COVID-19 and Congress

David Stewart: 0:01

Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: Congress and the coronavirus. As the U.S. Congress prepares to take its regular August recess, we'll look back at the coronavirus relief packages lawmakers have passed so far and what future legislation might hold. Now, before we go on, I should mention that we're recording this on July 30, and as there's some pending legislation under consideration, things might change by the time you hear this. Here to talk more about this is Tax Notes Capitol Hill reporter Alexis Gravely. Alexis, welcome to the podcast.

Alexis Gravely: 0:41

Thanks. Glad to be here.

David Stewart: 0:43

As we speak, the House is only days away from its planned August recess followed by the Senate a week later. There's another relief package in the making. So, where do things stand now?

Alexis Gravely: 0:53

So, right now Democrats and Republicans, along with the Trump administration, are in the midst of negotiating the next release package. Earlier this week, Senate Republicans released a collection of bills that serve as their negotiating startpoint, and has been long awaited since House Democrats passed the HEROES Act back in May, which is what their vision for the next release package is. So, leaders around the negotiating table have said so far they're nowhere close to a deal, even as parts of the CARES Act are set to expire soon. So, we'll have to wait and see what happens.

David Stewart: 1:28

Since the pandemic really took hold in the U.S. back in that February to March period, there's been a lot of effort to help taxpayers and the economy. So, who did you talk to about what Congress has done over these last five months and what did they have to say?

Alexis Gravely: 1:41

I spoke with Edward Karl, vice president of taxation at the American Institute of CPAs. We discussed what the previous coronavirus relief packages have done for the tax community and Ed shared some ideas of what he would like to see Congress do for the next legislation.

David Stewart: 1:56

All right, let's go to that interview.

Alexis Gravely: 1:59

Hi, Ed. Thanks for joining us on the podcast today.

Edward Karl: 2:02

Hi. Thanks very much for having me.

Alexis Gravely: 2:04

So, let's begin by looking at what's already been done in Congress. There have been three major legislative packages passed in response to the pandemic, along with a couple of smaller bills addressing specific issues that have come up. What do you think has been the most successful part of the relief packages so far?

Edward Karl: 2:23

A lot has been done, but I think frankly, we're not finished here. And I think time really will answer that question. I think one of the most dramatic things that has happened is the speed with which Congress acted in the springtime with the onset of the coronavirus. So, we had, with some of the bill, the creation of the PPP loan. So, you had close to 5 million loans exceeding$500 billion. So, that was dramatic. You also had, coming out of SBA, the EIDL loans, the EIDL advances. I think there were again about 5 million advances totaling$16 billion. There were over 2 million EIDL loans exceeding$134 billion. And so, I think whether or not that has helped businesses to weather the pandemic is really the big question. And interestingly, there's a group called the Global Accounting Alliance that I'm active with, basically the English speaking accounting associations around the world, plus Germany and Japan. And I meet with the tax directors, my equivalents at those associations, on a monthly basis. And earlier this spring, we had a meeting and we were talking about the various country reactions to what was going on with the pandemic and the impact on businesses, the impact on the economy. There were similar conversations. So, there was a lot of discussion about wage subsidies, loans, job retention and self-employment schemes, tax administration relief. Basically meaning deadlines that were extended, compliance holds that the revenue authorities around the world were putting on their systems. And those are things that we've been involved with in this country. So, I think a lot of what the U.S. Congress did reflects a lot of what was going on around the world and trying to react. In essence, I think time will ultimately tell. It's a little bit too soon.

Alexis Gravely: 4:30

Are there any parts of the previous release bills that you think Congress should have done differently?

Edward Karl: 4:36

Well, you sort of mentioned some of it yourself, where there were various phases of legislation. There were other bills. Just so, for example, we know what the CARES Act that created the PPP. There was legislation after that bill passed at the end of March, and then there was-- there were additional pieces of legislation. There was the PPP Flexibility Act of 2020. That bill changed several things that seem to be problematic in the first bill. So, for example, the covered period for PPP loans, the time that businesses had to use the money, was originally eight weeks. That was extended to 24 weeks in the second legislation. Likewise, there was a requirement with the first bill that 75 percent of the loan had to be used for payroll. That was reduced to 60 percent. So, we're seeing as time goes on what the actual business reaction has been. Part of the earlier legislation provided unemployment benefits to workers, and what we were hearing from small businesses that as they got PPP loans, and they try to use that money to bring workers back or to pay them actually, the workers found that they were better off on unemployment benefits that were enhanced by a federal aspect to what they were getting from the state. Likewise, businesses were a little bit hesitant to utilize their PPP loans to pay for workers when they thought they only had eight weeks and they might be able to open up at some point and then they would need some of that money to sort of kickstart the business as they started to open up. So, we were seeing from experience with the legislation that certain things need to change. Also, there were some definitional issues. There were issues of intent of Congress. So, I think one of the biggest problems that we saw with the CARES Act and the PPP legislation, the legislation was very clear that a PPP loan that was later forgiven and the business would not have to pay that loan back. That loan forgiveness was not taxable income to the business, but then there was a question. Well, what about the expenses that were paid and the expenses that went towards the PPP loan forgiveness. Would they be deductible? Well, the forgiveness that the loan is not income was clear. It was explicit in the legislation. It was not taxable. But the legislation was silent about the deductibility of the expenses. And IRS, in fact, came out with a notice indicating that the expenses would not be deductible, even though it was clear the intent of Congress. Then there were numerous statements coming out of the Senate in particular, where that legislation originated. There were statements coming out of the Senate that the intent, even though it wasn't stated in the legislation, the intent was the expense should be deductible. So, you're seeing, which is fairly typical with legislation, that there are gaps. There's often the need for technical corrections. There's need for guidance, which is also a particular issue here. But I would say, in general, the speed with which legislation comes out also indicates that there likely to be issues with some of the guidance, issues with intent. And that's what we're seeing also here.

Alexis Gravely: 8:14

I'd love to hear more about how you've seen some of the tax provisions in the coronavirus legislation play out so far, whether that's among professionals or businesses. Are there any particular provisions that have been helpful or hurtful?

Edward Karl: 8:30

Well, I'd say some of them, again, they're going to have to take time to see how they play out. The changes to NOL rules or any of the sick leave credits, those types of things. So, we don't know yet. But what we do know is that there was an information gap and there were a lot of questions that I know that came through from CPAs representing millions of businesses that they needed additional and understanding. Another one was the employee retention credit, which is probably all of these provisions are helpful. Some of them you could not use together with a PPP loan. There were questions in terms of timing of when you would get a PPP loan forgiven, which means you couldn't use any of the payroll tax deferrals. So, in terms of how they work with the timing. In terms of the huge amount of guidance that was necessary, some of which is still outstanding. So, those were the major problems I would say, or gaps that we had. And that individuals, advisers, CPAs, who were working with businesses need that guidance in order to help the businesses make the appropriate decisions.

Alexis Gravely: 9:42

Do you think that there are any lessons to be learned here that Congress should be considering as they work on the next release package?

Edward Karl: 9:49

Well, I think some of them are already coming up. So, for example, the one that I mentioned about the deductability of the PPP loans that are connected to forgiveness. There was a gap there in terms of the deductibility of the expenses. There has been a bill introduced in Congress. And so the idea would be as the next phase of legislation moves to try to associate that legislation with the next phase. Another area where there is a gap has to do with date taxation rules, but really needs to be corrected with federal legislation. So, there are workers who typically might work in a particular state and they're used to having withholding in particular states, but as they ride out the pandemic storm in different locations, we have younger workers, for example, who are riding out the storm with a parent and they're in a different state. And the question comes up, what is their obligation to pay tax in that different state? And so, there is a bill that was introduced in Congress to try to provide some clarity and guidance regarding those types of multistate tax issues that really need to be fixed through federal legislation and federal guidance. So, that's another area where there is a fix that needs to take place. I can give you a third example where in the PPP loan area, they allowed 501(c)(3) charitable organizations to apply for PPP loans, but they didn't allow 501(c)(6) educational groups that really could legitimately use that money. And there was additional money left over, about$130 billion was never lent out. And so 501(c)(6) organizations could use that money. Again, there was a separate bill that would allow 501(c)(6)s to apply for that money. And they're legitimately in need of those funds as well. So those are some examples.

Alexis Gravely: 11:56

We've been looking at the past, so let's switch gears and look ahead. We know that Congress is planning to have a next phase out sometime before the end of this month. And AICPA regularly submits recommendations to Congress for legislation. So, back in May, you all sent a letter to the leaders of the Senate Finance Committee and the House Ways and Means Committee recommending the modernization of certain tax provisions in response to the pandemic. Could you talk a little bit about what some of the recommendations are and why AICPA made them?

Edward Karl: 12:29

We're always trying to think ahead about good tax policy, what needs to change, what would help the tax system. And so, some of these items are not new. They are ideas that we've been thinking about for a while, but for example, did not make it into the last round of tax reform in 2017 when TCJA passed, that big tax reform bill. So, I'll give you an example, thinking about the way the home office deduction works and that type of provision gets a light shown on it by the pandemic. So, now we have, obviously, workers all over the world have to function on a remote basis. But in this country, the home office deduction rules are very restrictive, so that if you already have an office out of the home-- so for example, I have an office out of the home, but now I haven't been in that office since March, I could not take advantage of a home office deduction. So that's a type of role that really needs to reflect a different type of approach to tax policy, an approach that allows a thought process that allows a more of a remote working approach to different types of situations. There are other types of roles in there as well. So, we may have a lot of people who are trying to take up new types of jobs they're working. How many people, we have unprecedented level of unemployment in this country. And we have people who are probably entering the gig economy and taking up different types of jobs. So, for example, here's another item that we had in that letter, dealing with small amounts of self employment income. So, you have to pay self-employment tax if your self-employment income exceeds$400. That threshold has been unchanged for years and years and years, and it really needs to reflect some kind of updating and the more logical numbers. So, where people are working small amounts of jobs to try to make ends meet. And it doesn't make sense to pay self-employment tax on small amounts. So, a refreshing on those types of numbers needs to take place. So we have a number of other provisions from that perspective, that different ways that business entities, depending on the type of entity you are, there are different or disparate tax treatments. The uncertainty of the expiring tax provisions that we deal with every year. One of the items that I mentioned earlier about working remotely and that needed to be refreshed. So, the challenges and the confusion of the absence of a mobile workforce statute that needs to be fixed. So, we had quite a few suggestions in that letter to try to refresh the tax system for good tax policy. But to also put it in the context of the pandemic.

Alexis Gravely: 15:30

Today, July 20, is the first day that both the House and the Senate are back in session after the July 4 recess. So, I imagine soon we'll have a better idea of what exactly is going to be included in the next release package. What are some other things you would hope to see in that legislation?

Edward Karl: 15:46

Well, I mentioned a couple of them: the deductibility of the PPP loan expenses, the ability of 501(c)(6)s to get PPP loans, the mobile workforce legislation, but I think there are some other things that we would like to see. So for example, there needs to be some constraint on liability against businesses. We'd like to see some federal fiscal relief to state and local governments in whatever package comes out. And something interesting. So, I've mentioned the PPP loan forgiveness. So, those loans to apply for forgiveness. So, businesses, I've mentioned the number around 5 million businesses took out over$500 billion, to the extent that they meet certain criteria, their loan, all or part of it, could be subject to forgiveness. That really is a critical aspect of that legislation. But as they start to move over the next several weeks into the process of applying for the forgiveness, there's going to be a level of confusion and possibly complexity that will be a barrier or a challenge for many businesses to deal with. The other side of that concern about moving those loans into a forgiveness status is the possibility of fraud. So, a lot of the banking industry, I know everybody is concerned about fraud. And so, we want to make sure that there is a simplicity to the process, but one that also gives an eye towards constraining any possibility of fraud. The AICPA has been working on a tool that would aid in the forgiveness process, and we unveiled that tool last Friday, and we think that will help in the forgiveness process. So, it combines as a calculator that calculates the amount of the loan forgiveness together with an automatic filling out of the loan forgiveness forms. It also allows for the downloading of the necessary documentation that the Treasury Department and SBA think is appropriate for applying for the loans. And then it will automatically send the entire package to the lender in terms of vetting the process. So, there has been a bill that would certify these types of tools as appropriate, and we'd like to see those types of bills, if they can move, included in the next phase. It would really help with any concerns about the complexity of the process. It should help also with some of the fraud concerns and make the whole entire process easier for small business, easier for their advisors as well.

Alexis Gravely: 18:37

We've heard little snippets of what different parties would like to see in the next package, whether that's coming from the Trump administration or lawmakers themselves. Is there anything you've heard proposed so far that you're opposed to?

Edward Karl: 18:48

That we're opposed to? Well, I'll just mention some of the things that we've heard. We don't have positions on all of them, but I can for purposes of providing an update on what we've heard. So, liability reform is a key part. That's one of the items I mentioned, that we support some level of liability constraint. We've also heard about an employment insurance extension. Those run out about now, although there's likely to be a smaller amount than the current amounts. We've heard about the possibility of another round of checks that are under consideration to individuals. So, there were checks that were sent out to millions and millions of taxpayers under a certain income threshold. I think another round of PPP loans. As I mentioned, there was about$130 billion left in unlent funds. I think there is likely to be another round of PPP legislation authorizing additional loans beyond the August 8 deadline that's currently in effect. I think Congress is also likely to consider putting out additional funds in addition to the$130 billion. And I think also they're more likely to target those funds so that they are targeted to really hard-hit businesses. So, for example, businesses that have some kind of a revenue reduction. Putting some kind of definitions in that legislation would be something we support so that it would be clearer as to who would qualify for those loans. I think they're also considering minority and women-owned businesses as part of an appropriate target. And likewise, some of the hard-hit sectors of the economy. And for example, in the travel and entertainment areas, we're also seeing the possibility of some kind of a long-term debt commission being created. And I think that's something that's appropriate considering the level of debt and deficit that we're facing now, which is really at unprecedented levels. Congress does have to act to help our economy and help our businesses. But sometime soon we have to get our arms around the unprecedented levels of debt and deficit. So, they're looking at some interesting and appropriate items.

Alexis Gravely: 21:07

What about a payroll tax cut that President Trump has been pushing for since March? Does AICPA have a position on that?

Edward Karl: 21:13

We don't have a position on that. We know that the House has been focused heavily on relief to states and directly to individuals. The Senate has been looking at liability reform. And the administration has been looking at payroll tax cuts. So, we have three different focuses for the legislation. And so, I think the likelihood of what we'll see is some kind of compromise by all three parties to get a package. The likelihood is we'll see something moving over the next couple of weeks, because I think what's clear is that additional help is needed.

Alexis Gravely: 21:49

OK. And on that note, we'll finish up. Thank you so much for joining us today and sharing your expertise.

Edward Karl: 21:55

Thank you for thinking of us and speaking with me. I appreciate it.

David Stewart: 22:00

And now, coming attractions. Each week we highlight new and interesting commentary in our magazines. Joining me now from her home is Acquisitions and Engagement Editor in Chief Faye McCray. Faye, what will you have for us?

Faye McCray: 22:10

Thank you, Dave. In Tax Notes Federal, Nancy McLaughlin examines section 170(h)(5)(A)’s requirement that the conservation purpose of a deductible conservation easement must be“protected in perpetuity.” Shane Hamilton and Tony Provenzano consider exceptions in the proposed regulations that may apply to relieve a for-profit company of liability for the section 4960 tax on excess remuneration. In Tax Notes State, Dan Bucks, Peter Enrich, Michael Mazerov, and Darien Shanske respond to a recent Tax Notes State column expressing concern about increasing business taxes during the current fiscal crisis, countering that those taxes would be a good investment. Alysse McLoughlin and Kathleen Quinn argue that a recent New York case regarding the definition of a qualified New York manufacturer is a significant win for taxpayers. In Tax Notes International, John Bush and Rachel Thrasher consider four options for taxing the digital economy. Tara Ferris discusses why countries are adopting common reporting standard compliance measures. And on the Opinions page, Marie Sapirie argues that the growing need to change the gig economy information reporting thresholds has been exacerbated by the coronavirus pandemic. Nana Ama Sarfo outlines the reemergence of the United Nations and the debate over taxation of the digital economy. And Robert Goulder and Joseph Thorndike discuss the recent Supreme Court decisions on the release of Trump's financial records.

David Stewart: 23:41

You can read all that and a lot more in the pages of Tax Notes Federal, State, and International. That's it for this week. You can follow me online@TaxStew, that's S-T-E-W. And be sure to follow@TaxNotes for all things tax. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org. And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.