Keeping Up With the Velocity of Tax Changes

FEI Daily: A lot has happened since the CARES Act was signed; can you catch us up on tax-related aspects of the legislation? 

Jon Traub: On the business side, the biggest provisions are the allowance of NOL carrybacks (prohibited after 2017), expansion of deductible business interest (changed with the Tax Cuts and Jobs Act), accelerating refunds of corporate minimum tax payments, employee retention tax credits (a payroll tax credit for companies effected by the coronavirus shutdowns), deferral of payroll taxes for employers, and a technical correction for qualified improvement properties. These are major tax policy changes on the corporate tax side, designed to provide companies with liquidity at a time when they are strained for revenues, given the fact that they are losing customers or are forced to close entirely given state or local orders.

FEI Daily: Can you provide a little more detail on the expansion of deductible business interest?

Traub: It’s a bit of an oversimplification, but generally, in 2017, congress said you can deduct your net business interest expense up to 30% of your business income.  In the CARES Act, congress raised the limitation up to 50%. What might be as important for companies, Congress provided an election to choose 2019 as the year to apply your taxable income limit against – rather than 2020. You would imagine that a company that was profitable in 2019 has much higher taxable income than it does in 2020, so 50% of that 2019 limit is higher than 50% of the 2020 income might be. By allowing you to elect to choose a more favorable year, this will help many companies deduct more interest on a current basis.  

FEI Daily: The Senate returned to work this week. What should possible tax changes should companies be looking for in a possible phase-4 COVID-19 relief bill? 

Traub:  We’re still in the early phases in what a phase-4 bill should look like. Right now, we’re seeing a lot of turf defining from each side. House Democrats have made it clear that they are looking for a very big, ambitious package including a large piece of state and local assistance for those that have been hit hard by revenue losses. Senate Republicans have stated that their top priority is liability protection; how do you allow employers to open their doors to employees and customers if they face lawsuits if an employee or customer gets coronavirus? The President wants to make sure that the next bill has a payroll tax suspension. It’s difficult to square that triangle.

As a general rule, I am somewhat skeptical that phase 4 includes a tax title as robust as phase 3. In phase 4, you could see some clean up from phase 3. For example, whether PPP (payroll protection program) loan proceeds are deductible if used for business expenses. You could see some clarification around how the employee retention tax credit is calculated if you have an employer paying only healthcare costs but not wages of its employees (Note: in the time between the interview [May 6] and publishing [May 10] the Treasury department announced they would fix this regulatorily.) We may see some other fixes from the cares act, but I don’t see it being a robust tax title. At this point, I think that the momentum seems to be moving away from that and toward spending programs.  Having said that, throughout the course of the last eight to ten weeks, the congressional response to the pandemic has exceeded expectations at every turn. We have already seen congress approve $3 trillion of spending without any offsets and almost no votes against it.  We have seen Congress go above and beyond to keep the economy alive since it was put into a medically induced coma. It is certainly possible Congress will overdeliver again, but it just doesn’t seem like business tax will be key piece of phase 4.

FEI Daily: The President and others have lobbied for an expanded ability to deduct meals and entertainment expenses. Are we likely to see something like this included in a phase-4 legislation?  

Traub: I would never discount a proposal from the President of the United States, but I am somewhat skeptical, because I am not sure that the practicalities really work here. The theory behind this working is that companies (post-pandemic) will have money to spend on meals and entertainment that they wouldn’t spend without tax benefits. In many cases, I think that companies will be cash strapped and looking to cut back expenses – not expand them. So, companies may be reticent to dive back too deeply into meals and entertainment until they are on firmer financial footing – regardless of the tax benefits provided.

There will be some meals and entertainment that goes on by businesses due to it being part of their operating structure or business model. The question is whether we would be getting full bang for our buck or paying companies for stuff they would already be doing.

FEI Daily: Are there any other parts of this legislation or other regulatory changes that we haven’t already discussed? 

Traub: The whole experience of seeing the CARES Act implementation is a great reminder to pay careful attention to the regulatory process as laws get implemented. In the development of the PPP forgivable loan program, the SBA added a rule that 75% of the loan proceeds had to be used for payroll and only 25% could be used for other allowable expenses (e.g., facilities and rent) – that isn’t anywhere in the statute. Similarly, in an FAQ released about the employee retention tax credit, the Treasury department initially said that companies paying only health benefits for furloughed employees could not count the costs of those health benefits toward the employee retention tax credit. We saw several members of the House (including members of the Ways and Means Committee) say that the Treasury’s interpretation did not follow their intention. (Note: As aforementioned in the note above, the Treasury department altered course on May 7). We saw it again regarding whether forgivable PPP loan proceeds could be deducted if used for allowable expenses: the IRS issued a notice saying that the proceeds are not deductible if the amounts are later forgiven – that caught a lot of House members by surprise.

This is a reminder that the law says one thing, but the implementation can often mean very different things. Therefore, it is critical to pay attention to the implementation and not just read the statute.

FEI Daily: Any concluding thoughts? 

Traub: Unemployment numbers for April (released on May 8) are going to be super important to watch; they will drive the public discourse about what needs to be done to keep the economy okay and help struggling businesses and individuals.