economic Recovery Omnibus Emergency Solutions Act, H.R. 6800 (the “HEROES Act” or “Bill”).  Although the Bill was passed only four days after being introduced in the House, its future in the Senate is uncertain given the critical Republican response to the Bill.  On May 14, 2020, Senate Majority Leader Mitch McConnell spoke out against the Bill on the Senate floor calling it a “totally unserious effort.”  In addition, the White House has published a Statement of Administrative Policy stating that the “Administration cannot support H.R. 6800 as currently drafted” and “[i]f H.R. 6800 were presented to the President, his advisors would recommend that he veto the bill.”

The HEROES Act proposes a number of changes to tax provisions enacted by the Coronavirus Aid, Relief, and Economic Security Act, Pub. L. 116-136, 134 Stat. 281 (the “CARES Act”), the Families First Coronavirus Response Act, Pub. L. 116-127 (the “Families First Act”), and 2017 Tax Cuts & Jobs Act (the “TCJA”) and suggests a few new business tax provisions, as summarized below.

Changes to the Tax Provisions in the CARES Act, the Families First Act, and the TCJA

• Limits Net Operating Loss Carrybacks. The CARES Act allows taxpayers to carry back net operating losses (“NOLs”) arising in 2018 – 2020 to the five prior tax years preceding the year of the loss and permits using those NOLs to fully offset taxable income in a tax year beginning before January 1, 2021.  These rules modified the NOL provisions in the TCJA, which provided that NOLs arising in tax years beginning after December 31, 2017 could not be carried back to prior tax years and could only be used to offset 80 percent of taxable income for a given year.

The HEROES Act would limit the application of the NOL provisions in the CARES Act.  If enacted, the HEROES Act would disallow NOL carrybacks to any tax year beginning before January 1, 2018.  This change would limit the value of NOLs that benefit from the CARES Act provisions because it would prevent a taxpayer from carrying back NOLs to offset income that was taxable at the top corporate tax rate of 35 percent.  In addition, the Bill would completely disallow NOL carrybacks for certain taxpayers, including taxpayers with excessive stock buybacks and dividends, taxpayers subject to limitations under Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”) (i.e., limits related to certain employee wages that exceed $1 million) and taxpayers subject to limitations under Code Section 280G (i.e., limits related to “golden parachute” payments to certain executives and other individuals).  However, a taxpayer would still be permitted to use NOLs to fully offset taxable income in a 2018, 2019, or 2020 tax year.

• Removes the Temporary Excess Businesses Loss Limitation Suspension. The CARES Act suspended the “excess business loss” limitation that the TCJA imposed on noncorporate taxpayers for tax years 2018, 2019, and 2020.  The TCJA disallowed any excess business losses of noncorporate taxpayers (e., losses that exceed a taxpayer’s business income) if the amount of the excess loss exceeds $250,000 ($500,000 for a joint return).  The CARES Act retroactively removes the prohibition on excess business loss deductions for the 2018 and 2019 tax years and provides that such prohibition only applies for tax years beginning after December 31, 2020.

The HEROES Act would retroactively reverse the CARES Act temporary suspension of the excess business loss limitation.  In addition, the Bill would make the excess business loss limitation permanent (instead of allowing it to sunset after 2025, as provided in the TCJA).

• Expands the Employee Retention Tax Credit. The CARES Act created an employee retention tax credit for a taxpayer that suspended a trade or business (partially or fully) due to a governmental order or whose gross receipts declined by more than 50 percent when compared to the same quarter of the prior year.  The tax credit is equal to 50 percent of up to $10,000 in “qualified wages” paid per employee in the calendar year (with certain limitations for employers with more than 100 full-time employees).  

The HEROES Act would expand the CARES Act employee retention credit through a few retroactive amendments.  It would increase the employee retention tax credit to 80 percent of up to $15,000 in “qualified wages” paid per employee per quarter (up to $45,000 annually per employee).  In addition, it would increase the employer limitation threshold for the credit from 100 full-time employees to employers with 1,500 full-time employees and gross receipts of more than $41.5 million during 2019.  The Bill also would create a partial employee retention credit available to taxpayers whose gross receipts declined between 10 percent and 50 percent compared to the same quarter of the prior year.

• Expands the Paycheck Protection Program. The CARES Act allows a taxpayer to apply for a Paycheck Protection Program (“PPP”) loan, which is eligible for loan forgiveness to the extent the loan is used for certain expenses (g., payroll costs, interest on mortgage obligations, rent and utilities) (“covered expenses”) during an eight week period beginning on the loan’s origination date.  Under the CARES Act, a taxpayer may defer payment of the employer-side Social Security payroll tax for wages paid from the date of enactment until December 31, 2020 or, if earlier, the date during 2020 that a PPP loan is forgiven.  As explained in a separate Client Alert, the Internal Revenue Service (“IRS”) and Congress currently disagree regarding the deductibility of expenses funded by a forgiven PPP loan where the income associated with such loan forgiveness is excluded from gross income. 

The HEROES Act would make a number of changes to enhance the tax benefits of the PPP.  The Bill would clarify that a taxpayer is eligible to defer payment of employer-side Social Security payroll taxes even if its PPP loan is ultimately forgiven.  In addition, the Bill would expand “covered expenses” that can give rise to PPP loan forgiveness to include certain interest on debts incurred prior to the PPP covered period and expenses of providing personal protective equipment to employees.  The HEROES Act also would confirm the deductibility of expenses funded by a forgiven PPP loan (overruling IRS Notice 2020-32, which concludes that such expenses are not deductible), as well as expenses funded by certain other CARES Act grant and loan programs.

• Expands Paid Sick and Family Leave and Related Tax Credits. The Families First Act requires employers with fewer than 500 employees to provide paid sick leave for COVID-19 related reasons until December 31, 2020 and includes payroll tax credits to help employers absorb the cost of providing sick leave.  Similarly, the Families First Act requires such employers to provide 12 weeks of paid family leave for COVID-19 related reasons until December 31, 2020 and includes payroll tax credits to help employers absorb that cost. 

The HEROES Act would expand the requirement to provide COVID-19 paid sick and family leave to all employers, regardless of size, until December 31, 2021.  The Bill would extend the related payroll tax credits until December 31, 2021, increase the amount of credit that could be claimed per employee, and make the credit available to wages paid by certain governmental employers.  However, the payroll tax credits would remain limited to employers with fewer than 500 employees (although this restriction would not apply to governmental employers).

• Temporary Repeal of Limitation on State and Local Tax Deduction. The TCJA limited the individual state and local tax deduction to $10,000 ($5,000 if married filing separately).  Prior to the TCJA, an individual taxpayer could deduct state and local taxes in full when calculating federal income tax liability.

The Bill would eliminate the limitation on the deduction for state and local taxes for 2020 and 2021.  This change would apply to taxes paid or accrued in tax years beginning after December 31, 2019.

New Proposed Business Tax Provisions in the HEROES Act

• Payroll Tax Credit for Certain Fixed Expenses of Employers Subject to Closure or Reduced Gross Receipts. The HEROES Act would create a new refundable payroll tax credit for certain employers equal to 50 percent of its “qualified fixed expenses” (g., mortgage, rent, and utility expenses within the meaning of the PPP provisions).  An employer would generally be eligible for the payroll tax credit if (a) it suspended a trade or business (partially or fully) due to a governmental order or if its gross receipts declined by more than 20 percent when compared to the same quarter of the prior year and (b) it has no more than 1,500 full-time employees or no more than $41.5 million in gross receipts in 2019.  The Bill would create a partial credit available to taxpayers whose gross receipts declined by 10 percent compared to the same quarter of the prior year.

The credit would apply against the employer-side Social Security payroll tax.  For each quarter, qualified fixed expenses eligible for the credit would be limited to the least of (1) qualified fixed expenses paid by the eligible employer in the same calendar quarter of calendar year 2019, (2) $50,000, or (3) the greater of 25 percent of “qualified wages” (as defined in the CARES Act provisions related to the employee retention credit) or 6.25 percent of 2019 gross receipts.

• Payroll Tax Credit for Certain COVID-19 Related Benefits Paid by Employer. The Bill would create a refundable payroll tax credit for certain employee expenses reimbursed or paid that are “qualified disaster relief payments” excludible from income under Code Section 139 (g., reasonable and necessary personal, family, living or funeral expenses) that the employer elects to treat as a “qualified pandemic-related employee benefit expense.”

The credit would apply against the employer-side Social Security payroll tax.  For each quarter, an employer would be eligible for a payroll tax credit equal to 50 percent of expenses paid for the benefit of essential employees and 30 percent in all other cases. The credit would be limited to $5,000 in benefits paid per employee per calendar quarter. 

• Business Interruption Credit for Self-Employed Individuals. The HEROES Act would create a refundable individual income tax credit to benefit certain self-employed individuals whose gross income from a self-employed trade or business is reduced by greater than 10 percent from 2019 to 2020.  The credit would apply against the taxpayer’s individual income tax and would be capped at $45,000 for a tax year.  The credit begins to phase out at $60,000 of adjusted gross income ($120,000 if married filing jointly) at a rate of $50 for every $100 of income.

Please reach out to us with any questions about the HEROES Act and its implications for the business tax provisions in the CARES Act and the TCJA.