Yesterday, House Democrats released the initial bill text of the HEROES Act, their version of the Phase 4 COVID-19 bill. The bill text, which spans 1,815 pages and provides a $3 trillion coronavirus relief package, includes proposed revisions to many of the tax provisions of the Families First Coronavirus Response Act (the “FFCRA”) and the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), as well as entirely new provisions. Senate Republicans have said that the bill, as drafted, is “dead on arrival” at the Senate as the bill does not include provisions that Republicans have identified as “must haves” and contains non-COVID-19 related provisions. Nonetheless, we thought it would be helpful to provide a high-level summary of some of the more notable proposed changes as it may help provide insight into the potential scope of the Phase 4 COVID-19 bill.

Net Operating Loss Carryback and 461(l)

• The ability to carry back a net operating loss (NOL), which was provided for a limited time in the CARES Act, is proposed to be significantly modified and limited. Under the HEROES Act, only an NOL arising in a taxable year beginning after December 31, 2018, and before January 1, 2021 can be carried back, and it cannot be carried back to any taxable year beginning before January 1, 2018. Additionally, the ability to carry back losses is subject to limitations similar to the limitations the House Democrats proposed in their version of the Phase 3 COVID-19 bill (discussed in detail here).
• Section 461(l), which limits noncorporate taxpayers’ use of excess business losses to offset nonbusiness income, was suspended by the CARES Act for 2018-2020, but is proposed to be retroactively reinstated to apply to all taxable years beginning after December 31, 2017.

Deductibility of Expenses Associated with PPP Loans

• In Notice 2020-32, the IRS “clarified” that a taxpayer is not allowed a deduction for an otherwise deductible expense, the payment of which results in forgiveness of a Paycheck Protection Program (PPP) loan (which by law does not result in gross income).  
• The HEROES Act overturns Notice 2020-32 and provides that a taxpayer is allowed a deduction for such expenses, as well as any other expenses that might have been disallowed as related to the tax-exempt debt forgiveness.

Payroll Provisions

• It is proposed that taxpayers that receive PPP forgiveness continue to be eligible for the deferral of the employer’s portion of Social Security taxes.
• The employee retention credit (ERC), which was provided in the CARES Act (and discussed in greater detail here) is proposed to be significantly broadened.  There are numerous proposed changes, including:
  • Allowing a taxpayer that receives a PPP loan continued qualification for the ERC;
  • Increasing the amount of qualified wages that can be paid to an employee and the percentage of such wages that are eligible for the ERC;
  • Clarifying that qualified group health plan expenses can be treated as qualified wages even if no other wages are paid to an employee (in line with a recent change to the IRS FAQs);
  • Expanding the scope of employers that are eligible for the ERC for all wages paid during a period in which the employer’s trade or business is fully or partially suspended due to a governmental order or has a significant decline in gross receipts during a governmental shutdown or calendar quarter with significantly lower gross receipts; and
  • Providing a phased-in partial credit for employers whose gross receipts declined by 10% to 50% from the previous year.
• Several new payroll tax credits are proposed to be added, including:
  • A 30% refundable tax credit for expenses reimbursed or paid for the benefit of an employee for reasonable and necessary personal, family, living, or funeral expenses incurred as a result of COVID-19;
  • A 50% refundable payroll tax credit for qualified fixed costs of smaller employers; and
  • A 90% refundable individual income tax credit for certain self-employed individuals who have experienced a significant loss of income.
• The payroll tax credits for paid sick leave and emergency family and medical leave under the FFCRA are extended through the end of 2021 and increased .

Proposed Changes for Individuals

• Providing another round of economic recovery payments. 
• Eliminating the limitation on the deduction for state and local taxes for taxable years beginning on or after January 1, 2020 and on or before December 31, 2021. 
• Expanding the earned income tax credit and refundability of the child tax credit.

A&M Taxand Says

The discussion above covers only some of the tax-related provisions of the proposed HEROES Act. We felt it was important to highlight some of the more significant provisions to help clients find ways to maximize liquidity and benefit from the application of the COVID-19 laws. As highlighted by the proposed HEROES Act, the law remains in flux and it is imperative that clients work with their trusted advisors to navigate the landscape during this uncertain time. A&M will continue to monitor the evolving approach to COVID-19 relief on Capitol Hill and within the Administration, and will provide timely updates on new developments, which will be found here.