In attempting to be the largest aid package in U.S. history, the HEROES Act makes substantial changes to the Internal Revenue Code.
On May 15, 2020, nearly a month and a half since the passage of the Coronavirus Aid, Relief and Economic Security Act (CARES Act), the House of Representatives passed the $3 trillion Health and Economic Recovery Omnibus Emergency Solutions Act (HEROES Act) in an effort to blunt COVID-19's increasingly severe economic impact. The HEROES Act aims to continue the CARES Act initiative by helping businesses and individuals. It also adds relief to state and local governments. While the Senate has not yet voted on the bill, this is the first step toward securing an additional round of stimulus for an economy that is desperate for relief.
In attempting to be the largest aid package in U.S. history, the HEROES Act makes substantial changes to the Internal Revenue Code, both expanding what is already present and making substantial modifications to the changes made under the CARES Act. This Alert serves as a brief overview of a few of these provisions.
Additional Economic Impact Payments
In addition to the stimulus payments provided under the CARES Act, the HEROES Act provides individuals with another stimulus payment, by way of a refundable tax credit, of $1,200 for single filers ($2,400 for joint filers) plus $1,200 for each dependent (for up to three dependents). Thepayment phases out for higher income taxpayers ($75,000 for single filers and $150,000 in the case of joint filers). Further, the HEROES Act also expands the definition of “dependent” to include children from the ages of 17 to 24.
2020 and 2021 State and Local Taxes Deduction Limit Removed
Beginning in 2018, the Tax Cuts and Jobs Act (TCJA) placed a $10,000 cap on the deductibility of state and local taxes. The HEROESAct suspends the foregoing cap for the 2020 and 2021 tax years.
CARES Act Temporary Modification of Limitation on Losses for Noncorporate Taxpayers Repealed
For tax years beginning after December 31, 2017, the TCJA added tax code section 461(l), prohibiting noncorporate taxpayers from utilizing their “excess business losses.” A noncorporate taxpayer's “excess business losses” means the excess of the taxpayer's business deductions over the sum of the taxpayer's business income plus a threshold amount. The CARES Act temporarily suspended the application of section 461(l), thereby permitting noncorporate taxpayers to utilize their business deductions to reduce or eliminate their nonbusiness income in the same year.
The HEROES Act, however, reinstates the application of section 461(l), prohibiting noncorporate taxpayers from utilizing their “excess business losses” for the taxable year in which they are incurred.
Net Operating Loss Carryback Under the CARES Act Modified
Beginning in 2018, the TCJA modified tax code section 172 by limiting the amount of net operating losses (NOLs) a business could utilize in a given year to 80 percent of such business' taxable income. The TCJA also amended section 172 to prohibit a business's ability to carry back its incurred NOLs. The CARES Act, however, repealed the 80 percent limitation and prohibition against carrying back such losses. Furthermore, under the CARES Act, losses realized in 2018, 2019 and 2020 may be carried back to the previous five taxable years.
In an effort to modify the provision, the HEROES Act repeals the five-year carry back rule implemented by the CARES Act and instead limits the carryback of such NOLs to tax years beginning on or after January 1, 2018. Moreover, the HEROES Act prohibits certain businesses from carrying back their NOLs if they have paid excessive amounts of executive compensation or made excessive amount of distributions (i.e., dividends and/or stock buybacks).
Employee Retention Credit Modified for Employers Subject to COVID-19 Closure
The CARES Act permits certain employers a refundable employment tax credit of 50 percent of the “qualified wages” paid by businesses affected by the COVID-19 pandemic. “Qualified wages” includes both actual wages paid plus qualified health plan expenses allocable to those wages. However, the credit ceases when qualified wages exceed $10,000 per employee. Furthermore, “qualified wages” also differ depending on the size of the employer. For employers with over 100 full-time employees, such wages include only those paid to employees who are not providing services due to the suspension of their employer's trade or business. For employers with less than 100 full-time employees, such wages include all employee wages, whether or not the employee is providing services to the employer.
The HEROES Act increases the credit from 50 percent to 80 percent of qualified wages and increases the $10,000 amount to $45,000 for each employee. Furthermore, the 100 full-time employee threshold is increased to more than 1,500 employees and gross receipts of over $41.5 million. With the foregoing changes, more wages qualify for the credit than under the CARES Act.
Payroll Credit for Certain Fixed Expenses of Employers Subject to COVID-19 Closure
The HEROES Act provides “eligible employers” a credit against applicable employment taxes for each calendar quarter equal to 50 percent of the qualified fixed expenses paid or incurred during such quarter. Qualified fixed expenses include rent obligations, mortgage obligations and utility payments. Further, “eligible employers” includes employers with no more than 1,500 full-time employees or no more than $41.5 million in gross receipts.
Like the employee retention credit in the CARES Act, the credit is also limited to employers whose business has been fully or partially suspended as a result of COVID-19 or has experienced a substantial decline in gross receipts in comparison to the preceding year.
Child Tax Credit Modified
Under current law, families with children may be eligible for the Child Tax Credit, which is worth up to $2,000 per child (up to the age of 17). The HEROES Act raises the foregoing amount to $3,600 (for children 5 and younger) or $3,000 (for children between the ages of 6 and 17) per child.
Earned Income Tax Credit Modified
The HEROES Act reduces the minimum age for individual applicants of the Earned Income Tax Credit (EITC) from 25 to 19 (other than in the case of a full-time students) and increases the maximum age for individual applicants from 65 to 66. In addition to friendlier age restrictions, the HEROES Act also increases the EITC amount for childless applicants and also increases phaseout limitations for the credit.
In addition to the foregoing, the HEROES Act also made other changes that may affect taxpayers across a broad array of industries. Please note that a discussion of such tax provisions is beyond the scope of this Alert.
As the foregoing provisions demonstrate, the intent of the HEROES Act is to build and expand upon the already substantial amount of stimulus set forth by the CARES Act. Though the HEROES Act has passed the House, it now moves on to a Republican-controlled Senate that has been vocal about its hesitation to pass yet another historic stimulus bill. Further, because the HEROES Act continues to make changes to certain Republican-led provisions of both the TCJA and the CARES Act, it is expected that the bill that passed in the House is nowhere near the final version of the bill that will become law. As such, only time will tell which provisions make the cut.
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Originally published 19 May, 2020
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.