By: Rachel Trickett and Maria Pigna
While “stimulus” COVID-19 relief may be uncertain, COVID-19 tax relief nonetheless may occur. While less publicized, proposed legislation would (1) “clarify” the deductibility of business expenses reimbursed under the Paycheck Protection Program (“PPP”) and (2) simplify employer and employee state and local tax (“SALT”) obligations.
Deductibility of Business Expenses Paid with PPP Loans
On December 9th, a bipartisan group of lawmakers proposed a new COVID-19 relief proposal, the Bipartisan Emergency COVID Relief Act of 2020 (“COVID 2020”). COVID 2020, among other things, would expand on the proposed supplemental $908 billion to the CARES Act [1] by a temporary unemployment benefit supplement, a second round of PPP small business loans, [2] and “clarify” the deductibility of business expenses reimbursed by forgiveness of a PPP loan.
The deductibility of business expenses reimbursed by forgiveness of a PPP loan under the CARES Act has been heavily debated. [3] While the forgiveness of a PPP loan clearly does not result in income for the borrower, many argued that Congress intended to allow a borrower to deduct business expenses [4] reimbursed by the loan forgiveness. In Notice 2020-32 and Revenue Ruling 2020-27, the IRS stated its position that borrowers whose PPP loans are forgiven, or are expected to be forgiven, cannot deduct business expenses reimbursed by the PPP loan forgiven.
COVID 2020 would codify the Congressional intent in the CARES Act that business expenses reimbursed by forgiveness of a PPP loan are deductible. “Sponsors of the proposed bill appear optimistic” that it will be enacted. [5]
Uniformity of SALT Laws Affecting Employers
On June 18, 2020, a bipartisan group of lawmakers introduced the Remote and Mobile Worker Relief Act (S. 3995) (the “SALT Relief Act”) to relieve employers from inconsistent SALT laws and create a uniform national standard to simplify and enhance compliance with various SALT laws, especially during the pandemic. The purpose of the SALT Relief Act would be to clarify how remote workers should be taxed during the pandemic.
Overview of Certain SALT Compliance Obligations Applicable to Employers
State and local income taxation and employer withholding obligations of such taxes differ from state to state and create complex compliance burdens for employers. The SALT Relief Act addresses (1) employer income tax withholding/reporting obligations and (2) employer nexus for income and other business taxes.
Employer SALT Income Tax Withholding/Reporting. Wages are generally subject to employer withholding in the state where the wages are earned. If due to COVID-19 an employee works remotely from a different state than the employee’s employer, the employer might be obligated to withhold and remit income taxes to the state where the employee is working since withholding obligations often arise as soon as an employee begins performing services in that state.
States have been inconsistent in their approach to pandemic-related remote worker withholding. With many employees working remotely (and states looking for revenue), states increasingly have focused on taxing people working remotely. The lack of a uniform approach has resulted in litigation between some states (such as Massachusetts and New Hampshire[6]).
Employer Nexus for Income and Other Business Taxes. A business may be considered to be “doing business” in a state (and therefore subject to the state’s tax laws) if the business has an employee working in the state (i.e., nexus). Thus, a “remote worker” and his or her employer may be subject to tax in that state. To date, some eighteen states have issued guidance waiving (to an extent) the usual application of nexus provisions in response to COVID-19. [7]
Summary of Certain Relief Act Provisions
The SALT Relief Act would provide that:
(1) A state can tax a nonresident working in the state only if during a calendar year the individual works in the state for (i) at least 30 days or (ii) 90 days if due to COVID-19.
(2) An employee working remotely is taxable in their employer’s state during the “covered period,” which begins on the date the employee began working remotely due to COVID-19 and ends on the earlier of (a) the date on which the employer allows at least 90 percent of its workforce (including the subject employee) to return to work at the employee’s ordinary location or (b) December 31, 2020.
(3) A temporary nexus exception for businesses applies for employees “working remotely” during the “covered period.” “Working remotely” means working at a location other than the employee’s ordinary work location at the direction of the employer due to COVID-19.
The destiny of the SALT Relief Act seems uncertain although Senator Thune recently expressed that a solution should be found before the end of 2020. [8] It is likely that it will be attached to any additional COVID 2020. [9] Speculation is that the SALT Relief Act may encounter significant resistance from states and congressional districts that may be “losers” of revenue, including New York City and it's powerful representatives in the Senate (Schumer) and House (Nadler).
_____________________________ [1] In New Hampshire v. Massachusetts, New Hampshire filed a Motion for Leave to File Bill of Complaint in the United States Supreme Court on behalf of its residents to block a temporary rule enacted by the Massachusetts Department of Revenue. Massachusetts law provides that it may continue to collect income taxes from employees of Massachusetts companies working remotely from home during COVID-19. No. 220154 (U.S. docketed Oct. 23, 2020) (petition pending review). The rule lasts until the earlier of the end of 2020 or 90 days after the end of the state of emergency over the COVID-19 pandemic. It is important to note that the New Hampshire case does not involve two states taxing the same individual: New Hampshire does not tax income from wages or salaries. [2] The states are Alabama, California, District of Columbia, Georgia, Indiana, Iowa, Kentucky, Maine, Massachusetts, Minnesota, Missouri, New Jersey, North Dakota, Oregon, Pennsylvania, Rhode Island, South Carolina, and Wisconsin. [3] Tax Notes, Bipartisan Group’s Outline Offers PPE Expense Deduction (December 10, 2020). [4] Id. [5] Summary of Coronavirus Legislation, The CARES Act: https://www.wbrickerlaw.com/post/summary-of-coronavirus-legislation-the-cares-act [6] Federal Loans, Forgiveness and Taxes in the Time of Corona: https://www.wbrickerlaw.com/post/federal-loans-forgiveness-and-taxes-in-the-time-of-corona [7] See Professor Langbehn, The Deductibility of PPP-Reimbursed Expenses Tax Notes (posted December 14, 2020). [8] Including, for example, wages, rent, mortgage interest, employee health care benefits, and utilities. [9] Tax Notes PPP Deductibility May Find Its Way into Final Relief Bill (December 3, 2020).
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