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Business Tax Breaks Could Move Fast if Big Ticket Items Resolved

July 31, 2020, 8:46 AM

Lawmakers in both parties have signaled that they could quickly move on more pandemic relief for businesses once a compromise is found on more contentious issues, including the federal pandemic unemployment aid expiring Friday.

Republicans, Democrats, and the White House remain far apart on the makeup of the next Covid-19 response package, particularly on how to handle the imminent expiration of the federal government’s $600 weekly boost to state unemployment benefits. The parties are also divided over other high priority issues, including state and local government aid that Democrats want and a liability shield for businesses that Senate Majority Leader Mitch McConnell (R-Ky.) has said must be included for a bill to pass the Senate.

Yet there appears to already be bipartisan backing for other relief measures, including an expansion of targeted payroll tax relief for businesses established in the CARES Act (Public Law 116-136).

“Changes that provide greater certainty for small businesses, in particular, in determining whether they are eligible could be helpful,” Sen. Ron Wyden (D-Ore.), the top Democrat on the Senate Finance Committee, said in an emailed statement to Bloomberg Tax, commenting on the employee retention tax credit.

The Senate Republicans’ roughly $1 trillion package, released July 27, proposes an expansion of the employee retention tax credit, which offers employers an advance credit on their payroll tax contributions.

Wyden, as well as House Democrats in their own legislation (H.R. 6800) , have similarly incorporated expansion of the advance payroll tax credit into their proposals.

A Starting Point

An expansion of the employee retention tax credit seems to have support among the four main congressional tax writers.

“My main goals, outside of fighting the public health crisis, are keeping as many employees connected to their employers as possible and making sure those who are out of work continue to have cash in their pockets to put food on the table and pay their rent,” House Ways and Means Committee Chairman Richard Neal (D-Mass.) said in an emailed statement. “I will be supportive of proposals that help achieve these.”

Rep. Kevin Brady (R-Texas), the top Republican on Ways and Means, said on a Wednesday press call that he supports expanding the credit.

That provides a starting point for additional business measures in congressional talks—Senate Finance Chairman Chuck Grassley (R-Iowa) introduced the portion of the Republican proposal that would expand the credit.

The GOP package would expand the credit’s value to be 65% of an employee’s wages, up from 50% in the CARES Act. The proposal also would raise the annual amount of qualified wages that a company can claim to $30,000 per employee, up from $10,000, and lower the bar to qualify for the credit.

The House-passed bill would expand the credit even further, so while there are still issues to hammer out, both parties view a similar approach as sound policy.

“The initial wage cap included in the CARES Act was envisioned for a crisis that only lasted a few months,” Wyden said. “Given Donald Trump’s failure to contain the virus, which has made the economic crisis far worse, it makes sense to revisit this issue, along with other small business issues.”

PPP Deductibility

There also is an opening for lawmakers to agree on allowing businesses to “double dip” on government-backed Paycheck Protection Program loans by allowing recipients to deduct business expenses like rent and utilities, even if loan proceeds covered those costs.

The IRS in May determined that expenses that qualify businesses for loan forgiveness won’t generate federal tax deductions, something that the agency said would prevent “a double tax benefit” since PPP loan proceeds aren’t considered to be taxable income.

Grassley, Wyden, and Neal quickly wrote to Treasury Secretary Steven Mnuchin asking him to reconsider. Grassley and Wyden followed that up by signing onto a bill (S. 3612) introduced by Sen. John Cornyn (R-Texas).

Brady, who didn’t join his colleagues on that letter to Mnuchin, softened his position this week when asked about making PPP-related expenses deductible in the upcoming relief package.

“I’m open to a conversation,” Brady said on a weekly press call. “There could be a case for making this exception.”

Lawmakers will have to win over the administration on the issue, as the Treasury Department has resisted the idea so far. Treasury didn’t respond to a request for comment.

Other Possibilities

Neal said he is open to some other ideas in the Senate Republican proposal, like a tax credit designed to make workplaces more resistant to the spread of coronavirus.

But Neal said his focus is on “direct proposals that will give Americans the immediate relief they need.”

There is also interest among Republicans in making a number of general business tax credits effectively refundable. That didn’t make it into the Republican relief package, which was restrained by a self-imposed $1 trillion spending cap.

Democrats haven’t endorsed the tax credit idea, but they also haven’t fully closed the door on it either.

“Any proposal to monetize general business credits would need to be carefully designed and properly targeted,” Wyden said. “Otherwise it would be ripe for abuse, difficult for the IRS to administer, and the benefits would flow overwhelmingly to large multinational corporations that don’t need assistance.”

Rohit Kumar, former deputy chief of staff to McConnell, now a principal and leader of PwC’s Washington National Tax Services Tax Policy Group, acknowledged that both parties will need to be on board for something to make it into the package.

“No one’s going to get a partisan-only thing,” Kumar said. “Even the liability language at the end of the day is going to have to be bipartisan.”

—With assistance from Allyson Versprille.

To contact the reporter on this story: Colin Wilhelm in Washington at cwilhelm@bloombergtax.com

To contact the editors responsible for this story: Patrick Ambrosio at pambrosio@bloombergtax.com; Yuri Nagano at ynagano@bloombergtax.com

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