Refundable Business Tax Credits Gain Traction In Virus Talks

Business setbacks are fueling a drive by Republicans on Capitol Hill to reshape traditional business tax credits so they can be used to trigger cash payments from the Internal Revenue Service during the COVID-19 pandemic.

GOP lawmakers in both chambers say the novel coronavirus has eroded earnings and made it harder for businesses to immediately use traditional tax credits, so they are looking for ways to make them refundable and more flexible. Democrats have signaled a willingness to discuss such measures, but also have made the case for similar incentives for families, including the expanded refundable child tax credit contained in the $3 trillion House-passed Health and Economic Recovery Omnibus Emergency Solutions Act.

Refundable tax incentives — whether for businesses or for workers and their families — likely will be on the table as both sides try to develop a bipartisan package of measures to replace expanded jobless aid set to expire July 31. Both sides remain divided on a number of contentious issues as Democrats seek to include more relief measures in the bill and Republican vie for business incentives, including a shield against COVID-19 liability lawsuits.

Senate Finance Chairman Chuck Grassley, R-Iowa, voiced skepticism about the immediate need for refundable business tax incentives, but stopped short of ruling out such proposals.

"With the economy turning around the way it is, I wouldn't consider those today. Now, maybe you ask me a month from now, I might think about stuff like that. But right now, I don't think so," the top Senate tax writer told Law360.

Grassley said he was waiting to hear more from President Donald Trump and administration officials on key issues such as another round of economic impact payments, a payroll tax cut and tax incentives to promote tourism while sifting through ideas for a Senate GOP pandemic response plan.

Sen. Rob Portman, R-Ohio, a senior member of the Finance Committee, said he and other Republicans were looking into the idea of allowing a business to receive a refund, or cash payment. It would be equal to the business' so-called general business credit, which represents the cumulative value of various tax credits, which currently can be carried back for one year or carried forward over 20 years under Internal Revenue Code Section 39 .

"Allowing people to use them now would be good stimulation for the economy," Portman told Law360.

Portman said another option might be to look at easing restrictions on business tax credits. For example, he pointed to the allowance for a company to use the general business credit to offset the first $25,000 of its tax liability and no more than 75% of its remaining tax liability under Section 38(c) .

"We could change the 75% rule," Portman said.

Other items that could be examined include a provision of the 2015 Protecting Americans From Tax Hikes Act that allowed a refundable version of the research credit as an offset against payroll taxes for small startup companies, or those with less than $5 million in annual gross receipts and no record of gross receipts more than five years ago.

Senate Banking Committee Chairman Mike Crapo, R-Idaho, a senior member of the Finance Committee, said proposals to make business tax credits refundable and more flexible could gain momentum if Republicans conclude businesses need more cash to deal with the outbreak of the coronavirus, which causes COVID-19, a respiratory disease.

"That's a good mechanism. I'm not sure that it would substitute for other things that are already in place. We will just have to look at it. It's an intriguing idea," Crapo told Law360, referring to the possibility of broader refundable business tax credits.

While Crapo and other Republicans on the Finance Committee vet proposals for refundable tax credits, some Democrats on the panel say they are concerned such plans would boost wealthy business owners and argue instead for tax measures aimed at workers and their families.

"Anything we get into should be balanced. It should not just be a giveaway to high-income folks," said Sen. Sheldon Whitehouse, D-R.I., a member of the Finance Committee.

In addition to pushing back against refundable business tax incentives, Whitehouse has pushed with other Democrats against strong GOP opposition to curb or repeal contentious language enacted in the Coronavirus Aid, Relief and Economic Security Act  that allowed net operating losses in 2018, 2019 and 2020 to be carried back five years.

In the House, Ways and Means Chairman Richard Neal, D-Mass., has said he will weigh several business incentives as part of a potential stimulus package later this year. But he also stressed his desire for a deal on contentious relief measures in the Heroes Act.

Neal's priorities include two temporary Heroes Act provisions. One would for 2020 lift the child tax credit to $3,000 for children age 6 or older and younger than 18, or to $3,600 for children younger than 6, and make it fully refundable. The other would expand the refundable earned income tax credit for workers without children, nearly tripling the maximum credit amount to $1,487.

Rep. Kevin Brady, R-Texas, ranking member on Neal's panel, generally backed the idea of allowing business tax credits to be converted into cash. He said he was exploring approaches to a "timing shift" for certain business tax incentives as he develops a draft stimulus plan with other provisions, including continued full expensing for research costs rather than switching in 2022 to five-year amortization.

As Brady and Grassley develop GOP stimulus plans, Sen. Debbie Stabenow, D-Mich., a senior member of the Finance Committee, said she and other Democrats would insist that any refundable business tax incentives be combined with similar incentives for families.

"We also ought to be making the child tax credit refundable. So, I'd like to see something broader. Refundability is not just for business," Stabenow told Law360.

With or without a deal on proposed expansions of the child tax credit and the refundable EITC for workers without children, Portman said he believed there could be bipartisan consensus on legislation to allow more flexibility in the use of business tax credits.

He predicted lawmakers in both parties would have interest in examining potential tweaks aimed at broadening the appeal of popular business tax credits such as the work opportunity tax credit, which rewards employers for hiring from targeted groups, including long-term jobless workers, veterans, former felons and participants in the Supplemental Nutrition Assistance Program.

"We can look at all of the credits. If you look, there are 38 of them," Portman said.

--Editing by Tim Ruel and Neil Cohen.

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