House Democrats have put a huge amount on the table for more virus aid as Senate Republicans hold back, so far. Around the globe, countries are grappling with what direction to take on taxes as virus costs slam their fiscal prospects. U.S. states begin to put hard numbers on the revenue hits they will suffer.
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The Democratic House laid down its $3 trillion coronavirus-aid challenge (H.R. 6800) to Republicans on Friday, but as parts of the country start cautious reopenings this week Republican leadership wants to wait and see what happens before sending out more federal dollars.
Pressure for help is building, though, even from GOP members, and it remains to be seen how long lawmakers will wait to start negotiating with one another and the White House on new relief, including tax breaks.
The Democrats went all out on tax measures, including expanding an employee retention credit created in the CARES Act (Public Law 116-136) by allowing businesses to claim up to 80% of an employee’s wages for the credit, up from 50%, and overriding the CARES Act provision for companies to carry back net operating losses, limiting it to 2018 and 2019.
But they also went for items from their existing wish list, including extension of the earned income tax credit and, controversially, removal of the cap on federal deductions for state and local taxes for 2020 and 2021.
Getting rid of the SALT deduction cap is on the priority lists of high-tax states like New Jersey and New York, where Gov. Andrew Cuomo (D) makes a practice of calling for it as a way of helping the virus-slammed state. Meanwhile, some states are getting on the bandwagon for a way to work around the cap by letting pass-through businesses pay income tax instead of having their individual owners pay. Businesses aren’t subject to the cap.
Here is a summary of H.R. 6800, with a section on tax provisions.
Read this summary for more on the various phases of virus relief.
Interpreting Tax Aid Provisions
The pandemic-relief work that Congress has assigned to the Treasury Department and the IRS is illustrating a gap that happens sometimes when tax laws are passed—the gap between what lawmakers wrote (or meant) and what the agencies put in guidance. But the problem is playing out in real time now as agencies have to act immediately on laws Congress wrote fast.
Such gaps or disagreements can make it hard for businesses to make decisions, especially when the IRS puts its guidance in informal vehicles like FAQs.
For example: the initial guidance that limited the benefits of two virus-relief measures—a tax credit for businesses that retain employees and a loan program for small businesses. Lawmakers, both Democrats and Republicans, raised heck about the limitations. Treasury ultimately reversed its decision about the employee retention credit, so that employers who furlough people but keep providing health coverage can get the credit. And the administration says it continues to work with lawmakers as issues arise.
Unexpected Benefit: The IRS’s urgent virus-induced work will delay a report the agency has to send Congress describing its plans to reform itself for the 21st century. But the crisis is helping shape the direction those plans should go, officials said this week.
The agency’s Taxpayer First Act Office was partway through its work of meeting July and September report deadlines when the virus hit. That threw timetables off but allowed the IRS to test evolving ideas for goals like improving engagement with partners in and outside the government and enabling more digital self-service options, according to Jim Clifford, a project director in the office.
Even with the major delays, the final report will be delivered to lawmakers by December, IRS Chief of Staff Lia Colbert said in an interview, “because we don’t want to lose their energies and their excitement.”
The Old College Try: Colleges are losing potentially hundreds of millions of dollars, with empty campuses and sports stadiums and uncertain prospects for the next school year. They’re asking Congress for various kinds of financial help, including a temporary pandemic response bond program, suspension of a new endowment tax created by the 2017 tax law, and restoration of advance refunding of tax-exempt bonds, which was eliminated by that law. But the optics of helping schools that may boast healthy endowments can be tricky.
Get up to date on federal and state responses to the virus.
Some countries are considering new tax measures—wealth taxes and digital-business taxes among them—as they face massive fiscal shortfalls.
Argentina and Peru are considering higher taxes on high-income earners, although Ecuador’s president just withdrew, for lack of support, his own proposal for high-income taxes and a special tax on profitable companies. The International Monetary Fund and the Organization for Economic Cooperation and Development are talking about taxes on carbon emissions.
Members of the European Parliament recommended that the bloc forge ahead with measures some of them have pushed for: digital services taxes, financial transactions tax, and more.
“The challenge is designing new taxes during a very weird time for the economy,” says Daniel Bunn, vice president of global projects at the Tax Foundation.
VAT Breaks: More than 45 countries so far give value-added tax relief to companies and individuals donating, supplying, importing, or selling medical services and products like masks, ventilators, and protective clothing, according to Bloomerg Tax data.
There’s a host of versions of the relief, from exemptions only for imports being donated to sales of a broad range of medical and sanitization equipment.
Aid for Inverted Companies: It appears that businesses that moved headquarters offshore but still have U.S. presence are eligible for American coronavirus aid, under Federal Reserve guidance. Inverted companies can get the aid as long as they use it “in the approved manner,” tax consultant Robert Willens says.
More than 80 American companies, including medical device maker Medtronic Plc and insurer Everest Re Group Ltd have moved their homes overseas—to lower-taxed Ireland and Bermuda, respectively.
But the issue is sure to raise controversy. “The Fed is kicking dirt in the face of American workers with this move.” said Sen. Ron Wyden (Ore.), top Democrat on the Finance Committee.
- France is adding protections for its small and medium-sized wine businesses, exempting them from social welfare taxes that fund programs such as healthcare, retirement, and unemployment. The government also created a 140 million euro ($151 million) “crisis distillation fund” to help wine companies reduce excess stock during the crisis.
- Russia will spare small and medium-sized businesses from most taxes in the second quarter, although the companies will still have to pay value-added tax. And it expanded tax relief to more retailers.
- Italy is offering tax cuts and other tax breaks to spur the economy as the country emerges from lockdown: among them a tax credit worth 60% of the costs businesses incur to reopen, a 500-euro vacation tax credit for families with children, and deductions for energy efficiency and seismic retrofit iprovements.
- India extended the filing date of tax returns for fiscal 2020 and offers rate reductions as part of a $20 trillion rupee ($265 billion) relief package.
More international news and information on coronavirus is here.
In January it was thought that several states might enact laws or issue guidance for how they would address GILTI—global intangible low-taxed income, the new category of foreign income created by the 2017 tax law.
There might still be a chance for action in some states this year, said Jamie Yesnowitz, a principal and state and local tax practice and national tax office leader at Grant Thornton LLP. Lawmakers may hold later-year sessions, during which they will want to consider ways to improve their financial situations.
Online Sales Bright Spot: Staying at home sends people to their computers for shopping trips, which appears to have blessed states with robust tax revenue from online sales just as other tax revenue has been whacked.
It wouldn’t have been possible but for the Supreme Court’s 2018 Wayfair decision, which freed states to impose sales taxes on remote sellers.
The evidence is still anecdotal, but sources who watch state revenue numbers told Bloomberg Tax collections from online sellers were at least 25% higher during the early months of the pandemic compared with the same period last year.
Vermont, for example, usually sees online sales account for under 12% of its monthly sales tax collections. The number has at least doubled since the state’s emergency was declared March 13, said Thomas E. Kavet, chief economist for the legislature.
California: Gov. Gavin Newsom’s (D) budget proposal would cut back corporate tax breaks to help close the pandemic-induced deficit. He would suspend net operating loss deductions for medium and big businesses and bar use of the R&D tax credit to offset more than $5 million in tax liability for the next three years. Newsom estimates the deficit to be $54 billion through June 2021.
New York: Coronavirus-induced financial troubles will be felt through 2024, Comptroller Thomas P. DiNapoli said in an analysis that showed a three-year budget gap of $25.6 billion as it struggles to meet challenges associated with the pandemic.
New Jersey: The state lost an unprecedented $3.5 billion of revenue in April after Gov. Phil Murphy (D) closed most state activity on March 21, state Treasury Department data showed. Murphy announced things would start to open May 18, though customers won’t be permitted inside nonessential stores.
Music City: Cities across the country are facing serious pain from the shutdowns. Nashville, Tenn., is no exception, but it may be different in the way its mayor proposes to make up some of the huge losses. He proposes a 32% property tax increase. Some cities haven’t proposed any tax increases at all—yet. Seattle officials have talked about a new payroll tax. Philadelphia is opting to cut services “down to the most essential,” Mayor Jim Kenney said, but also to raise taxes on businesses and commuters.
Bloomberg Tax has a state-by-state roadmap logging all developments as they happen.
Talking Tax Podcast: People and companies are dealing with the headache of figuring out whether they may owe taxes in different jurisdictions now that so many workers are signing on remotely. Hear more about it on this week’s episode of Talking Tax.
Dive Deeper With Bloomberg Tax Insights
- Attorneys at Ropes & Gray: There are practical considerations for taxpayers and advisers in light of federal and state tax authorities’ enforcement-related responses to Covid-19.
- Alex Harris and Madeline Lansky of Bartlit Beck: Two former U.S. Supreme Court law clerks say the court’s telephonic oral arguments have been impressive, but they doubt the justices will make the practice permanent.
- Tax practitioners at KPMG: The life sciences industry, at the epicenter of the Covid-19 disruption, has supply chain issues, financing and cash flow challenges, and R&D issues—now and into the future.
- Attorneys at Norton Rose Fulbright: A look at best practices especially in complex transactions, for using electronic signatures during social distancing,