DC Tax Flash: House Passes Revised HEROES Act

Tax Alert

The House last night approved a revised version of the HEROES Act (H.R. 925), giving lawmakers what could be their final chance to debate and vote on a virus relief package just ahead of the November elections. ​The bill passed on a 214-207 tally.

The House-passed relief package is going nowhere in the Senate, but Speaker Nancy Pelosi (D-CA) hopes it could nudge forward negotiations with the Administration on a potential bipartisan bill capable of clearing both chambers. Failing that, she said the House will return to work on the HEROES Act "early next year."

Major partisan differences remain in the broader talks between congressional leaders and the administration, especially in terms of the overall size of a potential relief bill. ​The revised House-passed HEROES Act would cost $2.2 trillion.

Treasury Secretary Steve Mnuchin has reportedly offered a package as high as $1.62 trillion. Senate Republicans are on record in support of a relief package well under $1 trillion. 

"Anything above $1 trillion would be difficult," Senate Finance Committee Chairman Chuck Grassley (R-IA) said yesterday. "There's a real revulsion among Republicans to going above $1 trillion and even $1 trillion is real difficult."

The text of the updated HEROES Act is posted here.

A section-by-section summary is posted here. The following selected excerpts from this summary identify key business-related tax provisions in the bill.

Title II – Provisions To Prevent Business Interruption

Sec. 201. Improvements to employee rehiring and retention credit.

Increases the applicable percentage of qualified wages reimbursed through the employee retention and rehiring credit from 50% to 80%.

Modifies the gross receipts requirement to allow a partial credit, phased in for a decline in gross receipts between 10% and 50% compared to the same calendar quarter of the previous year.

Increases the limit on wages taken into account per employee from $10,000 for the year to $15,000 per quarter (limited to $45,000 for the calendar year).

Replaces the 100-employee delineation for determining the relevant qualified wage base with a definition of large employer. A large employer is an employer with greater than 1,500 full time employees and gross receipts of greater than $41,500,000 in 2019.

Allows state and local governments and certain federal instrumentalities to claim the credit in the event they are paying wages to employees while their operations are fully or partially shut down.

Clarifies that group health plan expenses can be considered qualified wages even when no other wages are paid to the employee, consistent with recent revisions to IRS guidance on this issue. This provision also clarifies that wages paid by an employer for lost tips will not trigger the wage limitation in section 2301(c)(3)(B) of the CARES Acts.

Ensures that wages paid for with government grants do not qualify for the credit.

All provisions apply retroactively to the effective date included in section 2301 of the CARES Act.

Sec. 202. Certain loan forgiveness and other business financial assistance under CARES Act not includable in gross income.

Excludes certain loan forgiveness by the Small Business Administration, emergency EIDL grants, RESTAURANTS Act grants and proceeds, and certain loan payments from the gross income of the ultimate recipient.

Sec. 203. Clarification of treatment of expenses paid or incurred with proceeds from certain grants and loans.

Clarifies that expenses paid or incurred with proceeds from Payment Protection Program loans that are forgiven pursuant to section 1106(b) of the CARES Act and certain loan forgiveness by Small Business Administration, emergency EIDL grants, RESTAURANTS Act grants and proceeds, and certain loan payments that are not included in gross income under section 333 of this Act do not result in a denial of any deduction or basis of any asset for federal tax purposes This provision also clarifies the order in which section 1106(i) of the CARES Act and relevant provisions of the Internal Revenue Code apply.

Title III – Net Operating Losses

Sec. 301. Limitation on excess businesses losses of non-corporate taxpayers restored and made permanent.

Amends changes made by the CARES Act to section 461(l) of the Code, which provides that an excess business loss of a taxpayer (other than a corporation) is not allowed for a taxable year. Excess business losses are treated as net operating losses in the next succeeding taxable year. An excess business loss exists if taxpayer’s total deductions from all trades or businesses exceed all income from such trades or businesses, plus $250,000 ($500,000 for joint filers). The CARES Act suspended this provision for taxable years beginning in 2018, 2019 and 2020. Under current law (as amended by CARES), this provision applies for taxable years beginning on or after January 1, 2021, and beginning before December 31, 2025. This section amends current law to apply the provision to taxable years beginning on or after January 1, 2018, as was the case before CARES passed. In addition, this section makes the provision permanent, and repeals section 461(j) of the Code as a deadwood provision. This provision is made effective retroactive to the date of enactment of the CARES Act.

Sec. 302. Certain taxpayers allowed carryback of net operating losses arising in 2019 and 2020.

Amends the CARES Act changes to section 172 of the Code. Under current law (as amended by CARES), taxpayers with a loss in 2018, 2019 or 2020 may apply those losses to the preceding five taxable years. This section amends the provisions of CARES that provide for net operating loss carrybacks by limiting carrybacks to taxable years beginning on or after January 1, 2018. In addition, this provision prohibits taxpayers with excessive executive compensation or excessive stock buybacks and dividends from carrying back losses. This provision is made effective retroactive to the date of enactment of the CARES Act.

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