Around 2 PM yesterday, the Senate failed a procedural vote regarding their lasted Phase 3 COVID-19 Bill (“Senate Bill”). Our alert discussing the Senate Bill can be found here. Less than an hour and a half later, the House Democrats released their bill, the Take Responsibility for Workers and Families Act (the “House Bill”). A little after midnight this morning, it was announced that a “deal” between the Democrats and the administration is very close. The final bill will reflect a compromise between the Senate’s Phase 3 bill and the House’s Phase 3 bill, so we highlighted some of the tax provisions included in the House Bill, as well as provisions of the Senate bill that are not included in the House Bill.
Due Date Extensions
Similar to the Senate’s original Phase 3 bill, the House bill proposes to extend the filing and payment deadline to July 15, 2020 and the due date for individual estimated tax payments for 2020 to October 15, 2020.
Although similar relief has been afforded by the IRS under Notice 2020-18, by changing the filing deadline, the House’s bill allows taxpayers to obtain a further 6-month extension by filing a Form 4868 or Form 7004.
NOL Carrybacks and Excess Business Losses
The approach taken with respect to NOL carrybacks in the House Bill is drastically different from the approach in the Senate Bill. Under the House Bill, a corporation may be able to carry its 2018 NOLs back 3 years, its 2019 NOLs back 4 years, and 2020 NOLs back five years. In other words, the House Bill does not allow any carrybacks beyond the 2015 taxable year.
Additionally, the House Bill provides two hurdles that corporations needs to overcome in order to be able to carryback NOLs.
- For taxable years ending after December 31, 2019, and beginning before January 1, 2021, neither the corporation nor any person related to the corporation can have a deduction disallowed by reason of section 162(m) (which limits the deduction for compensation of certain employees of a publicly held corporation to $1,000,000) or section 280G (which limits the deduction for golden parachute payments) (“Hurdle 1”). If this hurdle is failed, then the corporation cannot carryback any of its NOLs from 2018, 2019, or 2020.
- For the taxable year that gave rise to the NOL being carried back, neither the taxpayer corporation nor any corporation related to the taxpayer can have made aggregate distributions (including redemptions) in any taxable year ending after 2017 that exceed the sum of (i) the aggregate value of stock issued by the corporation after 2017 in exchange for money or property other than stock in such corporation and (ii) 5% of the FMV of the stock of the corporation as of the last day of the taxable year (Hurdle 2). For purposes of this hurdle, issuance of and distributions made with respect to plain vanilla preferred stock are disregarded. If this hurdle is failed for any taxable year, then the corporation cannot carryback its NOL for that taxable year.
It is noteworthy that for both Hurdle 1 and Hurdle 2, the corporation needs access to the confidential tax information and possibly confidential corporate information of all related parties in order to determine whether it can carryback its NOLs. As a result, the corporation must identify all related persons, which requires the application of attribution rules. The House Bill does not address the choice of relevant taxable years where a taxpayer and a related person have different taxable years.
Observations regarding Hurdle 1:
- If Hurdle 1 is not satisfied, then the corporation is not allowed to carryback any of its NOLs. However, Hurdle 1 cannot generally be applied before December 31, 2020 (or the time the corporation prepares its 2020 federal income tax return). As a result, it is unclear whether a taxpayer will be able to carryback 2018 and 2019 NOLs immediately upon enactment (assuming it has cleared Hurdle 2 with respect to those years), or if it must wait until after it prepares its 2020 tax federal income tax return to carryback its 2018 and 2019 NOLs. Obviously, this question has enormous significance for the effectiveness of the stimulus the bill is intended to provide.
- It is interesting to note that, as drafted, Hurdle 1 applies to a single taxable year (2020) if the taxpayer files on the basis of a calendar year, but applies to two different taxable years (2020 and 2021) if the corporation files on the basis of a fiscal year other than the calendar year.
Observations regarding Hurdle 2:
- In order to apply Hurdle 2, a corporation and its related persons must determine the amounts of their “distributions.” However, the House Bill does not define what constitutes a distribution, and so it may include tax-free stock distributions (e.g., a stock split or a spin-off). It is also unclear whether distributions include amounts that are characterized as dividends but are not typically viewed as distributions outside the tax context (e.g., boot provided in a reorganization exchange).
- In order to apply Hurdle 2, if a corporation or its related corporation made any distributions during the year in which the corporation’s NOL arose, then it will be necessary to determine the value of the distributing corporation’s stock at the end of the taxable year.
The House Bill also provides that an NOL carryback cannot be used to offset a section 965 inclusion. Finally, similar to the Senate Bill, the House Bill removes for taxable years beginning after 2017, and before 2021 the TCJA’s limitation on the use of NOLs to 80% of taxable income computed before the NOL deduction.
Individuals are entitled to a refundable credit
The House Bill provides for a one-time refundable credit on an individual’s 2020 tax return. The amount of the credit is equal to the sum of:
- $1,500 ($3,000 if married filing jointly), plus $1,500 for each qualifying child (not to exceed 3 children) (collectively, the “Base Amount”), and
- The excess (if any) of the taxpayer’s AGI for 2019 over the taxpayer’s AGI for 2020; or, if greater, and if the taxpayer’s 2020 household income does not exceed a phaseout amount,
- Five times the Base Amount plus $5,000.
- The credit is phased out based on adjusted gross income.
Payroll tax credits
The House Bill provides a refundable payroll tax credit to certain employers for 2020 with respect to wages paid to employees of an “inoperable trade or business” (a business whose gross receipts are less than 80% of the gross receipts from the same calendar quarter for the prior year). An employer is eligible if it conducted an active trade or business on January 31, 2020, became an inoperable trade or business after that date, employed no more than 1,500 full-time employees in 2019, and had no more than $41.5 million in gross receipts in 2019. The amount of the credit is generally equal to 80% of the wages paid to each employee in a calendar quarter, with a cap on the total amount of wages taken into account with respect to an employee being limited to $10,000 for all calendar quarters. The employer is eligible for the credit during the period that begins with the quarter in which the business became inoperable and ends in the quarter for which gross receipts are more than 90% of gross receipts for the same calendar quarter of the prior year.
The House Bill also amends the Emergency Family and Medical Leave (“FMLA”) and the paid sick leave and the associated payroll credits that were included in the Families First Coronavirus Response Act (discussed in detail in our past alert) by:
- Extending them to 2021,
- Eliminating the limitation that the FMLA and paid sick leave provisions only apply to employers with up to 500 employees (but the credits are only available to an employer with up to 500 employees), and
- Expanding the cap for and credit associated for leave taken by caregivers and others categories to $511 per day and $5,110 in the aggregate (the same as the direct impact categories).
Provisions of the Senate Bill not included in the House Bill
Unlike the Senate Bill, the House Bill does not contain:
- Changes to the AMT refundable credit
- Modifications to the section 163(j) limitation on interest deductions, or
- Technical corrections to TCJA (including a correction to the retail glitch).
Alvarez and Marsal Taxand Says:
The discussion above covers only some of the tax-related provisions of the House Bill. Those provisions constitute only a small part of the relief provisions of the House Bill, as is also the case with respect to the tax-related provisions of the Senate Bill. It is evident that the Senate and House Bills differ significantly, and it is not surprising that the two chambers have not yet been able to agree on a final text. 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.