On Friday, May 15, 2020, the House of Representatives passed the Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act by a vote of 208-199. The $3 trillion bill is part of an effort to further support the economy during the COVID-19 pandemic closures. It marks the fourth coronavirus-related stimulus package.
The bill contains multiple spending measures designed to encourage employers to retain employees, provide additional economic impact payments to individual taxpayers and their families, extend the weekly unemployment compensation payments through January 2021, and further modify tax and benefit changes from the recent Coronavirus Aid, Relief, and Economic Security (CARES) Act and the Tax Cuts and Jobs Act (TCJA) of 2017.
The focal point of the stimulus plan is the nearly $1 trillion of aid to state and local governments, many of which are staring down some serious budget shortfalls due to the ongoing coronavirus crisis. Some in the Senate may resist state and local aid, but this appears to be the principal issue that will drive negotiations forward since the current bill is unlikely to pass the Senate in its current form. Many of the tax items included in this bill could find their way into final legislation.
Reports indicate it may be June or later before Congress reaches any compromise on a new stimulus package. While talks persist between the administration and lawmakers, there does not appear to be a rush in pushing another piece of legislation through as we saw with the first three. However, on May 13, Federal Reserve Chairman Jerome Powell urged Congress to consider another ambitious fiscal rescue package, warning that the economy may need additional support to avoid a cycle of business failures, job losses, and bankruptcies. The combination of further business closures, rising unemployment claims, and the financial condition of many states may pressure Congress to reach a compromise.
What’s in this article?
- Improvements to the employee retention credit
- Improvements to individual rebates
- Additional recovery rebates to individuals
- Child tax credit
- Dependent care assistance
- Flexibility for certain employee benefits
- Deduction of state and local taxes (SALT cap)
- Payroll credit for certain fixed expenses
- Business interruption credit for self-employed
- How can Squar Milner help?
Improvements to the employee retention credit
The HEROES Act, as passed on May 15, adjusts the employee retention credit (ERC), in the following ways:
- Increases the applicable percentage of qualified wages reimbursed from 50% to 80%.
- Modifies the gross receipts requirement to allow for a partial credit with a decline in gross receipts between 10% and 50% compared to the same calendar quarter of the previous year.
- Increases the wage limit per employee to $15,000 per quarter; limited to $45,000 per calendar year.
- Redefines “large employer” to mean greater than 1,500 full-time employees and gross receipts of greater than $41.5 million in 2019.
- Allows consideration of health plan expenses as qualified wages even when the employer does not pay other wages to the employee.
- Provisions retroactive to CARES Act enactment date.
Improvements to individual rebates
- All dependents are eligible for $500 qualifying dependent payment; full-time student dependents under the age of 24 as well as adult dependents are eligible.
- Economic impact payments will be made to individuals with a taxpayer identification number instead of a Social Security number.
Both provisions described are retroactive to the enactment date of the CARES Act.
Additional recovery rebates to individuals
- A second round of stimulus checks would see a $1,200 refundable tax credit for each family member ($1,200 for single filers/$2,400 married filing jointly); plus, up to $1,200 per dependent up to a maximum of three dependents.
- Phase-out begins at adjusted gross income (AGI) of $75,000 single filers/$150,000 married filing jointly. Payments are in addition to CARES Act amounts and excess amounts will not be repaid.
Dependent care assistance
- The exclusion for employer-provided dependent care assistance increases to $10,500 from $5,000 for 2020.
- The provision is fully refundable for 2020 and its maximum credit rate jumps to 50%.
- Phase-out begins at $120,000.
- It doubles the amount of the credit to $6,000 for one qualifying child and $12,000 for two or more.
Flexibility for certain employee benefits
- Participants can carry over up to $2,750 in unused benefits or contributions from 2020 to 2021 from health flexible spending arrangements.
- Participants in dependent care flexible spending arrangements can carry over up to the maximum annual amount of unused benefits or contributions from 2020 to 2021.
- The bill allows for retroactive amendments to plans.
Deduction of state and local taxes (SALT cap)
- The HEROES Act reinstates the deduction for state and local taxes for 2020 and 2021.
- Notes: The TCJA in 2017 changed the deduction, capping the amount of state and local tax deductions at $10,000.
Payroll credit for certain fixed expenses
- The payroll tax credit is 50% refundable for qualified fixed costs, including covered rent obligations, covered mortgage obligations and covered utility payments.
- Qualified wages (same definition as ERC) are limited to 25% or 6.25% of 2019 gross receipts with a maximum of $50,000.
- The bill limits the credit to employers with 1,500 or less full-time equivalent employees or $41.5 million in gross receipts.
- Employers must be subject to a full or partial suspension due to a COVID-19 government order or at least a 20% decline in gross receipts from the same calendar quarter of the preceding year.
Business interruption credit for self-employed
- The individual income tax credit is 90% refundable for certain self-employed individuals experiencing a significant loss of income.
Of course, tax measures are not the only provisions outlined in the HEROES Act. Other notable components of the legislation include:
Financial aid for state and local governments
More specifically, the bill contains $500 billion for states, $375 billion for local governments, $20 billion for tribal communities, and another $20 billion for territories like Puerto Rico, Guam, and the US Virgin Islands. As currently written, the bill also allocates $755 million to Washington, DC. Overall, the proposed aid for state and local governments far exceeds the $150 billion established in the CARES Act.
Extension of extended unemployment insurance
The CARES Act already expanded unemployment insurance by $600 per week until the end of July. It also modified the criteria to make more people, like freelancers and the self-employed, eligible for unemployment. However, it is becoming abundantly clear that many people will need assistance beyond July. Therefore, the bill extends the expanded benefits through January 31, 2021, and instituted a so-called “soft cutoff” to ensure some individuals receive the appropriate aid through March 2021.
Additional funding for small businesses
As lawmakers continue to monitor the Paycheck Protection Program (PPP) and the Economic Injury Disaster Loan (EIDL) Program, underrepresented business owners have so far been less likely to obtain funding from these programs. Therefore, the bill includes $10 billion for additional grants for small businesses.
How can Squar Milner help?
As noted above, it seems inevitable that this bill will undergo significant changes in the coming weeks. However, should you like to discuss how any of the provisions in the HEROES Act or other coronavirus-related stimulus packages may affect you and your tax situation, please contact your Squar Milner tax advisor.
Disclaimer: This material has been prepared for informational purposes only, and is not intended to substitute for obtaining accounting, tax, or financial advice from a professional tax planner or financial planner. All information is provided “as is,” with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information.