House Democrats Release Their Version of Phase 3 COVID-19 Bill with Drastically Different Tax Provisions

Around 2 PM yesterday, the Senate failed a procedural vote regarding their lasted Phase 3 COVID-19 Bill (“Senate Bill”). Our alert discussing the Senate Bill can be found here. Less than an hour and a half later, the House Democrats released their bill, the Take Responsibility for Workers and Families Act (the “House Bill”). A little after midnight this morning, it was announced that a “deal” between the Democrats and the administration is very close. The final bill will reflect a compromise between the Senate’s Phase 3 bill and the House’s Phase 3 bill, so we highlighted some of the tax provisions included in the House Bill, as well as provisions of the Senate bill that are not included in the House Bill.

Due Date Extensions

Similar to the Senate’s original Phase 3 bill, the House bill proposes to extend the filing and payment deadline to July 15, 2020 and the due date for individual estimated tax payments for 2020 to October 15, 2020.

Although similar relief has been afforded by the IRS under Notice 2020-18, by changing the filing deadline, the House’s bill allows taxpayers to obtain a further 6-month extension by filing a Form 4868 or Form 7004.

NOL Carrybacks and Excess Business Losses

The approach taken with respect to NOL carrybacks in the House Bill is drastically different from the approach in the Senate Bill.  Under the House Bill, a corporation may be able to carry its 2018 NOLs back 3 years, its 2019 NOLs back 4 years, and 2020 NOLs back five years. In other words, the House Bill does not allow any carrybacks beyond the 2015 taxable year.

Additionally, the House Bill provides two hurdles that corporations needs to overcome in order to be able to carryback NOLs.

• For taxable years ending after December 31, 2019, and beginning before January 1, 2021, neither the corporation nor any person related to the corporation can have a deduction disallowed by reason of section 162(m) (which limits the deduction for compensation of certain employees of a publicly held corporation to $1,000,000) or section 280G (which limits the deduction for golden parachute payments) (“Hurdle 1”). If this hurdle is failed, then the corporation cannot carryback any of its NOLs from 2018, 2019, or 2020.
• For the taxable year that gave rise to the NOL being carried back, neither the taxpayer corporation nor any corporation related to the taxpayer can have made aggregate distributions (including redemptions) in any taxable year ending after 2017 that exceed the sum of (i) the aggregate value of stock issued by the corporation after 2017 in exchange for money or property other than stock in such corporation and (ii) 5% of the FMV of the stock of the corporation as of the last day of the taxable year (Hurdle 2). For purposes of this hurdle, issuance of and distributions made with respect to plain vanilla preferred stock are disregarded.  If this hurdle is failed for any taxable year, then the corporation cannot carryback its NOL for that taxable year.

It is noteworthy that for both Hurdle 1 and Hurdle 2, the corporation needs access to the confidential tax information and possibly confidential corporate information of all related parties in order to determine whether it can carryback its NOLs. As a result, the corporation must identify all related persons, which requires the application of attribution rules. The House Bill does not address the choice of relevant taxable years where a taxpayer and a related person have different taxable years…

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