Authored by Paul Dillon, Michelle Hobbs, Pat Balthazor and Michael Wronsky
In an effort to further support the economy during the pandemic closures, the House of Representatives passed the fourth COVID-19-related stimulus package, the Health and Economic Recovery Omnibus Emergency Solutions (Heroes) Act. The $3 trillion 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 Coronavirus Aid, Relief, and Economic Security (CARES) Act and the Tax Cuts and Jobs Act.
The centerpiece of the plan is nearly $1 trillion of aid to state and local governments, which, it seems clear, will require financial assistance to get through this crisis. Some in the Senate may resist state and local aid, but this appears to be the issue that will drive negotiations forward since the current bill is unlikely to pass the Senate as is. 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 any compromise is reached on a new stimulus package. While talks continue between the administration and lawmakers, there appears to be no rush in pushing another piece of legislation through as we saw with the first three (and one-half). 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 the states may pressure Congress to reach a compromise.
Improvements to employee retention credit (ERC)
- The applicable percentage of qualified wages reimbursed increases to 80% from 50%.
- The gross receipts requirement is modified to allow for a partial credit with a decline on gross receipts between 10% and 50% compared to same calendar quarter of previous year.
- The wage limit per employee rises to $15,000 per quarter; limited to $45,000 per calendar year.
- Large employer redefined to mean greater than 1,500 full-time employees and gross receipts of greater than $41.5 million in 2019.
- Health plan expenses can be considered qualified wages even when no other wages are paid to the employee.
- Provisions retroactive to CARES Act enactment date.
Individual rebate improvements
- 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 (retroactive to CARES Act enactment).
- Economic impact payments will be made to individuals with a taxpayer identification number instead of a Social Security number (retroactive to CARES Act enactment).
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/$2,400 married filing jointly); plus, up to $1,200 per dependent up to a maximum of three dependents. Phase-out begins at adjust gross income (AGI) of $75,000 single/$150,000 married filing jointly). Payments are in addition to CARES Act amounts and excess amounts will not be repaid.
Child tax credit
- The credit amount increases to $3,000 per child ($3,600 for children under 6). It’s fully refundable for 2020 and 17-year-olds qualify.
Dependent care assistance
- 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.
- The exclusion for employer-provided dependent care assistance increases to $10,500 from $5,000 for 2020.
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.
- Retroactive amendments to plans are allowed.
Deduction of state and local taxes (SALT cap)
- The limitation on the deduction for state and local taxes is eliminated for 2020 and 2021
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 credit is limited to employers with no more than 1,500 full-time equivalent employees or $41.5 million in 2019 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.
Please reach out to your Baker Tilly tax advisor to discuss how these changes may affect your tax situation.
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