On May 6, 2020, Senators Chuck Grassley (R. Iowa) and Ron Wyden (D. Ore.), the Chair and Ranking Member of the Senate Finance Committee, introduced the Small Business Expense Protection Act of 2020 (S. ___),[1] which would reverse a recent Internal Revenue Service (“IRS”) Notice and permit deductions for expenses that relate to loan forgiveness under the Small Business Administration’s Paycheck Protection Program (the “PPP”). On May 8, 2020, a bipartisan group of Representatives introduced the Jumpstarting Our Businesses’ Success Credit Act (the “JOBS Credit Act”) (H.R. ___), which would expand the employee retention tax credit available under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) (H.R. 748). [2]  This blog summarizes these bills.

Small Business Expense Protection Act: Deductibility of Expenses Paid with PPP Loans

The CARES Act includes a loan forgiveness program under the PPP.  Any cancellation of debt income under the PPP is tax-free (i.e., excluded from income), and does not result in a loss of tax attributes.  However, the CARES Act did not specify whether a borrower under the PPP may deduct expenses that relate to the forgiven amount (i.e., the eight weeks of wages, employee benefits, interest, rent, and utilities that determined the forgiven amount). The IRS held that these expenses are not deductible.[3]  The Small Business Expense Protection Act would reverse this rule and permit small businesses to deduct the expenses paid with a PPP loan even if the loan is forgiven. In other words, receiving loan forgiveness under the PPP would not result in loss of a deduction for otherwise ordinary business expenses.

JOBS Credit Act: Changes to the Employee Retention Tax Credit

Credit increased to 80% of qualified wages and cap on credit increased. The CARES Act provides for a refundable tax credit of 50% of certain “qualified wages”, capped at $5,000/employee (50% of up to $10,000 of qualified wages for all calendar quarters).  The JOBS Credit Act would increase the credit from 50% to 80% of “qualified wages” and increase the cap from $5,000 for all calendar quarters to $12,000 (80% of $15,000) for each calendar quarter for up to three calendar quarters. Accordingly, the JOBS Credit Act would increase the maximum amount of credit from $5,000 (under the CARES Act) to $36,000.

PPP borrowers may receive credit. The CARES Act denies the employee retention tax credit to any employer that receives a PPP loan.  The JOBS Credit Act would permit an employer that receives a PPP loan to receive the employee retention tax credit.[4]  However, under the JOBS Credit Act, to prevent any double-dipping, an employer would have the choice to exclude qualified wages from “payroll costs” for purposes of determining its loan forgiveness under the PPP, or to exclude qualified wages for purposes of calculating the employee retention tax credit so that the wages may be included as “payroll costs” for purposes of determining its loan forgiveness under the PPP.[5]

Large employer threshold. For an employer with more than 100 full-time employees, the CARES Act provides that the employee retention tax credit is available only with respect to wages paid to an employee who is not providing services due to (i) the employer’s trade or business being fully or partially suspended due to a governmental order related to COVID-19 (the “suspension test”) or (ii) the employer experiencing a significant decline in gross receipts (the “gross receipts test”). The JOBS Credit Act would apply this rule only to an employer with more than 1,500 full-time employees and gross receipts of more than $41.5 million in calendar year 2019.[6]

Lower reduction required by gross receipts test. Under the CARES Act, an employer qualifies for the credit under the gross receipts test for the period beginning with the first calendar quarter for which gross receipts for the employer’s trade or business are less than 50% of gross receipts for the same calendar quarter of 2019 and ending at the end of the first subsequent quarter in which gross receipts are more than 80% for the same calendar quarter of 2019. Under the JOBS Credit Act, an employer could qualify for the period beginning in a calendar quarter in which the employer’s gross receipts were less than 80% (instead of 50%) of gross receipts for the same calendar quarter of 2019 and ending at the end of the first subsequent quarter in which gross receipts are more than 80% for the same calendar quarter of 2019 (the “80% gross receipts test”).[7] However, under the JOBS Credit Act, if an employer (i) is eligible under the 80% gross receipts test, but not under the current gross receipts test (i.e., the employer’s gross receipts in a calendar quarter are less than 80%, but not less than 50%, of its gross receipts in same calendar quarter in 2019) and (ii) does not otherwise satisfy the suspension test, the employer’s credit would be reduced by an amount equal to the full credit multiplied by the ratio of the “excess gross receipts percentage point amount” to 30%.[8]

For example, assume an employer had gross receipts from its trade or business of $100 in the second quarter of 2019, but has $60 of gross receipts and $50 of qualified wages in the second quarter of 2020, and does not satisfy the suspension test.  Under the CARES Act, the employer would not qualify for the employee retention tax credit because its second quarter 2020 receipts are not less than 50% of its second quarter 2019 gross receipts.  Under the JOBS Credit Act, the employer would qualify for employee retention tax credit because its second quarter 2020 gross receipts are less than 80% of its second quarter 2019 gross receipts. However, the employer would receive a reduced credit of about $26.67 (rather than $40 [80% * $50]), calculated by reducing the full credit of $40 by an amount equal to the full credit of $40 multiplied by 1/3, which is the ratio of the excess gross receipts percentage point amount of 10% (i.e., 60% over 50%) to 30%.

Tax-exempt organizations and governmental entities. The JOBS Credit Act would provide that, for purposes of the employee retention tax credit, the term “gross receipts” of a section 501(c) tax-exempt organization means the amounts the organization receives during its annual accounting period from all sources without subtracting any costs or expenses.[9]

Under the CARES Act, federal, state or local government (and their agencies) are not eligible for the credit. The JOBS Credit Act would permit state and local governments (and their agencies), Indian tribal governments (and their agencies) and federal credit unions to receive the employee retention tax credit if they are engaged in a trade or business and meet the suspension test.[10]

Health plan expenses. The JOBS Credit Act would include health plan expenses in the definition of “qualified wages” for purposes of the employee retention tax credit, including in cases where an employer furloughs employees but continues to provide health benefits to them.[11]

[1] The sponsors were Senators Chuck Grassley (R. Iowa), Ron Wyden (D. Ore.), John Cornyn (R. Tex.), Marco Rubio (R. Fl.), and Tom Carper (D. Del.).

[2] The sponsors were Rep. Stephanie Murphy (D. Fl.), Suzan DelBene (D. Wash.), John Katco (R. N.Y.), Brian Fitzpatrick (R. Pa.), and Chris Pappas (D. N.H.).  Reps. Murphy and DelBene sit on the House Ways and Means Committee.

[3] Notice 2020-32.

[4] Section 3. All section references are to the JOBS Credit Act or the Internal Revenue Code unless otherwise specified.

[5] Section 3(b).

[6] Section 2(c).

[7] Section 2(d)(1).

[8] Section 2(d)(2). The excess gross receipts percentage point amount is equal to the excess of (i) the lowest of the “gross percentage point amounts” with respect to any calendar quarter during the period ending with such calendar quarter and beginning with the first calendar quarter during the period when the employer meets the 80% gross receipts test, over (ii) 50%. The gross receipts percentage point amount is equal to the gross receipts in a calendar quarter divided by the gross receipts in the same calendar quarter in 2019 (expressed as a percentage point).

[9] Section 2(d)(3).

[10] Section 2(g).

[11] Section 2(f).

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Photo of Muhyung (Aaron) Lee Muhyung (Aaron) Lee

Muhyung (Aaron) Lee is a partner in the Tax Department. Aaron works predominantly on U.S. federal corporate, partnership and international tax matters that include advising on mergers and acquisitions, fund formation, financial products and financing transactions.

Before joining Proskauer, Aaron was an associate…

Muhyung (Aaron) Lee is a partner in the Tax Department. Aaron works predominantly on U.S. federal corporate, partnership and international tax matters that include advising on mergers and acquisitions, fund formation, financial products and financing transactions.

Before joining Proskauer, Aaron was an associate at Davis Polk & Wardwell LLP in New York. Before attending law school he worked in finance at Société Générale and Bank of America Merrill Lynch.

Photo of Amanda H. Nussbaum Amanda H. Nussbaum

Amanda H. Nussbaum is the chair of the Firm’s Tax Department as well as a member of the Private Funds Group. Her practice concentrates on planning for and the structuring of domestic and international private investment funds, including venture capital, buyout, real estate…

Amanda H. Nussbaum is the chair of the Firm’s Tax Department as well as a member of the Private Funds Group. Her practice concentrates on planning for and the structuring of domestic and international private investment funds, including venture capital, buyout, real estate and hedge funds, as well as advising those funds on investment activities and operational issues. She also represents many types of investors, including tax-exempt and non-U.S. investors, with their investments in private investment funds. Business partners through our clients’ biggest challenges, Amanda is a part of the Firm’s cross-disciplinary, cross-jurisdictional Coronavirus Response Team helping to shape the guidance and next steps for clients impacted by the pandemic.

Amanda has significant experience structuring taxable and tax-free mergers and acquisitions, real estate transactions and stock and debt offerings. She also counsels both sports teams and sports leagues with a broad range of tax issues.

In addition, Amanda advises not-for-profit clients on matters such as applying for and maintaining exemption from federal income tax, minimizing unrelated business taxable income, structuring joint ventures and partnerships with taxable entities and using exempt and for-profit subsidiaries.

Amanda has co-authored with Howard Lefkowitz and Steven Devaney the New York Limited Liability Company Forms and Practice Manual, which is published by Data Trace Publishing Co.

Photo of David S. Miller David S. Miller

David Miller is a partner in the Tax Department. David advises clients on a broad range of domestic and international corporate tax issues. His practice covers the taxation of financial instruments and derivatives, cross-border lending transactions and other financings, international and domestic mergers…

David Miller is a partner in the Tax Department. David advises clients on a broad range of domestic and international corporate tax issues. His practice covers the taxation of financial instruments and derivatives, cross-border lending transactions and other financings, international and domestic mergers and acquisitions, multinational corporate groups and partnerships, private equity and hedge funds, bankruptcy and workouts, high-net-worth individuals and families, and public charities and private foundations. He advises companies in virtually all major industries, including banking, finance, private equity, health care, life sciences, real estate, technology, consumer products, entertainment and energy.

David is strongly committed to pro bono service, and has represented more than 200 charities. In 2011, he was named as one of eight “Lawyers Who Lead by Example” by the New York Law Journal for his pro bono service. David has also been recognized for his pro bono work by The Legal Aid Society, Legal Services for New York City and New York Lawyers For The Public Interest.

Photo of Martin T. Hamilton Martin T. Hamilton

Martin T. Hamilton is a partner in the Tax Department. He primarily handles U.S. corporate, partnership and international tax matters.

Martin’s practice focuses on mergers and acquisitions, cross-border investments and structured financing arrangements, as well as tax-efficient corporate financing techniques and the tax…

Martin T. Hamilton is a partner in the Tax Department. He primarily handles U.S. corporate, partnership and international tax matters.

Martin’s practice focuses on mergers and acquisitions, cross-border investments and structured financing arrangements, as well as tax-efficient corporate financing techniques and the tax treatment of complex financial products. He has experience with public and private cross-border mergers, acquisitions, offerings and financings, and has advised both U.S. and international clients, including private equity funds, commercial and investment banks, insurance companies and multinational industrials, on the U.S. tax impact of these global transactions.

In addition, Martin has worked on transactions in the financial services, technology, insurance, real estate, health care, energy, natural resources and industrial sectors, and these transactions have involved inbound and outbound investment throughout Europe and North America, as well as major markets in East and South Asia, South America and Australia.

Photo of Sean Webb Sean Webb

Sean is an associate in the Tax Department. He earned his J.D. from UCLA School of Law and his LL.M. from NYU School of Law, where he served as a graduate editor for the Tax Law Review.

Prior to law school, Sean…

Sean is an associate in the Tax Department. He earned his J.D. from UCLA School of Law and his LL.M. from NYU School of Law, where he served as a graduate editor for the Tax Law Review.

Prior to law school, Sean lived and worked in Shanghai, China, where he learned Mandarin. He has served as a translator for Stanford Law School’s China Guiding Cases Project. He received his B.A. from McGill University.