Congress continues to debate legislative proposals related to the next COVID-19 package, though a final package is not expected until late July. This weekly newsletter outlines the latest developments in Washington, including tax, small business and financial services developments in the negotiations on Phase Four legislation and regulatory guidance from various federal agencies.
What To Expect in Next Economic Recovery Package
COVID-19 on the Backburner. As states begin to reopen their economies, the number of COVID-19 cases is beginning to inch higher. However, alongside a spike of the virus, the economy also seems to have rebounded in these states, resulting in a decline in May unemployment numbers and a 17.7% jump in retail sales. This has strengthened Senate Majority Leader Mitch McConnell’s (R-KY) argument to push the timeline for the next response package further out.
McConnell, whose Democratic opponents have accused him of slow rolling the next package, has turned his attention to legislative matters unrelated to COVID-19. For the four weeks preceding the Senate’s upcoming two-week district work period for the Fourth of July, McConnell has scheduled a slate of more traditional bills.
The Senate will first consider the Great American Outdoors Act (H.R. 1957).The legislation, which would fully fund the Land and Water Conservation Fund and help reduce the $20 billion federal land maintenance backlog, has widespread bipartisan support and is expected to pass the Senate.
The National Defense Authorization Act (NDAA), which authorizes appropriations for various Department of Defense programs and activities, is also on the Senate’s schedule of legislation to pass ahead of the Fourth of July work period. The Senate Armed Services Committee overcame a significant step in the legislative process last Thursday when it approved the measure, teeing up a potential floor vote before the Senate leaves town.
Lawmakers have been under pressure from nationwide protests following the death of George Floyd to enact police reform legislation. McConnell has tasked Sen. Tim Scott (R-SC) with drafting Senate Republicans’ legislation, which he is expected to introduce later this week. According to Scott, the legislation would increase funding for police body cameras and correlate grant funding to reports of use of force that result in death or serious injury. McConnell has announced that he would like to consider the Senate bill on Monday, barring any parliamentary hurtles. House Democrats, meanwhile, have already unveiled a police reform proposal, the Justice in Policing Act (H.R.7120), which would, among other things, establish national standards for police department operations, require data collection on police encounters and make investments for community-based policing programs.
As the Senate considers non-COVID-19-related legislation, House Democrats have renewed calls for the Senate to bring the HEROES Act (H.R.6800) to the floor. For now, McConnell is unlikely to do so until after the July 4 recess.
Acitivity This Week
Below is a brief discussion on select hearings for the tax and financial services committees.
House Ways and Means Committee
On Wednesday, the committee held a hearing entitled “The 2020 Trade Policy Agenda,” during which it heard testimony from U.S. Trade Representative Robert Lighthizer.
On Thursday, the Subcommittee on Select Revenues will hold a hearing entitled “Tax Relief to Support Workers and Families During the COVID-19 Recession,” during which it will hear testimony from:
- Amy Matsui, senior counsel, The National Women’s Law Center
- Indivar Dutta-Gupta, co-executive director, Georgetown Center on Poverty and Inequality at the Georgetown University Law Center
- Allison Bovell-Ammon, director of Policy Strategy for Children’s HealthWatch at Boston Medical Center
- Martha Rodriguez, preschool educator, Renton, WA
- Kyle Pomerleau, resident fellow, American Enterprise Institute (AEI)
Senate Finance Committee
On Wednesday, the committee held a hearing entitled “The President’s 2020 Trade Policy Agenda,” during which it heard testimony from U.S. Trade Representative Robert Lighthizer.
House Financial Services Committee
On Tuesday, the Subcommittee on National Security, International Development and Monetary Policy held a hearing entitled “Cybercriminals and Fraudsters: How Bad Actors Are Exploiting the Financial System During the COVID-19 Pandemic,” during which it heard testimony from:
- Tom Kellerman, head of Cybersecurity Strategy, VMware
- Kelvin Coleman, executive director, National Cyber Security Alliance
- Amanda Senn, chief deputy director, Alabama Securities Commission; on behalf of the North American Securities Administrators Association (NASAA)
- Jamil Jaffer, founder and executive director, National Security Institute, assistant professor of law and director, National Security Law & Policy Program
On Wednesday, the committee held a hearing entitled “Monetary Policy and the State of the Economy,” during which it heard testimony from Federal Reserve Chair Jerome Powell.
Senate Banking Committee
On Tuesday, the committee held a hearing entitled “The Semiannual Monetary Policy Report to the Congress,” during which it heard testimony from Federal Reserve Chair Jerome Powell.
Phase Four Proposals
In the absence of House and Senate negotiations, lawmakers continue to introduce legislation and other proposals for Phase Four. Below are proposals that garnered significant attention last week.
- Restaurant Fund. Rep. Earl Blumenauer (D-OR), a member of the House Ways and Means Committee, is developing a bill with Sen. Roger Wicker (R-MS) that would lend assistance to the restaurant industry. According the Blumenauer, the forthcoming legislation would “establish a $120 billion fund for food service or drinking establishments that aren’t publicly traded or part of a chain with 20 or more locations doing business under the same name.” The assistance would be given through grants, rather than loans, to independent restaurants with annual income of $1.5 million or less. Blumenauer said the White House has indicated a potential interest in the bill.
- Small Business Expense Protection Act. Sen. John Cornyn (R-TX) has introduced legislation that would allow companies to deduct Paycheck Protection Program (PPP) expenses. The Small Business Expense Protection Act (S.3612), cosponsored by Senate Finance Committee Chair Chuck Grassley (R-IA) and Ranking Member Ron Wyden (D-OR), would clarify that PPP loans do not affect the tax treatment of ordinary business expenses. Cornyn is attempting to quickly pass the measure by unanimous consent rather than via the lengthier process involving floor debate.
- Accelerating Corporate Tax Breaks. Senate Finance Committee Republicans are considering a proposal that would remove the limitation on federal tax credits that prevents corporations from claiming tax credits in excess of their total tax liability, thereby allowing them to receive more money from the federal government than they paid. The proposal, which would allow businesses to “cash out” on their credits for 2020, is reportedly a top priority for business advocacy groups like the U.S. Chamber of Commerce as they lobby for provisions to include in the next COVID-19 package. Opponents claim the provision would reduce government revenues, particularly from large corporations that have seen their stock prices jump in recent weeks. House Ways and Means Committee Ranking Member Kevin Brady (R-TX) said the policy “has merit—it wouldn’t in normal times, but we’re not in normal times.”
- BEAT CHINA Act. Sens. Kelly Loeffler (R-GA), Joni Ernst (R-IA) and Ted Cruz (R-TX) introduced the Bring Entrepreneurial Advancements to Consumers Here In North America (BEAT CHINA) Act, which would incentivize pharmaceutical and medical device manufactures to relocate to the U.S. The bill would encourage companies to relocate through tax incentives, eligible depreciation and the exclusion from gross income the gains earned from the sale of assets in their former manufacturing location.
- P4 Act. Sens. Ben Cardin (D-MD), Chris Coons (D-DE) and Jeanne Shaheen (D-NH) introduced the Prioritized Paycheck Protection Program (P4) Act. The legislation would authorize new PPP loans for businesses with 100 employees or less that have already expended, or are on pace to expend, their PPP loan and have lost 50% or more of their revenue due to COVID-19. Qualifying businesses would be eligible for 350% of their monthly payroll costs up to $2 million.
- Safe Reopening Tax Credit Act. Rep. Jimmy Panetta (D-CA), a member of the House Ways and Means Committee, introduced legislation on Monday that would provide a tax credit for business expenses related to preventing the spread of COVID-19. Businesses and nonprofits in the restaurant, hospitality, retail, entertainment and recreation sectors with up to 1,500 full-time-equivalent employees with less than $41.5 million in 2019 gross receipts would be eligible for a 30% tax credit up to $15,000 on covered expenses through 2020. According to Panetta, covered expenses include “plexiglass barriers, contactless point-of-sale systems, employee health education expenses, testing and virus monitoring expenses, personal protective equipment.”
The Week in Rewind
Congress and IRS officials are back to relatively normal schedules, albeit from home. Below is an update on the IRS’s efforts to bring back its employees and other notable stories from last week.
IRS Return to Work
Since Internal Revenue Service (IRS) employees began returning to their offices on June 1, there have been few complaints. According to IRS Commissioner Charles Rettig, the IRS is providing hand sanitizer to its employees and is cleaning the offices after every shift. National Treasury Employees Union President Tony Reardon, who heads an organization that represents thousands of IRS workers, has even said that “for the most part, there aren’t any really big issues.”
Despite this, the effort has not been without its hiccups. There have been a few cases of COVID-19 diagnoses, causing some offices to temporarily shut down. To further mitigate these risks, in addition to suggestions from lawmakers like House Ways and Means Committee Chair Richard Neal (D-MA) that the IRS provide on-site temperature checks, Reardon has called on the IRS to use contact tracing to identify employees who may have come into contact with the disease.
Although the partial reopening of the agency has gone smoothly, the IRS has a long way before it fully returns to pre-COVID-19 operations. On Monday, IRS workers in Georgia, Tennessee, Missouri and Michigan returned to their offices. Those states will be followed by Indiana, Ohio, California, Oregon and Puerto Rico on June 29.
Senate Finance Committee Examines Unemployment Insurance
The Senate Finance Committee held a hearing on June 9 to explore the role the Coronavirus Aid, Relief and Economic Security (CARES) Act’s (P.L.116-136) Unemployment Insurance (UI) provisions have played during the COVID-19 pandemic. Among the expert witnesses testifying was Eugene Scalia, the U.S. Secretary of Labor.
Republicans, led by Committee Chair Chuck Grassley (R-IA), reiterated concerns that the additional $600 per week in UI benefits enacted under the CARES Act, provides workers a disincentive to return to work. They advocated for a “return-to-work bonus” that would allow employees to retain some portion of their unemployment benefits if they return to their previous jobs. Democrats, led by Committee Ranking Member Ron Wyden (D-OR), largely rejected the suggestion that U.S. workers would prefer to stay home instead of returning to work. In light of this, Wyden and other Democrats urged Congress to extend the current unemployment benefits regime as the unemployment rate remains high.
Scalia testified that, going forward, the Department of Labor has three primary goals: (1) help states make prompt unemployment payments to workers; (2) ensure program integrity; and (3) work with states to help Americans transition back to work safely. Discussing the suggested disincentive posed by UI benefits, Scalia said most American workers would prefer to work as opposed to simply collect UI benefits, but he added that some will elect to remain on UI if they receive at least the same amount of income as they would from working. Given that the expanded UI benefits are scheduled to expire on July 31, Scalia said the Trump administration has not yet made a decision on what steps it will take if Congress fails to extend the benefits. He said the forthcoming June jobs report will influence how the administration proceeds.
Friday: Mail Day
Following their June 12 appearance before the Senate Small Business Committee, several lawmakers sent letters sent to Treasury Secretary Steven Mnuchin and Jovita Carranza, administrator of the U.S. Small Business Administration (SBA).
In a letter led by Sen. Mike Rounds (R-ID), a bipartisan group of 43 lawmakers urged Mnuchin and Carranza to make it easier for businesses to navigate the PPP Loan Forgiveness Application. The lawmakers report that their constituents have complained the process “is difficult to understand and to complete.” As a potential remedy, the lawmakers suggested the application be revised to be no longer than one page for any loan under $250,000.
In another letter to the duo led by Senate Minority Leader Chuck Schumer (D-NY), 46 Democratic senators echoed concerns expressed in the other letter, pressing Mnuchin and Carrazna to “significantly streamline and simplify the forgiveness process” for the smallest and most underserved businesses. The letter suggests four steps the administration could take to accomplish this: (1) streamlining the forgiveness process for low-dollar loan amounts; (2) providing a reasonable safe harbor to lenders of low-dollar loan amounts; (3) developing online tools to help businesses navigate the forgiveness process; and (4) standing up a help line for borrowers.
A third letter was sent to Mnuchin and Carranza on June 12, asking about what they saw as the SBA’s failure to provide transparency regarding PPP loan recipients. In response to Mnuchin’s testimony that PPP loan information is “proprietary” and “confidential,” Rep. Katie Porter (D-CA) and Sen. Kamala Harris (D-CA) suggested such an assertion was “patently untrue” and accused Mnuchin of attempting to protect the Treasury Department “from having to answer to the American people.” The lawmakers ultimately said they will introduce legislation to direct the SBA to “make public basic information about PPP grants, including whether recipient businesses are minority-owned.”
HSGAC Issues Free File Report
On June 9, the Senate Homeland Security and Governmental Affairs Permanent Subcommittee on Investigations issued a report after conducting a yearlong investigation into the IRS Free File program. Following allegations in June 2019 that Free File Alliance participants, which includes tax preparers like H&R Block and Intuit, were manipulating search engine results so as to steer away from their free services for qualifying low-income taxpayers, the subcommittee initiated a review of the program to more deeply understand the program’s operations and the validity of the claims. After reviewing investigations from other governmental bodies, the subcommittee reached a number of conclusions, including:
- The IRS has, until recently, conducted little oversight of the Free File program, having only three full-time employees oversee the program over the past four years and relying heavily on “self-policing”;
- Resulting from a failure to clarify whether or not Alliance members should index Free File websites to appear in online search engines, five companies—H&R Block, Intuit, TaxHawk, Drake and TaxSlayer—coded their websites in such a way that prevented search engines from including their sites in organic results; and
- MITRE found that 85% of taxpayers visiting Alliance member sites found the pages through links in Alliance member advertisements that promoted the products for which they charge fees.
Ultimately, the subcommittee determined that even with adequate funding, marketing and IRS oversight, millions of Americans are likely to begin their search through a search engine when choosing an online tax preparation software, rather than IRS.gov. The subcommittee provided no recommendations apart from calling on Congress, the IRS and Alliance to coordinate in an effort to maximize opportunities for taxpayers to find and use free tax filing services.
After lawmakers rushed to enact legislation, agencies are now attempting to keep up by quickly releasing regulations and other guidance. Below is a look at select COVID-19-related implementation guidance and non-COVID-19-related guidance released during the previous week.
- Qualifying Relative. The IRS released proposed rules on the definition of a qualifying relative for taxpayers claiming federal income benefits from a qualifying relative for years between 2018 and 2025. The rules address a support test released in early 2017 and provide replacement language.
- Applicable Dollar Amount. The IRS published Notice 2020-44, which provides that the dollar amount for determining the Patient-Centered Outcomes Research Trust Fund (PCORTF) fee for years between Oct. 1, 2019, and Oct. 1, 2020, is $2.54.
- Primary Care Arrangements and Heath Care. The IRS released proposed regulations that address the treatment of direct primary care arrangements and health care sharing ministry memberships that is regulated under section 213. This section permits taxpayers to take an itemized deduction for medical care that exceeds 7.5% of adjusted gross income.
- Priority Guidance Plan Recommendations. The IRS requests comments and recommendations for the priority guidance plan in Notice 2020-47. Submissions must be received by Wednesday, July 22.
- Like-Kind Exchanges. The IRS published proposed regulations on the limits on like-kind exchanges, limiting transactions to “real property.” The regulations preclude exchanges of art work, machinery and automobiles.
- Donation Program Relief. The IRS provided relief under Notice 2020-46 for employer leave-related donation programs for those affected by COVID-19. When employers make these specific contributions they may deduct them as a business expense.
- Empowerment Zones. Revenue Procedure 2020-16 states that any state or local government that nominated an empowerment zone will have this designation extended to Dec. 31, 2020.
- 501(c) Exemption. The IRS released Notice 2020-30 that updates procedures for organizations under Section 501(c) that allows subordinate organizations under this section to obtain an exemption from federal income tax.
- Postpone Investment Dates. Last Friday, the IRS released Notice 2020-49 that postpones due dates for investment, making reinvestment, and expending amounts for construction of real property under section 45D. The new date for these is now Dec. 31, 2020.
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The information in this article is accurate as of the publication date. Because this law in this area is changing rapidly, and articles are not automatically updated, continued accuracy cannot be guaranteed.