Tax Notes reporter Alexis Gravely talks with Edward Karl, vice president of taxation at the American Institute of CPAs, about tax changes made and considered by Congress in the wake of the COVID-19 pandemic.
The post below has been edited for length and clarity.
Alexis Gravely: Hi, Ed. Thanks for joining us on the podcast today.
Edward Karl: Thanks very much for having me.
Alexis Gravely: 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: A lot has been done, but I think, frankly, we’re not finished here. 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. We had the creation of the Paycheck Protection Program [PPP], with close to 5 million loans exceeding $500 billion. That was dramatic.
You also had the Economic Injury Disaster Loans [EIDL] and advances coming out the Small Business Administration. I think there were again about 5 million advances totaling $16 billion. There were over 2 million EIDL loans exceeding $134 billion. I think whether or not that has helped businesses to weather the pandemic is really the big question.
I’m active with a group called the Global Accounting Alliance, which is basically composed of the English- speaking accounting associations around the world, plus Germany and Japan. I meet with the tax directors, my equivalents at those associations, on a monthly basis. Earlier this spring, we had a meeting and were talking about the various country reactions to what was going on with the pandemic and the impact on businesses and the economy. There were similar conversations.
There was a lot of discussion about wage subsidies, loans, job retention, self-employment schemes, and tax administration relief. A lot of deadlines were extended and compliance holds that revenue authorities around the world were putting on their systems. Those are things that we’ve been involved with in this country.
I think a lot of what the U.S. Congress did reflects what was going on around the world. In essence, I think time will ultimately tell. It’s a little bit too soon.
Alexis Gravely: Are there any parts of the previous release bills that you think Congress should have done differently?
Edward Karl: There were various phases of legislation. For example, we know what the Coronavirus Aid, Relief, and Economic Security [CARES] Act that created the PPP. There was legislation after that bill passed at the end of March.
There was the PPP Flexibility Act of 2020. That bill changed several things that seemed to be problematic in the first bill. 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. We’re seeing as time goes on what the actual business reaction has been.
Part of the earlier legislation provided unemployment benefits to workers. What we were hearing from small businesses was that as they got PPP loans and tried 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. We were seeing from experience with the legislation that certain things need to change.
Also, there were some definitional issues. There were issues of the intent of Congress. I think one of the biggest problems that we saw with the CARES Act and the PPP legislation was that the legislation was very clear that a PPP loan would be 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 the question: What about the expenses that were paid and the expenses that went towards the PPP loan forgiveness? Would they be deductible?
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. The IRS, in fact, came out with a notice indicating that the expenses would not be deductible, even though it was clearly the intent of Congress.
Then there were numerous statements coming out of the Senate, where that legislation originated, saying that the intent was the expenses should be deductible, even though it wasn’t stated in the legislation.
There are gaps, which is fairly typical in legislation. 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 are likely to be issues with some of the guidance and issues with intent.
Alexis Gravely: 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: For some of them, they’re going to have to take time to see how they play out, such as the changes to net operating loss rules or any of the sick leave credits. We don’t know yet.
But what we do know is that there was an information gap. There were a lot of questions that I know came through from CPAs representing millions of businesses that they needed additional understanding.
Another one was the employee retention credit. Some of the provisions 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.
Those were the major problems or gaps that we had. Individuals, advisers, and CPAs who were working with businesses needed that guidance in order to help the businesses make the appropriate decisions.
Alexis Gravely: 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: I think some of them are already coming up. For example, the deductibility of the PPP loans that are connected to forgiveness. There was a gap in terms of the deductibility of the expenses. There has been a bill introduced in Congress. 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, which really needs to be corrected with federal legislation. There are workers who typically might work in a particular state who are used to having withholding in particular states. But as they ride out the pandemic storm in different locations, the question comes up: What is their obligation to pay tax in that different state?
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. That’s another area where there is a fix that needs to take place.
I can give you a third example in the PPP loan area, where they allowed 501(c)(3) charitable organizations to apply for PPP loans, but not 501(c)(6) educational groups that really could legitimately use that money. There was additional money left over, about $130 billion, that was never lent out.
Again, there was a separate bill that would allow 501(c)(6)s to apply for that money. They’re legitimately in need of those funds as well. Those are some examples.
Alexis Gravely: 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. The AICPA regularly submits recommendations to Congress for legislation.
Back in May, you 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 the AICPA made them?
Edward Karl: We’re always trying to think ahead about good tax policy, and what needs to change and what would help the tax system. Some of these items are not new. They are ideas that we’ve been thinking about for a while, but did not make it into the last round of tax reform in 2017.
I’ll give you an example. Thinking about the way the home office deduction works, that type of provision gets a light shone on it by the pandemic. Workers all over the world have to function on a remote basis. But in this country, the home office deduction rules are very restrictive. For example, I have an office out of the home, but now I haven’t been in that office since March, so I could not take advantage of a home office deduction.
That really needs to reflect a different type of approach to tax policy, an approach that allows a thought process for more of a remote working approach to different types of situations. We may have a lot of people who are trying to take up new types of jobs. We have an unprecedented level of unemployment in this country. We have people who are probably entering the gig economy and taking up different types of jobs.
Another item that we had in that letter was dealing with small amounts of self-employment income. You have to pay self-employment tax if your self-employment income exceeds $400. That threshold has been unchanged for years, and it really needs to reflect some more logical numbers. For people who are working small amounts of jobs to try to make ends meet, it doesn’t make sense for them to pay self-employment tax on those small amounts. A refreshing on those types of numbers needs to take place.
The challenges and the confusion of the absence of a mobile workforce statute needs to be fixed. 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: Today, July 20, is the first day that both the House and the Senate are back in session after the July 4 recess. 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: I mentioned a couple of them: the deductibility of the PPP loan expenses, the ability of 501(c)(6)s to get PPP loans, and the mobile workforce legislation. But I think there are some other things that we would like to see.
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.
I’ve mentioned the PPP loan forgiveness. Those loans to apply for forgiveness. 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. I know everybody is concerned about fraud. 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. We unveiled that tool last Friday, and we think that will help in the forgiveness process. It combines 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. Then it will automatically send the entire package to the lender in terms of vetting the process.
There has been a bill that would certify these types of tools as appropriate, and we’d like to see that be 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 and for their advisors as well.
Alexis Gravely: 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: I’ll 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.
Liability reform is a key part. 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 stimulus checks going out to individuals. There were checks earlier sent out to millions and millions of taxpayers under a certain income threshold.
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. As I mentioned, there was about $130 billion left to lend.
I think Congress is also likely to consider putting out additional funds, in addition to the $130 billion. I think also they’re more likely to target those funds to really hard-hit businesses, like those that have some kind of a revenue reduction. Putting some kind of definition 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. Likewise some of the hard-hit sectors of the economy. In the travel and entertainment areas, we’re also seeing the possibility of some kind of a long-term debt commission being created. 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.
Alexis Gravely: What about a payroll tax cut that President Trump has been pushing for since March? Does the AICPA have a position on that?
Edward Karl: 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. The administration has been looking at payroll tax cuts. We have three different focuses for the legislation. I think there is a likelihood that we’ll see 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: Thank you so much for joining us today and sharing your expertise.
Edward Karl: Thank you for thinking of us and speaking with me. I appreciate it.