Pandemic-Related Tax Issues for In-House Counsel, C-Suite, and Their Teams

There is a dizzying array of issues to keep in-house counsel and their teams up at night. In my conversations with some of the sensational L.A. Times B2B Publishing In-House Counsel Awards finalists and nominees, it was no surprise to learn that was truer than ever over the last 18 months. While describing the challenges arising out of the pandemic as “unprecedented” is all but cliché at this point, I, like most, struggle to find a more suitable adjective. My perspective is, of course, through the lens of a tax attorney and I can attest that keeping abreast of the myriad tax changes – and proposed tax changes - is a daunting task. It would be impossible to attempt an exhaustive summary of all the tax issues that counsel, C-suite, and compliance and planning teams should be aware of. Nonetheless, a survey of but a few of the still-pertinent issues that have crossed my desk since the pandemic upended business as usual will likely serve many well. Some of these are household names by now, while others may be a bit more obscure.

COBRA Premium Assistance Credit
The American Rescue Plan Act (“ARPA”), enacted in March 2021, eliminated the premium that individuals must pay when electing COBRA continuation health care coverage upon a reduction in hours or an involuntary termination of employment. The payee of the COBRA continuation premiums (employer, insurer, or multi-employer plan) may then claim a 100% offsetting refundable tax credit against Medicare taxes on Form 941. The premium assistance and the credit are available for COBRA coverage from April through September. The IRS has issued two pronouncements, Notices 2021-31 and 2021-46, providing guidance on how an employer can provide such assistance and how to claim the credit.

ERC
The Employee Retention Credit (“ERC”) was created by the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), enacted in March 2020 and amended by the Consolidated Appropriations Act 2021 (“CAA”). The CAA modified the ERC allowing eligible employers to claim a refundable tax credit against the employer share of Social Security tax equal to 70% of the qualified wages paid to employees from January 1 through June 30, 2021. The ARPA expanded the ERC to wages paid during the third and fourth quarters of 2021. Qualified wages are limited to $10,000 per employee per calendar quarter or a maximum ERC of $7,000 per employee per quarter ($28,000 per employee for all of 2021). The IRS has issued guidance in the form of Notices 2021-20 and 2021-23 with additional guidance forthcoming for the changes made by the ARPA.

PPP Forgiveness, Deductibility, Safe Harbors and State Conformity
Arguably the tentpole provision of the CARES Act was the Paycheck Protection Program (“PPP”), which provided forgivable loans to eligible businesses, the proceeds of which could be used on enumerated expenses in a prescribed formula. While the PPP loan program has ended, the compliance tail has not.

In Notice 2020-32 and Rev. Rul. 2020- 27, the IRS initially indicated that taxpayers could not deduct expenses paid with forgiven PPP loans. The CAA later clarified (and Rev. Rul. 2021-2) that deductions are allowed for otherwise deductible expenses paid with forgiven PPP loans (and that the tax basis and other attributes would not be reduced as a result of the loan forgiveness). However, some taxpayers did not deduct expenses paid with PPP loan proceeds on their 2020 tax returns filed prior to CAA. The IRS developed a safe harbor for such taxpayers in Rev. Proc. 2021- 20, which permits taxpayers to deduct those expenses on their 2021 tax return rather than file amended returns or request administrative adjustments if they filed their 2020 return on or before December 27, 2020.

Even with the federal treatment of PPP loans forgiveness and deductibility sorted out, businesses must still consider state conformity issues. For example, California Assembly Bill 80 (“A.B. 80”), enacted on April 29, 2021, conforms to federal rules regarding the deductibility of expenses but with limitations. Specifically, forgiven PPP loans are excluded from gross income and fully deductible if: (1) the taxpayer is not a publicly traded company; and (2) the taxpayer reported a decrease of at least 25% in gross receipts in 2020 as compared with 2019 (the same test that applied to Second Draw PPP loan eligibility). Other states fully conform, some don’t, and some, like California, conform with modifications.

Qualified Disaster Relief Payments
Many organizations have made valiant attempts to assist employees with unexpected expenses incurred as a result of the COVID-19 pandemic. Many have done so through traditional accountable plans, others through taxable wages.

There is, however, another option available under Internal Revenue Code (“IRC”) § 139(a), which provides that “ ross income shall not include any amount received by an individual as a qualified disaster relief payment.” IRC § 139(b) provides that the “term ‘qualified disaster relief payment’ means any amount paid to or for the benefit of an individual –... (1) – to reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster ... but only to the extent any expense compensated by such payment is not otherwise compensated for by insurance or otherwise.” The COVID-19 pandemic constitutes a “qualified disaster” as it is a “federally declared disaster” within the meaning of IRC § 139(c)(2) as of March 1, 2020.

There are no regulations that propound on the meaning of IRC § 139, but the IRS has issued Rev. Rul. 2003-12, which describes disaster relief provided by a state to its residents, a charitable organization to flood victims, and an employer to its employees. While qualified disaster relief payments do not include income replacement payments, such as the payment of lost wages, lost business income, or unemployment compensation, the IRS has not indicated what expenses are reimbursable under IRC § 139 in the context of a pandemic (compared to a natural disaster). However, the purpose of IRC § 139 suggests that the following non-exhaustive list of expenses might be reasonable and necessary expenses incurred: medical expenses not covered by insurance (e.g., co-pays, deductibles, over-the-counter medicines and cleaning supplies); expenses incurred for child care and tutoring services; expenses incurred to allow the employee to work from home (e.g., the cost of a personal computer, printer, supplies, internet service, etc.); commuting expenses; caregiver and domestic service expenses; funeral expenses; and legal and accounting expenses.

Providing relief under this provision is intended to be streamlined. Specifically, a written plan is not a technical requirement to provide relief under this provision (although likely a best practice). There is no requirement that employees account to the employer for their actual expenses, and the payments are not subject to withholdings nor are they reportable. Nicholas Sanchez is a partner and tax attorney at Miller Kaplan Arase LLP, offering general tax advisory and consulting services in addition to advising his clients regarding the tax implications of settlements and judgments arising out of class action litigation, administrative enforcement actions, bankruptcies, and receiverships. He can be reached at [email protected].