To follow up on our article from July 22nd, we now know the Republican proposal for the extension and expansion of the CARES Act, aptly named the Health, Economic Assistance, Liability Protection and Schools Act, or more commonly referred to as the HEALS Act.
On Monday, Senate Majority Leader Mitch McConnell announced the HEALS Act, backed by Senate Republicans as their opening bid for “Phase 4” economic relief ahead of negotiations with the Senate and House Democrats. Phase 4 relief is the anticipated follow-up legislation to the $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act that was enacted on March 27th.
The original purpose of the CARES Act was to preserve liquidity for businesses and households after economic activity collapsed and governments ordered businesses to comply with lockdowns and service reductions to bolster the country’s public health response. Among other provisions, that legislation provided increased unemployment insurance (UI) benefits, one-time economic impact payments, tax credits to preserve employer-employee relationships, and forgivable loans to businesses through the Paycheck Protection Program (PPP). Most experts have stated that the CARES Act has mostly succeeded in preserving business and household liquidity over the past four months.
A resurgence in COVID-19 cases and a decline in economic activity in many states, threaten a full economic recovery. To address the ongoing pandemic, the Senate Republican Phase 4 proposal builds on some CARES Act provisions while modifying others, including a scaled down federal UI benefit. The Republican plan focuses on reforming the bolstered unemployment benefits, providing support to schools and hospitals and additional relief to businesses. That contrasts with the Democrats’ more sweeping tax proposals, though there are areas of potential bipartisan agreement, such as in expanding the employee retention tax credit and additional stimulus payments.
Major proposed tax provisions of the HEALS Act include the following:
Additional Round of Economic Impact Payments
This is a second round of economic impact payments structured identically to the rebates sent to taxpayers in the spring. It would provide $1,200 for single taxpayers and heads of household, $2,400 for those married filing jointly. The credit will phase out identically to the first round, at 5% per dollar of qualified income above $75,000 for singles, $112,500 for heads of household, and $150,000 for joint taxpayers. Taxpayers’ income will be determined using 2019 or 2018 tax returns.
One difference from the CARES Act economic impact payments is that the $500 additional payment for eligible dependents will be expanded under the HEALS Act beyond qualified children (aged 17 and under) to include other dependents excluded from payment in the CARES Act, such as adult dependents, including those with no income. This is similar to the definition of dependents used in the HEROES Act proposed by House Democrats and may expand the number of eligible dependents by an estimated 26 million people.
The HEALS Act would exclude anyone deceased prior to January 1, 2020 from receiving a rebate and prohibit prisoners from receiving the rebate. Additionally, the rebates would be protected from federal and state debt collection and bank garnishment apart from past due child support payments.
Restructured Federal Pandemic Unemployment Compensation (FPUC)
The Federal Pandemic Unemployment Compensation (FPUC) benefit under the CARES Act originally provided $600 per week of federal unemployment compensation in addition to state unemployment compensation through July 31st. The HEALS Act proposes a supplemental FPUC benefit of $200 per week through September 30, 2020, and then converting in October to a payment that replaced 70% of a recipient’s lost wages when combined with state unemployment compensation with a maximum total of $500 per week. This would be determined through a formula or an alternative method proposed by states.
Also, the HEALS Act provides a $2 billion in funding to state unemployment agencies to help them upgrade their systems to be better prepared to handle a surge in claims and adjusted wage replacement levels.
An Increased Employee Retention Tax Credit (ERTC)
The employee retention tax credit (ERTC), which currently provides a 50% refundable payroll tax credit on certain wages paid by employers to employees during the pandemic, would be raised to 65% and the gross receipts threshold required to qualify would be reduced from 50% to 25% compared to the same calendar quarter in the previous year. The amount of wages the ERTC can be claimed for is also increased, from $10,000 per year to $30,000 per year, limited to $10,000 per quarter.
Under current law, the ERTC can only be claimed for employee wages that compensate employees for not performing services if a firm is over 100 employees. This proposal would expand this threshold to 500 employees or less. This means businesses with 101 to 500 employees can now claim ERTC on all employee wages. Businesses that qualify would also be able to claim both PPP and the ERTC under this proposal, but with guardrails to prevent double dipping of both benefits for the same payroll costs.
Expansion of the Work Opportunity Tax Credit (WOTC)
The HEALS Act would temporarily expand the work opportunity tax credit (WOTC) to employers hiring individuals in qualified groups and would include a new targeted group defined as 2020 qualified COVID-19 unemployment recipients. A 2020 qualified COVID-19 unemployment recipient is an individual who has been certified by the designated local agency as having received unemployment compensation under State or Federal law for the week of or immediately preceding the hiring date and who begins work after the date of enactment of the Act and prior to January 1, 2021. The act would also expand the maximum credit from $2,400 (40% of the first $6,000 of qualified first-year wages) to $5,000 (50% of the first $10,000 of qualified first-year wages). Lastly, it also removes the limitation on rehires for this target category through December 31, 2020.
Creation of a New Refundable Payroll Tax Credit for COVID-19 Expenses
If passed in its current state, the HEALS Act would create a new refundable payroll tax credit equal to 50% of an employer’s qualified employee protection expenses, including COVID-19 testing, cleaning supplies, and protective personal equipment (PPE). The maximum amount of qualified expenses is $1,000 for each of the first 500 employees, plus $750 for each employee between 500 and 1,000, and $500 for each employee over 1,000. The credit would apply to expenses paid after March 12, 2020 and before January 1, 2021.
Expansion of the Paycheck Protection Program
As a follow-up to the PPP provided under the CARES Act, INITITIVES UNDER THE heals Act will preserve cash flow and help prevent additional layoffs by focusing on small businesses and providing them $190 billion to support second draw loans from the PPP. The one caveat to this would be that it is restricted to businesses with fewer than 300 employees that have experienced at least a 50% reduction in gross revenues. This will allow these businesses to take out a second loan equal to 2.5 times total monthly payroll costs up to $2 million, and these loans are forgivable if at least 60% of the loan is used to cover payroll costs.
Additionally, the HEALS Act expands forgivable expenses to include worker protection costs and covered supplier costs, simplifies the forgiveness process for smaller loans, and expands PPP eligibility to certain 501(c)(6) organizations. The Small Business Administration (SBA) is also authorized to provide up to $100 billion in low-cost loans (maturity up to 20 years with a 1 percent interest rate) to “recovery sector businesses,” defined as seasonable businesses and businesses located in low-income census tracts that meet the SBA’s revenue size threshold, have fewer than 500 employees, and experience at least a 50 percent decline in gross revenues.
Additional Provisions of the HEALS Act include but are not limited to:
- Temporary, Full Deduction for Business Meals – The HEALS Act would temporarily allow a full deduction for business meals – up from 50% under current law – through December 31, 2020 to stimulate demand for meals at restaurants.
- Flexibility for State Using COVID-19 Relief Fund & State Income Tax Changes – For states and localities, the bill would expand the allowable use of the COVID-19 Relief Fund (CRF) established in the CARES Actby permitting funds for use beyond December 31, 2020 to 90 days after the end of a state or localities’ fiscal year 2021 date. The bill would also allow states and localities to use CRF funding to cover revenue shortfalls incurred in fiscal year 2020 and 2021, subject to a limit of 25% of relief funds. The HEALS Act would also modify state income taxes by mandating that through 2024, employees who perform employment duties in multiple states would be subject to income tax only in their state of residence and any states in which they are present and performing employment duties for more than a limited time during the calendar year.
- Emergency Appropriations – The HEALS Act includes $306 billion in emergency appropriations for COVID-19 health response, including $105 billion to help students return to school in the fall of 2020.
- Liability Protection – This action would be provided to health-care providers, schools, and employers that would limit lawsuits brought against them for exposure to the coronavirus. Gross negligence would still be subject to legal claims.
- FBI Headquarters – At the White House’s insistence, the bill contains $1.75 billion for a new Washington headquarters for the FBI.
- Farm Aid – The proposal provides $20 billion in aid for agriculture, delegating broad discretion on spending to the Agriculture Secretary. The legislation would allow the Secretary to use the aid to compensate livestock producers for losses from killing animals that couldn’t be processed due to COVID-19 shutdowns, etc.
The HEALS Act will require Democratic support in both chambers to be passed, and negotiations with Democrats are expected to begin over what a final deal may look like. This bill looks very different when compared to the House Democratic Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act introduced in May. Notable omitted items include proposed expansions to the Child Tax Credit and Earned Income Tax Credit, additional federal aid to state and localities, and an extension of the full $600/week FPUC benefit.
Our office has been monitoring legislation such as this since our inception and the COVID-19 pandemic is no exception. We will continue to provide updates to our clients as they become available. As always, if there are any questions please do not hesitate to contact us or visit our website at www.thomas-and-company.com.