Analysis

Industries Eye COVID-19 Bill As Vehicle For Pet Tax Breaks

By Joshua Rosenberg
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Law360 (March 24, 2020, 1:33 PM EDT) -- As Congress negotiates a nearly $2 trillion stimulus bill in response to the coronavirus pandemic, industry groups are elbowing to include in the must-pass legislation tax provisions they have long clamored for, arguing they will stimulate the economy. 

Certain industry groups have urged Congress for years to address some of the tax provisions included in the stimulus package, such as the carryback allowance for net operating losses and the qualified improvement property expensing allowance. The economic fallout generated by the coronavirus lends more urgency to addressing those concerns as businesses face liquidity crises, the groups have told lawmakers in recent days. 

Other provisions industry groups are seeking to include, such as extending the deadline that applies to alternative energy businesses seeking to qualify for carbon sequestration tax credits and allowing companies to receive direct payments under that section, represent a less-direct response to the crisis. Still, if the stimulus bill does include energy credits, those groups would like their priorities to be reflected in the legislation. 

Negotiations in Congress have hit roadblocks at various times, with some tax provisions appearing in Senate Majority Leader Mitch McConnell's first draft, only to be removed from later versions. But industry groups have remained engaged in the process and will help shape the legislation's final form. 

“It's an all-hands-on-deck approach right now,” David Koenig, vice president for tax at the Retail Industry Leaders Association, told Law360. “It's not your garden-variety lobbying effort.” He added that top-line members of his trade group, including CEOs, have conducted outreach to lawmakers. 

McConnell, R-Ky., introduced legislation last week, the Coronavirus Aid, Relief and Economic Security Act, or CARES Act. It would, among other things, target the so-called retail glitch included in the Tax Cuts And Jobs Act by allowing companies to immediately write off expenses related to physical improvements instead of depreciating them over 39 years. 

The bill would also allow businesses to carry back losses from 2018, 2019 and 2020, for up to five years, as in the past. Net operating losses would temporarily not be subject to a taxable income limitation, meaning they could fully offset income. 

Retailers and their trade organizations have worked for years to fix the retail glitch, otherwise known as the qualified improvement property provision, along with the net operating loss restriction included as technical errors in the TCJA, as Rachelle Bernstein, vice president and tax counsel at the National Retail Federation, told Law360. 

The fact that those provisions were included in McConnell's draft was likely an “aggregate result of all of the work” trade groups have accomplished since 2017, communicating retailers' perspectives to lawmakers, she said.

“Members of Congress know these issues,” Bernstein said.

Still, the legislation failed a crucial test of support in the Senate on Sunday night, falling short of the 60 votes needed to overcome a parliamentary hurdle. 

As negotiations continued into Monday, retailers and their trade groups maintained their engagement in the process. 

Retailers' efforts to communicate with lawmakers and their staff members have been even more vigorous than when Congress passed the TCJA, which was the largest tax overhaul legislation in approximately three decades, Koenig said, because businesses are currently facing existential crises. 

“This is for their existence, their survival,” he said. It's about “whether they can open their doors again in one month or two months, or whatever scenario we're looking at.” 

Fixing the TCJA's retail glitch would, by itself, provide a short-term stimulus of $15 billion in the economy, Bernstein said. 

“Fixing this is actually going to bring us the fastest-kept cash infusion of any of the tax provisions in [the CARES Act] because we can immediately file amended returns for 2018 and get money back that we overpaid in tax because of the error,” she said. 

Both Democratic and Republican lawmakers have been sympathetic to the provisions' inclusion in the coronavirus package, Bernstein and Koenig said. But some Democratic lawmakers have long argued that since their party was excluded from the efforts to craft the TCJA in 2017, Republicans should be willing to expand certain refundable tax credits for low-income Americans in return for addressing technical errors. 

Legislation unveiled Monday by House Speaker Nancy Pelosi, D-Calif., the Take Responsibility for Workers and Families Act, includes provisions to increase both the low-income housing credit and the child tax credit.

That's in no way a deal-breaker for retailers, Koenig said.

 “I would like to think in these emergency times there's enough room” in the package to address a variety of priorities, Koenig said. 

Separately, as negotiations have progressed, some Democrats began pressing for the inclusion of clean energy tax incentives in the legislation, which Republicans were quick to oppose. 

But if there's going to be a deal involving the energy industry, then it should include tax incentives for carbon capture projects, Brad Crabtree, vice president of carbon management for the Great Plains Institute and director of the Carbon Capture Coalition, told Law360.

While the main priorities for the government should be to secure the health of its citizens and to stimulate the economy in the near term, if Congress decides to address energy tax credits in this piece of legislation, “it's vitally important that the carbon capture credit is included,” he said. 

Specifically, the Carbon Capture Coalition is calling for a five-year extension for the carbon sequestration credit under Internal Revenue Code Section 45Q , which would help reassure investors that projects currently underway wouldn't be disqualified from the tax incentive if they fail to meet the Jan. 1, 2024, deadline. 

The credit provides for a tax credit of up to $50 per metric ton of carbon captured in qualified facilities. The coalition also recommends allowing investors to receive direct payments under Section 45Q in light of upheavals in the tax equity markets. 

While investors were heartened by the Internal Revenue Service's guidance from February, which outlined the criteria they'd need to meet in order to satisfy the credit's beginning-of-construction requirements and provided a safe harbor for partnership allocations, the fact is that many potential projects have been delayed, due to a lack of guidance, Crabtree said. 

And sooner or later, lawmakers should begin to focus on what measures will stimulate the economy after the initial fallout from the pandemic fades, Crabtree said. Tinkering with the Section 45Q credit will be an important part of the eventual recovery, he said.

“Part of what Congress will need to do is to look to the medium and long term after we move past this initial health and market crisis to be sure that we're stimulating investment and job creation to recover the economy,” he said.

--Editing by Robert Rudinger and Neil Cohen.

For a reprint of this article, please contact reprints@law360.com.

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