Senate Republicans Propose Additional Tax Relief in HEALS Act

With the number of COVID-19 cases continuing to rise throughout the summer months, hindering efforts to restart the economy, Senate Republicans have proposed new legislation to curb the financial suffering experienced by businesses and individuals throughout the United States. Referred to as “Phase 4” economic relief, the Health, Economic Assistance, Liability Protection, and Schools (HEALS) Act introduced Monday would fortify unemployment benefits, support schools, and hospitals, and bolster relief to businesses. The tax provisions of the HEALS Act would expand upon and modify several provisions of the Coronavirus Aid, Relief and Economic Security (CARES) Act while also introducing additional tax relief to individuals and businesses. We are monitoring the status of the proposed legislation and will prepare a follow-up alert reflecting future developments.

Business Tax Provisions

Enhancements to Employee Retention Tax Credit

The CARES Act created an employee retention tax credit, whereby “eligible employers” are provided a refundable tax credit for each calendar quarter equal to 50 percent of “qualified wages” paid to certain employees. The credit is capped under the CARES Act at $10,000 in wages (i.e., a $5,000 maximum credit) for each employee for all quarters.

The proposed HEALS Act would also expand on the employee retention tax credit available under the CARES Act in several ways.

• Increased Cap: The HEALS Act would increase the limitation on qualified wages taken into consideration to $10,000 per quarter per employee, up to $30,000 per employee for the calendar year. 

• Increased Tax Credit Percentage: The HEALS Act would increase the percentage of qualified wages eligible for the credit. Under the HEALS Act, the applicable percentage of qualified wages would increase from 50 percent to 65 percent.

• Expansion of Eligible Employers: The HEALS Act would broaden the availability of the employee retention tax credit by reducing the degree of financial harm that a business must suffer for it to be considered an “eligible employer.” Under the CARES Act, employers have to meet one of two tests to qualify as an eligible employer. Employers are eligible under the CARES Act if either (1) their operations were fully or partially suspended due to a COVID-19-related governmental order, or (2) their gross receipts declined by more than 50 percent when compared to the same quarter in the prior year. The HEALS Act would revise the second criterion to require only a 25 percent reduction in gross receipts (rather than a 50 percent reduction), expanding the number of employers that would qualify as “eligible employers.” In addition, under the HEALS Act, an employer may become eligible in the third quarter or fourth quarter of calendar year 2020 if the employer’s gross receipts in the preceding quarter has declined by at least 25 percent when compared to the same calendar quarter in the previous year. 

• Additional Flexibility for Employers with 500 or Fewer Employees: Under the CARES Act, the determination of which wages constitute “qualified wages” depends on the employer’s size. For eligible employers with 100 or fewer full-time employees, all employee wages qualify for the credit. For employers with more than 100 employees, wages eligible for the credit are wages that the employer pays employees who are not providing services due to the suspension of the business or a drop in the business’s gross receipts. The HEALS Act would increase the threshold from 100 employees to 500 employees, so that for eligible employers with 500 or fewer full-time employees, all employee wages would qualify for the employee retention tax credit.

• Interaction with Paycheck Protection Program (PPP) Loans: Finally, the HEALS Act would increase the compatibility between the employee retention tax credit and the Paycheck Protection Program (PPP) by allowing employers to be eligible for both programs. Under the CARES Act, the employee retention tax credit is not available to employers that obtain Small Business Interruption loans under the PPP established under the CARES Act. The HEALS Act would remove the barriers preventing an employer from partaking in both CARES Act programs by allowing employers to be eligible for both programs, but with limitations to prevent an employer from benefitting twice. 

In our May 13 client alert, available here, we summarized the aspirational tax package introduced by House Democrats within the Health and Economic Recovery Omnibus Emergency Solutions Act (the “HEROES Act”). The table below compares the approaches taken under the CARES Act, the HEROES Act, and the HEALS Act as it relates to the primary aspects of the employee retention tax credit.

Safe and Healthy Workplace Tax Credit

The HEALS Act would allow a new refundable tax credit to qualified employers (not including the federal government, the government of any state or political subdivision or any agency or instrumentality of any of the foregoing) equal to 50 percent of the sum of “qualified employee protection expenses,” “qualified workplace reconfiguration expenses,” and “qualified workplace technology expenses” paid or incurred between March 13, 2020 and December 31, 2020.

The HEALS Act defines the different categories of qualified expenses as follows:

• “Qualified employee protection expenses” include amounts paid or incurred for (A) testing employees and customers of the employer for COVID-19, and (B) equipment to protect employees and customers from contracting COVID-19, including masks, gloves, disinfectants, and cleaning products or services related to preventing the spread of COVID-19.
   
• “Qualified workplace reconfiguration expenses” include amounts paid or incurred by the employer to design and reconfigure retail space, work areas, break areas or other areas that employees or customers regularly use in the ordinary course of the employer’s trade or business if such design and reconfiguration (A) has a “primary purpose” of preventing the spread of COVID-19, (B) is with respect to tangible property located in the United States that is leased or owned by the employer, (C) is commensurate with the risk faced by employees or customers or is consistent with recommendations by the Centers for Disease Control and Prevention (the CDC) or the Occupational Safety and Health Administration (OSHA) and (D) is completed pursuant to a reconfiguration (or similar plan) that was not in place before March 13, 2020.

• “Qualified workplace technology expenses” include amounts paid or incurred by the employer for technology systems (including computer software and technological equipment) that employees or customers use in the ordinary course of the employer’s trade or business if such technology system (A) has a “primary purpose” of preventing the spread of COVID-19, (B) is used for limiting physical contact between customers and employees in the United States, (C) is commensurate with the risk faced by employees or customers, or is consistent with recommendations by the CDC or OSHA, and (D) is acquired on or after March 13, 2020 (but not pursuant to a plan that was in place before such date).

The amount of the credit would be capped based on the number of employees employed by an employer during an applicable calendar quarter. The maximum credit available is equal to the sum of:

• $1,000 multiplied by the number of employees (up to 500 employees), plus

• $750 multiplied by the number of employees in excess of 500 employees (up to 1,000 employees), plus

• $500 multiplied by the number of employees in excess of 1,000.

Illustrative Example

Employer A is a restaurant chain with 1,200 employees. Employer A incurs (i) $100,000 of “qualified employer protection expenses” to test employees for COVID-19 and provide masks and gloves to employees to prevent the spread of COVID-19, (ii) $125,000 of “qualified workplace reconfiguration expenses” to reconfigure dining rooms to comply with CDC and OSHA requirements, and (iii) $200,000 of “qualified workplace technology expenses” to develop new software and acquire new technology to allow customers to order food through a touchless mechanism that is intended to prevent the spread of COVID-19. Employer A’s total qualified expenses equal $425,000, resulting in a potential tax credit of $212,500 (i.e., 50 percent of the amount of qualified expenses). Because Employer A has 1,200 employees, the maximum amount of the tax credit available equals $975,000 (i.e., $1,000 for each of the first 500 employees, $750 for each of the next 500 employees, and $500 for each of the remaining 200 employees). Employer A is therefore not subject to the cap and Employer A is able to claim the full tax credit of $212,500 as a refundable tax credit.

The proposed text of the HEALS Act refers to the tax credit being capped at the amounts described above, but the separate summary of the legislation provided by the Senate Finance Committee inconsistently states that the amounts described provide a cap on the amount of qualified expenses used to determine the amount of the tax credit (which would make the cap on the tax credit equal to 50 percent of the amounts described above).

State Tax Certainty for Employers and Employees

Due to COVID-19, many employees have transitioned to remote work environments. These new work conditions have led to circumstances where employees who previously lived and worked in one location may now be working remotely from other states than where an employer is located and/or where the employee previously resided. This new shift to remote and mobile work raises significant tax uncertainty for both employers and employees regarding the tax treatment and implications of such arrangements. Although some states have issued emergency guidance addressing this situation, other states have remained silent, creating confusion for both employers and employees alike. Employers may be obligated to withhold taxes from multiple states for a single employee working in a remote location (e.g., withholding taxes from the state where the employee previously worked on a regular basis as well as the state where the employee may be physically performing his or her duties), and an employee may be required to file taxes in multiple states and claim refunds/ tax credits for duplicative withholding. In addition, the presence of remote employees may cause employers to have nexus in states where such employers did not previously have tax filing obligations.

In an effort to provide clarity and address these concerns, the HEALS Act proposes to establish state tax certainty for employers and employees who are engaging in remote or mobile work due to COVID-19. Under the provision, from calendar years 2020 through 2024, employees who perform employment duties in more than one taxing jurisdiction would be subject to income tax only in their state of residence and any states where they are present and performing employment duties for more than 30 days during the calendar year. For calendar year 2020, the maximum period that an employee may perform services from within a state would increase from 30 days to 90 days, providing additional relief to remote and mobile employees (and their employers) that would otherwise be subject to tax in multiple states (such as frontline health-care and other workers that perform services outside of the state where they normally work and reside).

To provide further certainty to employers and employees, the HEALS Act would allow employers to treat an employee’s wages as if such wages were earned at the employee’s regular work location, even if the employee is physically present in another state while performing such activities, for the period beginning on the date on which the employee began working remotely and ending on the earlier of when the employee returns to his or her typical work location or at the end of the 2020 calendar year. This provision would not apply to professional athletes, professional entertainers, or other types of highly compensated public figures.

The HEALS Act would also clarify that, notwithstanding any applicable state law, in the case of an out-of-jurisdiction business that has employees working remotely within a given jurisdiction, the duties performed by such employees will not be sufficient to create nexus or establish any minimum contacts or level of presence that would otherwise subject such business to any registration, taxation or other related requirements for businesses operating within such jurisdiction. In addition, for purposes of apportioning state income or gross receipts taxes, duties performed by an employee of an out-of-jurisdiction business while working remotely during the covered period would be disregarded (and would instead be apportioned to the jurisdiction which includes the primary work location of the employee).

The state tax relief provisions described above, if enacted, will be a welcome relief to many employers that are grappling with the implications of having a mobile workforce in multiple taxing jurisdictions as a result of COVID-19 business disruptions. Some states may object to the federal government impinging on what they may claim is their constitutional right to impose income taxation on workers within their borders. Note that the proposed legislation does not address partners performing services for partnerships and limited liability companies taxed as partnerships.

Expansion of Work Opportunity Tax Credit

The work opportunity tax credit (WOTC) provides an elective tax credit to employers for hiring individuals from certain targeted groups who have consistently faced significant barriers to employment (such as veterans, long-term unemployed individuals, and ex-felons). Generally, the maximum credit per employee is $2,400 (40 percent of the first $6,000 of qualified first-year wages), although the amount varies by targeted group. An employer claims the WOTC by obtaining certification of the employee’s eligibility from the appropriate state workforce agency.

The HEALS Act would temporarily expand this tax credit by adding a new WOTC targeted group, “qualified 2020 COVID-19 unemployment recipients.” A “qualified 2020 COVID-19 unemployment recipient” is an individual who is certified by the designated local agency as having received, or having been approved to receive, unemployment compensation under state or federal law for the week immediately preceding the hiring date, or the week which includes the hiring date, and begins work for the employer before January 1, 2021.

In addition to expanding the targeted groups for which a WOTC may be claimed, the HEALS act would also increase the available credit percentage applicable to this new group to 50 percent (increased from the normal 40 percent rate) and also increase the amount of qualified first-year wages to $10,000 (thereby producing a credit of up to $5,000 per qualified hire). The HEALS Act would also remove the limitation on rehires for 2020 qualified COVID-19 unemployment recipients.

COVID-19 Assistance Provided to Independent Contractors

For the period of March 13, 2020 to December 31, 2020, the HEALS Act would establish a safe harbor allowing service recipients and marketplace platforms to provide certain benefits to independent contractors without taking those benefits into account when determining the status of an individual as an employee or an independent contractor for purposes of the Internal Revenue Code. The benefits available would include certain financial assistance provided to independent contractors, the provision of healthcare benefits related to COVID-19, and the provision of equipment and cleaning products to protect individual service recipients or customers from contracting COVID-19.

The provision would further establish that such benefits (other than financial assistance) received by the service provider would be treated as “qualified disaster relief payments,” which characterization would cause the payments to be excluded from the service provider’s taxable income.

Waiver of Certain Modifications to Farming Losses

The Tax Cuts and Jobs Act of 2017 had eliminated the ability to carry back net operating losses to prior years effective for tax years beginning after December 31, 2017. The CARES Act restored the ability to carry back net operating losses arising in tax years beginning after December 31, 2017, and before January 1, 2021, and permitted such losses to be carried back five years rather than only the two years that was permitted immediately prior to the enactment of the 2017 Tax Act. Under the HEALS Act, farmers who had elected a two-year net operating loss carryback prior to the CARES Act would be permitted to elect to retain the two-year carryback rather than claim the five-year carryback provided in the CARES Act. Additionally, the HEALS Act would allow farmers who had waived an election to carry back a net operating loss to revoke that waiver, thereby eliminating additional compliance burdens for farmers.

Individual Tax Provisions

Economic Recovery Rebates to Eligible Taxpayers

The HEALS Act would create a second round of the economic recovery rebates that were provided to individuals under the CARES Act. Pursuant to the CARES Act, taxpayers with an adjusted gross income of up to $75,000 ($150,000 for taxpayers filing a joint return) were eligible to receive a rebate in the amount of $1,200 (or $2,400 in the case of those filing a joint return). That amount was increased by $500 for each qualifying child of the taxpayer. The HEALS Act would provide a second dose of these payments at the same levels (except as noted in the next paragraph relating to dependents). The rebate amount proposed under the HEALS Act would be subject the same phase-out rules that applied under the CARES Act (i.e., reducing the rebate by 5 percent per dollar of adjusted gross income above $75,000 for singles, $112,500 for heads of household, and $150,000 for joint taxpayers).

As was the case under the CARES Act, the determination of taxpayers’ income for purposes of the recovery rebates in the HEALS Act would be based on the taxpayer’s 2019 tax return, if filed, and otherwise the taxpayer’s 2018 tax return. The HEALS Act differs from the CARES Act, however, when it comes to the additional $500 payment per dependent. As noted in our April 1st Client Alert, the CARES Act limited the $500 additional payment to dependents under age seventeen as of the end of 2020. Under the HEALS Act, however, the additional $500 rebate would be available with respect to dependents of any age, such as adult dependents. As noted in our May 13 client alert, the expanded applicability of the $500 rebate was a feature contemplated in the House Democrats’ proposed HEROES Act.

Clarifications and Corrections of CARES Act Retirement Plan Provisions

The HEALS Act would clarify certain aspects of the CARES Act relating to pension plans. In our April 1 client alert, we noted that the CARES Act permits individuals to withdraw retirement funds for coronavirus-related distributions, without incurring the 10 percent early withdrawal penalty they would otherwise incur. The HEALS Act would clarify that money purchase pension plans are included in the plans that qualify for these temporary rules, and that the inclusion of money purchase pension plans would apply retroactively as if it were enacted pursuant to the CARES Act.

The HEALS Act would also clarify the due date for pension plan minimum required contributions (which were delayed for 2020 in the CARES Act), extending the due date to January 4, 2020. In addition, the HEALS Act would clarify that eligible retirement plans may rely on an employee’s self-certification that the employee meets the requirements for the increased limits on retirement plan loans permitted under the CARES Act.