The Health, Economic Assistance, Liability Protection, and Schools (HEALS) Act introduced in the Senate yesterday includes four notable tax provisions, including substantial modifications to the existing Employee Retention Tax Credit.
The HEALS Act is a $1 trillion Senate coronavirus relief bill introduced in response to the $3 trillion House HEROES Act legislation passed by House Democrats in May. Both parties are now negotiating a final bill. The following tax provisions in the Senate's HEALS Act may be significantly altered or eliminated in any bipartisan compromise.
Additional 2020 recovery rebates for individuals and modifications to recovery rebates made under the CARES Act
The Senate Republican plan proposes a second round of $1,200 recovery rebates. This would follow the same eligibility requirements as the first round of checks, but with a notable difference in the treatment of dependents. While the first round provided an additional $500 for each child aged 16 or younger, the HEALS Act would expand the eligibility for the additional $500 to include all dependents regardless of age or income. Taxpayers who cannot be claimed by another taxpayer as a dependent and meet the same income thresholds as the first round of checks would receive another check for $1,200.
Enhanced employee hiring and retention payroll tax credit
The Employee Retention Tax Credit (ERTC) was enacted as part of the CARES Act in March. It was designed as an alternative to a loan through the Payroll Protection Program (PPP). In practice, the qualification thresholds as well as the prohibition on using the ERTC if you receive a PPP loan marginalized the ERTC. The HEALS Act proposes significant structural changes to the ERTC which could open it up to wider use.
Under current law, employers become eligible for the ERTC if, within a calendar quarter in 2020, the operation of their business is suspended or if the business experiences a 50% decline in gross receipts relative to the same quarter last year. The HEALS Act proposes to reduce the revenue decline trigger to 25% for the third and fourth quarters of 2020. In addition, it would allow businesses to calculate the revenue decline by comparing gross receipts to either the same quarter in 2019 or to the preceding quarter in 2020.
Several changes in the Senate plan would increase the value of the credit. The ERTC would increase from 50% of eligible wages to 65%. In addition, although eligible wages for each employee would be subject to the same per-quarter maximum ($10,000), the annual cap on eligible wages would increase from $10,000 per year to $30,000 for the year. Wages are based on full-time, W-2 employees.
Another key change would allow businesses to take out a PPP loan and also claim the ERTC. Safeguards are included to prevent double dipping.
The final notable change to the ERTC increases the threshold from 100 to 500 full-time employees for the more robust wage calculation. Businesses under this threshold can include the wages of all employees. Larger businesses can only include the wages of employees who are unable to work.
Temporary expansion of Work Opportunity Tax Credit
The Work Opportunity Tax Credit is a federal tax credit available to employers for hiring individuals from certain targeted groups who have consistently faced significant barriers to employment. The Senate Republicans propose to add a new, temporary targeted group: 2020 COVID-19 unemployment recipients.
A 2020 qualified COVID-19 unemployment recipient is an individual who is certified by the designated lead agency as having received (or is approved to receive) unemployment compensation and who begins work prior to Jan. 1, 2021. The bill would also increase the credit amount for this new group to 50% of the first $10,000 of qualified first-year wages.
Safe and Healthy Workplace Tax Credit
The HEALS Act would establish a refundable payroll tax credit to help employers pay for expenses incurred to protect employees from COVID-19. The proposed credit is equal to 50% of qualified expenses. Qualified expenses includes PPE, cleaning supplies, qualified workplace reconfiguration expenses, and qualified technology expenses.
In each calendar quarter, qualified expenses cannot exceed a cap based on the average number of W-2 employees. The cap is equal to $1,000 for each of the first 500 employees, plus $750 for each employee between 500 and 1,000, plus $500 for each employee that exceeds 1,000. The credit covers expenses incurred after March 13, 2020 and before Jan. 1, 2021.
Self-employed individuals are eligible to claim a credit against income taxes.
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