The Senate Republicans released a revised draft (the “Revised Bill”) of their initial proposal (the “Original Proposal”) for the Phase 3 COVID-19 Bill yesterday. The Revised Bill is nearly 580 pages long and generally covers the same wide range of areas. Since its release, the Senate failed a key procedural hurdle last night, as well as this afternoon. This reflects the fact that there are still points of contention between the parties, particularly around unemployment insurance, limitations on stock buybacks and executive pay for corporations that get federal assistance, and worker protections. Nonetheless, we feel it is important to highlight some of the notable changes that were made to the tax provisions of the Original Proposal as this reflects the most recent bill text we have seen from Congress. Our alert discussing the Original Proposal can be found here.
Due Date Extensions
Late Friday evening, the IRS released Notice 2020-18, which supersedes Notice 2020-17, and allows taxpayers to make their federal income tax payments (including estimated taxes) that are due on April 15, 2020 by July 15, 2020 without any penalty. As a result, the Revised Bill does not include similar provisions that were included in the Original Proposal.
The Revised Bill does retain the Original Proposal’s extension of the due date of the employer’s portion of payroll taxes and 50% of self-employment taxes (regardless of the individual’s income level) from 2019 to 50% being due on December 31, 2021 and 50% due on December 31, 2022.
It is important to keep in mind, that the time to file all other returns, including returns that the due on a date other than April 15 (e.g., income tax returns of fiscal year taxpayers) and non-income tax returns (e.g., payroll), as well as various elections (e.g., section 83(b) elections) have not been extended. Additionally, the deadline to apply for a “quickie refund” of an overpayment of 2019 estimated taxes is April 15. It is our view that the deadline to apply for this refund has not changed, but the issue is not entirely clear. For a discussion of a quickie refund, please see our prior alert.
NOL Carrybacks and Excess Business Losses
The Revised Bill retains the NOL carrybacks and excess business losses provision from the Original Proposal but addresses the drafting glitch we highlighted in our last alert, so that the NOL carryback applies to losses arising in the 2018, 2019, and 2020 taxable years.
AMT Refundable Credit
The Revised Bill provides that the AMT minimum tax credit is 50% refundable in 2018 and 50% refundable in 2019. The Original Proposal provided that the entire amount of the credit was refundable in 2018, requiring taxpayers to file an amended 2018 tax return to claim the refund. The change to spread the refund period over 2018 and 2019 makes it so taxpayers do not need to file an amended 2018 return in order to obtain the refund.
However, taxpayers can elect to claim the full amount of the refundable credit in 2018. If such an election is made, then Revised Bill provides that such claim for refund is not subject to review by the Joint Committee of Taxation prior to issuance of the refund.
Modifications to Limitation on Interest Expense Deduction
The Revised Bill generally retains the proposed changes to the limitation on business interest expense (section 163(j) limitation) that were included in the Original Proposal, with two notable exceptions. First, the Revised Bill adds special 2019 rules that apply to partnerships.
Second, similar to the Original Proposal, the Revised Bill provides that for taxable years beginning in 2020, a taxpayer can elect to use its 2019 adjusted taxable income (ATI) to calculate its section 163(j) limitation. However, the Revised Bill provides further relief by allowing the taxpayer to prorate its 2019 ATI, if 2020 is a short year (the Original Proposal disallowed the use of the taxpayer’s 2019 ATI in computing its 2020 section 163(j) limitation if the taxpayer had a short year).
Individuals are entitled to a refundable credit
The Revised Bill modifies the refundable credit that was included in the Original Proposal. Similar to the Original Proposal, the amount of the one-time credit against an individual’s 2020 tax return is $2,400 if the taxpayer’s filing status is married filing joint (MFJ) and $1,200 for all other taxpayers, increased by $500 for each qualifying child. However, the Revised Bill eliminates the provision limiting the rebate to the individual’s taxable income.
The Revised bill maintains the phase out contained in the Original Proposal, but adds an additional rule for individuals filing as a head of household, so that:
- If a taxpayer’s filing status is MFJ, the credit begins to phase out if their 2020 adjusted gross income (AGI) exceeds $150,000, with a complete phase out if their AGI is $198,000;
- If a taxpayer’s filing status is HOH, the credit begins to phase out if their 2020 adjusted gross income (AGI) exceeds $112,500, with a complete phase out if their AGI is $136,500; and
- For all other taxpayers, the credit begins to phase out if their 2020 adjusted gross income (AGI) exceeds $112,500, with a complete phase out if their AGI is $99,000.
Lastly, the IRS is instructed to mail taxpayers a check as quickly as possible based on the amount of the credit that was available for the individual’s first taxable year beginning in 2019 (the advanced payment). If the 2019 return has not been filed, then the 2018 return will be used. Under the Original Proposal, a taxpayer could have received an advanced refund to the extent they would have received a refundable credit based on their 2018 return.
Section 382 Relief
The Revised Bill instructs Treasury to provide guidance that ownership interests arising from loans and loan guarantees provided by the federal government under the CARES Act do not trigger a change in ownership for section 382 purposes. A comprehensive discussion of section 382 can be found in our alert from June 12, 2019.
TCJA Technical Corrections
The Revised Bill contains to contain numerous technical corrections to TCJA. Of those highlighted in our prior alert, the Revised Bill no longer contains the technical correction regarding the application of downward attribution for purposes of determining whether a foreign corporation is a controlled foreign corporation (CFC) and whether a United States person is a United States shareholder.
Alvarez and Marsal Taxand Says:
The highlights listed above cover just a few of the items within the Revised Bill. As noted above, the modifications outlined above largely serve to clarify items that had already been proposed in the Original Proposal. While there were not many completely new additions or significant deletions in terms of tax provisions, the removal of the proposed rule which would eliminate downward attribution in determining CFC status is noteworthy, because downward attribution has imposed cumbersome reporting obligations since TCJA.
As mentioned previously, if the provisions in the Revised Proposal are included in the final bill that is signed into law, taxpayers will have an opportunity to increase their liquidity by filing amended returns for previously paid taxes. However, some taxpayers may not be able to take full advantage of the proposed rules. For example, portfolio companies may be contractually prohibited from filing amended tax returns for taxable years prior to their acquisition, thereby making it more difficult for them to benefit from some of these provisions. Stay tuned for future insights with regards to Congress’ tax measures as it seeks to infuse liquidity into the markets.