DC Tax Flash: House to Vote Today on $3 Trillion HEROES Act

Tax Alert
05.15.2020

The House is moving toward a vote today on legislation (H.R. 6800) crafted by Democratic leaders to further respond to the coronavirus outbreak. The Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act would authorize more than $3 trillion in federal spending and tax provisions directed at states, individuals, health care providers and businesses. 

The bill appears likely to pass the House. In the GOP-controlled Senate, the bill will function mostly as a starting point for negotiations between Democrats and their GOP counterparts in Congress and the White House.

​The HEROES Act would provide additional direct payments of up to $1,200 per individual; expand paid sick days, family and medical leave, unemployment compensation, nutrition and food assistance programs; establish a fund for employer grants to give essential workers pandemic premium pay; expand several tax credits and deductions; and increase flexibility for certain health, pension and retirement plans. The 1,815-page bill contains many more spending and revenue policy changes, including a temporary restoration of the deduction for state and local taxes.

Yesterday, the House Rules Committee met to set the parameters for floor debate on the legislation. During consideration, the panel adopted a manager's amendment to the bill that includes almost 90 pages of changes to the underlying bill. A Rules Committee summary explains:

MANAGER'S AMENDMENT

Makes technical and conforming changes so that the bill title reads as "The Heroes Act." Modifies appropriations provisions to provide additional rural assistance, provide greater flexibility for Labor and Health and Human services funding items, adds a risk mitigation program, ensures application of non-discrimination requirements, incorporates increased eligibility for authorized programs, prohibits PPP assistance for lobbyists salaries, prohibits covered loans to certain nonprofits engaged in election and campaign activities, expands the forgiveness safe harbor and the allowable use and forgiveness of expenditures for PPE, provides student loan debt relief, and requires every federal agency that funds or oversees scientific research to develop, adopt, and enforce a scientific integrity policy.

The 89-page text of the Rules Committee amendment is posted here.

The Joint Committee on Taxation (JCT) today issued a cost estimate for the bill's revenue provisions that says it would reduce federal revenue by $883 billion. The text of the JCT revenue estimate is posted here.

The House vote on final passage is expected this evening. No floor amendments are in order.

The 1,815-page text of H.R. 6800 is posted here.

A one-page summary is posted here.

A 90-page section-by-section summary is posted here

The following are key excerpts from this summary that cover certain selected revenue provisions of the bill focused primarily on businesses and employers:


DIVISION B – Revenue Provisions

Prepared by the Democratic staff of the House Committee on Ways and Means

SUBTITLE B – ADDITIONAL RECOVERY REBATES TO INDIVIDUALS

Sec. 20111. Additional recovery rebates to individuals.

Provides a $1,200 refundable tax credit for each family member that shall be paid out in advance payments, similar to the Economic Impact Payments in the CARES Act. The credit is $1,200 for a single taxpayer ($2,400 for joint filers), in addition to $1,200 per dependent up to a maximum of 3 dependents. The credit phases out starting at $75,000 of modified adjusted gross income ($112,500 for head of household filers and $150,000 for joint filers) at a rate of $5 per $100 of income.

Treasury shall issue this credit as an advance payment based on the information on 2018 or 2019 tax returns. Treasury shall issue advance payments for Social Security Old-Age, Survivors, and Disability Insurance beneficiaries, Supplemental Security Income recipients, Railroad Retirement Board beneficiaries, and Veterans Administration beneficiaries who did not file returns for 2018 or 2019 based on information provided by the Social Security Administration, the Railroad Retirement Board, and the Veterans Administration. Treasury shall conduct outreach to non-filers to inform them of how to file for their advance payment.

Taxpayers receiving an advance payment that exceeds their maximum eligible credit based on 2020 information will not be required to repay any amount of the payment to the Treasury. If the credit based on 2020 information exceeds the amount of the advance payment, taxpayers can claim the difference on their 2020 tax returns.

The recovery rebate improvements in sections 201 through 205 of this division generally apply to these additional rebates. Additionally, Treasury is instructed to make payments to the territories that relate to the cost of providing the credits for each territory.

SUBTITLE E – DEPENDENT CARE ASSISTANCE

Sec. 20141. Refundability and enhancement of child and dependent care tax credit for 2020.

Makes the child and dependent care tax credit ("CDCTC") fully refundable for 2020 and increases the maximum credit rate to 50 percent. Amends the phaseout threshold to begin at $120,000 instead of $15,000. Doubles the amount of child and dependent care expenses that are eligible for the credit to $6,000 for one qualifying individual and $12,000 for two or more qualifying individuals.

Sec. 20142. Increase in exclusion for employer-provided dependent care assistance for 2020.

Increases the exclusion for employer-provided dependent care assistance from $5,000 to $10,500 (from $2,500 to $5,250 in the case of a separate return filed by a married individual) for 2020.

SUBTITLE F – FLEXIBILITY FOR CERTAIN EMPLOYEE BENEFITS

Sec. 20151. Increase in carryover for health flexible spending arrangements in 2020.

Permits cafeteria plans and health flexible spending arrangements to allow participants to carry over up to $2,750 in unused benefits or contributions from 2020 to 2021.

Sec. 20152. Carryover for dependent care flexible spending arrangements in 2020.

Permits cafeteria plans and dependent care flexible spending arrangements to allow participants to carry over up to the annual maximum amount of unused dependent care assistance benefits or contributions from 2020 to 2021.

Sec. 20153. Carryover of paid time off in 2020.

Permits cafeteria plans to allow participants to carry over unused paid time off from 2020 to 2021.

Sec. 20154. Change in election amount in 2020.

Permits cafeteria plans and health flexible spending arrangements to allow participants to make one-time elections for any reason to a health FSA or to the amount of paid time off. Such one- time election is allowed between the date of enactment and December 31, 2020.

Sec. 20155. Extension of grace periods, etc. in 2020.

Permits cafeteria plans, health flexible spending arrangements, and dependent care flexible spending arrangements to provide an extension of the grace period for the 2020 plan year to 12 months after the end of the 2020 plan year. Extension of the grace period will allow benefits or contributions from these plans or arrangements to be used for expenses incurred up to 12 months after the end of the plan year.

Permits cafeteria plans and health flexible spending arrangements to allow employees who cease participation in the plan (e.g., due to being terminated) to continue to receive reimbursements from unused contributions for the rest of the plan year (including the grace period as extended above).

Sec. 20156. Plan amendments.

Permits retroactive amendments to cafeteria plans, health flexible spending arrangements, and dependent care arrangements for the purposes of this subtitle.

SUBTITLE G – DEDUCTION OF STATE AND LOCAL TAXES

Sec. 20161. Elimination for 2020 and 2021 of limitation on deduction of state and local taxes.

Eliminates 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.

Title II – Additional Relief For Workers

Sec. 20204. Payroll credit for certain pandemic-related employee benefit expenses paid by employers.

Provides a 30% refundable payroll 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 the presidentially declared disaster related to COVID-19. The credit percentage is 50% for expenses paid to employees if a substantial portion of the services performed by the employee is essential work, as defined for pandemic premium pay reimbursable from the COVID-19 Heroes Fund. No credit is allowed if the expenses are provided in a manner which discriminates in favor of highly compensated employees. The Social Security and Railroad Retirement trust funds are held harmless under this provision, through a General Fund transfer of lost receipts as a result of this credit.

SUBTITLE B – TAX CREDITS TO PREVENT BUSINESS INTERUPTION

Sec. 20211. Improvements to employee retention credit.

Increases the applicable percentage of qualified wages reimbursed through the employee retention 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.

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

Sec. 20212. Payroll credit for certain fixed expenses of employers subject to closure by reason of COVID-19.

Provides a 50% refundable payroll tax credit for qualified fixed costs. Qualified fixed costs include covered rent obligations, covered mortgage obligations, and covered utility payments. These terms have the same definitions as the definitions provided in section 1106 of the CARES Act, relating to forgiveness of Paycheck Protection Program loans. For each quarter, qualified expenses eligible for this credit are limited to 25% of qualified wages (as defined in the employee retention credit) or 6.25% of 2019 gross receipts (which annualizes to 25%), with a maximum of $50,000.

This credit is limited to employers with no more than 1,500 full-time equivalent employees or no more than $41,500,000 in gross receipts in 2019. Additionally, employers must be subject to a full or partial suspension due to a COVID-19 government order or have a decline in gross receipts of at least 20% compared to the same calendar quarter of the preceding year. This credit is phased in for employers with a decline in gross receipts between 10% and 50%.

The Social Security and Railroad Retirement trust funds are held harmless under this provision, through a General Fund transfer of lost receipts as a result of this credit.

The section applies to qualified fixed expenses paid or accrued from March 12, 2020 until December 31, 2020.

Sec. 20213. Business interruption credit for the self-employed.

Provides a 90% refundable individual income tax credit for certain self-employed individuals who have experienced a significant loss of income. The credit may be claimed on "qualified self-employment income" which is the loss in gross income for self-employment that exceeds a 10% reduction from 2019 to 2020, scaled using the ratio of net earnings from self-employment to gross income from self-employment in 2019. The amount of qualified self-employment income taken into account cannot exceed the reduction in adjusted gross income from 2019 to 2020, and is capped at $45,000. The credit phases out starting at $60,000 of adjusted gross income ($120,000 for married filing jointly) at a rate of $50 for every $100 of income.

SUBTITLE C – CREDITS FOR PAID SICK AND FAMILY LEAVE

Sec. 20221. Extension of credits.

Extends the refundable payroll tax credits for paid sick and family leave, enacted in the Families First Coronavirus Response Act, through the end of 2021. This provision is effective as if included in FFCRA.

Sec. 20222. Repeal of reduced rate of credit for certain leave.

Coordinates changes made to the requirement to provide paid sick time to allow employers to claim up to $511 per day, rather than $200 per day for leave for caregivers of individuals subject to a coronavirus related stay at home order and parents providing for children affected by a coronavirus related school closure. This provision applies to days on or after the date of enactment of this Act.

Sec. 20223. Increase in limitations on credits for paid family leave.

Coordinates changes made to the requirement to provide emergency paid family and medical leave to allow employers to claim up to $12,000 in refundable payroll tax credits, rather than $10,000. Allows individuals to claim the credit for a maximum of 60 days (corresponding to the $12,000 amount) rather than 50 days. This provision is effective as if included in FFCRA.

Sec. 20224. Election to use prior year net earnings from self-employment in determining average daily self-employment income.

Allows individuals to elect to use their average daily self-employment income from 2019 rather than 2020 to compute the credit. This provision is effective as if included in FFCRA.

Sec. 20225. Federal, state, and local governments allowed tax credits for paid sick and paid family and medical leave.

Removes the exclusion disallowing the paid sick and family leave credits enacted in the Families First Coronavirus Response Act for Federal, state, and local governments. It makes conforming changes to the definition of qualified wages to align the credit with the intent that the credit cover the leave required by the respective mandates. This provision is effective as if included in FFCRA.

Sec. 20226. Certain technical improvements.

Makes technical changes coordinating the definitions of qualified wages within the paid sick leave, paid family and medical leave, and the exclusion of such leave from employer OASDI tax. This provision is effective as if included in FFCRA.

Sec. 20227. Credits not allowed for certain large employers.

Provides that, notwithstanding other changes in this Act requiring that employers with 500 or more employees provide required paid sick leave and paid family and medical leave, these employers are not eligible for payroll tax credits for these wages. This restriction does not apply to federal, state, and local governments. This provision applies to wages paid after the date of enactment.

SUBTITLE D – OTHER RELIEF

Sec. 20231. Payroll tax deferral allowed for recipients of certain loan forgiveness.

Allows businesses receiving Paycheck Protection Program loan forgiveness to defer payment of payroll taxes under Section 2302 of the CARES Act.

Sec. 20232. Emergency financial aid grants.

Excludes emergency financial aid grants made to students from gross income and holds students harmless for purposes of determining eligibility for higher education tax incentives.

Sec. 20233. 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, and certain loan payments from the gross income of the ultimate recipient.

Sec. 20234. Authority to waive certain information reporting requirements.

Provides the Secretary of the Treasury with the authority to waive information reporting requirements under Chapter 61 of the Code with respect to income that is exempt from tax as excludible loan forgiveness under the Paycheck Protection Program or under sections 332 or 333 of this Act.

Sec. 20235. 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, 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.

Sec. 20236. Reinstatement of certain protections for taxpayer return information.

Restores certain taxpayer protections under Section 6103 of the Internal Revenue Code that were modified by the CARES Act, retroactively effective as of the date of the FUTURE Act.

Title III – Net Operating Losses

Sec. 20301. 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. 20302. 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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