As we continue to look for ways to address the immediate impacts of the COVID-19 pandemic and reinvigorate the economy, tax policy provides a powerful tool. These measures afford policymakers with the ability to provide much-needed liquidity for struggling businesses, defray added costs companies are confronting, and create incentives to keep employees on the payroll and help maintain their health insurance.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act contained several helpful tax provisions to help businesses maintain payrolls and to give them the cash flow they need to avoid furloughs and meet their expenses in these truly unprecedented economic times. As the U.S. Congress looks for ways to provide additional relief broadly across the U.S. economy, there are a number of options to consider:
- Help businesses and workers defray the costs of deploying telework capabilities. Employers have moved rapidly to deploy telework capabilities for their employees wherever possible, and employees have had to quickly adapt to this new reality. Secure telework requires a suite of technology solutions, including devices, collaboration tools, cloud computing solutions, and cybersecurity products and services. Unfortunately, these expenses are not allowable costs for purposes of the Paycheck Protection Program administered by the U.S. Small Business Administration and Treasury Department, making these costs more difficult for businesses to shoulder. We recommend that Congress look at whether additional measures would be helpful, particularly given that prolonged telework seems increasing likely. Additionally, employees may ultimately find themselves needing to purchase items out of pocket to allow them to telework successfully. One option to help cover those costs is restoring the employee deduction on unreimbursed business expenses, either as an above-the-line deduction or without the 2 percent adjusted gross income (AGI) floor.
- Address the tax impacts of extended telework. Employees working from home face an uncertain tax landscape when their location is different from where their usual office is. The patchwork of state laws that govern when an employee needs to file a return in a state and when an employer needs to begin withholding that state’s income taxes or might have a nexus with a state for their own tax purposes will create considerable complexity for both employers and employees. Employees who will be affected include workers who are staying with an elderly relative to help care for them, young people staying with their parents in this uncertain time, and workers who have volunteered to relocate to hotspots to help with the response to the virus. A federal solution that disregards days spent working in a different state than the employee’s usual office location during the pandemic is the best way to address the potential tax difficulties these workers will face.
- Ensure the tax code does not create unintended pitfalls for struggling companies. Unfortunately, there are a number of aspects of the international portion of the U.S. tax code that may create unintended pitfalls for companies that are already facing unforeseen losses. Congress should take a comprehensive look at the international provisions to blunt these impacts and avoid undesirable results. For example, a company with less income than it expected – or even losses – could suddenly be facing liability under the Base Erosion and Anti-Abuse Tax (BEAT). This is especially applicable to services firms, which do not have the benefit of the cost of goods sold exclusion. U.S.-based companies with foreign subsidiaries that only do routine functions could find themselves in the unusual situation of having overall domestic losses, but still having Global Intangible Low-Taxed Income (GILTI) taxable at the full 21 percent rate. Efforts to allow companies to monetize Net Operating Losses (NOLs) quickly by carrying them back may be stymied if NOLs are carried back to a Section 965 inclusion year, as NOLs must fully offset any Section 965 income included in that year before the losses can be carried forward.
- Incentivize investment and research and development (R&D) as the U.S. economy recovers. As the U.S. economy gets on a path to recovery, policymakers can continue to leverage the tax code to promote investment and innovation. It will be key to promote investment while avoiding unintended interactions in the tax code that might, for example, disincentivize companies from utilizing full expensing for their investments because of the possible impact full expensing may have on any BEAT liability. Continued reliance on U.S. innovation and ingenuity will mean a great need to continue incentivizing research and development (R&D). Policymakers should consider expanding the R&D Credit, such as providing an R&D credit that incentivizes research from the first dollar spent rather than incremental investment in R&D, and delaying or permanently repealing the requirement to begin amortizing R&D expenses for tax purposes.
As we continue to come together to reopen the U.S. economy and help businesses recover and flourish, the tech industry stands ready to continue to think through options in the tax space that would benefit the economy as a whole.