Biotech Group Finds Obstacles to Receiving Cash Relief

April 6, 2020

The Honorable David J. Kautter
Assistant Secretary for Tax Policy
Department of the Treasury
1500 Pennsylvania Ave, NW
Washington, DC 20220

The Honorable Charles P. Rettig
Commissioner
Internal Revenue Service
1111 Constitution Ave, NW
Washington, DC 20224

Dear Messrs. Kautter and Rettig:

Biotechnology Innovation Organization (BIO) represents over 1,000 biotechnology companies, academic institutions, state biotechnology centers, and related organizations in all 50 states. The vast majority of BIO's membership includes pre-revenue innovators. Many of BIO's members are engaged in developing novel treatments for patients. Our members are also involved in the research and development of innovative biotechnology products that will help to solve some of society's most pressing challenges, such as managing the environmental and health risks of climate change, sustainably growing nutritious food, improving animal health & welfare, enabling manufacturing processes that reduce waste & minimize water use, and advancing the health and well-being of our families. As our members and the biotech industry as a whole navigate the economic disruption associated with Coronavirus in their pursuit of innovative therapies and solutions, it is critical that they are not disqualified from taking advantage of the short- and long-term small business assistance efforts included in the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

On behalf of our members, I write today to ask for your assistance in addressing an unnecessary obstacle to providing immediate cash relief to small companies posed by the interaction of the new loan and tax relief provisions in the CARES Act. In particular, the small business loans and loan forgiveness programs in the Keeping Workers Paid and Employed Act section will provide a lifeline for many small businesses in these difficult economic times. Two tax provisions also potentially provide important relief, the employee retention payroll tax credit and deferral of certain 2020 payroll taxes. The Service has already published helpful guidance on certain aspects of the payroll tax provisions in the CARES Act regarding penalty protection (Notice 2020-22), but does not address other open issues under the CARES Act.

The CARES Act loan and payroll tax provisions are intended to help companies keep employees on their payrolls and keep the lights on. For our small companies working on innovative therapies to help save and improve lives, access to capital is extremely important in general and even more so in this challenging time. Our companies are currently trying to assess how the financial assistance in the CARES Act and other government programs can be utilized to provide as much help as soon as possible.

As you know, companies who receive loans from the paycheck protection loan program under Section 1102 of the CARES Act will no longer be eligible for the employee retention payroll tax credit and companies who have CARES Acts loans forgiven under Section 1106 or Section 1109 lose eligibility for the 2020 payroll tax delay. These tax provisions potentially offer immediate relief to small companies as they navigate the loan process, and then determine eligibility for loan forgiveness.

Unfortunately, the potential for retroactive denial of one or both of these provisions, should a company subsequently receive a loan or loan forgiveness, significantly undermines the utility of the tax relief. Companies may choose to forgo the immediate benefits of the tax relief anticipating qualifying for the loans and loan forgiveness. Even for the most streamlined application process to receive the loans, the loan forgiveness cannot occur until after, even well after, the eight-week period, meaning companies may be forced to forgo weeks or months of tax relief for the uncertain promise of loans and loan forgiveness. Especially with policymakers already suggesting that the $350 billion loan fund may be insufficient for demand, forcing small businesses to make that choice presents unnecessary and damaging risks to the small companies that need help the most. This is especially critical because many of the other tax relief provisions in the CARES Act, such as the increased use of NOLs and reduced limitations on interest expense deductions, will not provide any immediate tax relief to our pre-revenue companies — as pre-revenue companies, they have not paid income taxes for which they can obtain tax refunds.

In the case of the employee retention tax credit, Section 2301(j) of the CARES Act provides that an employer is not eligible for the employee retention credit if it receives a loan. We believe, as a policy matter, that the employer should be entitled to claim this credit during any quarter in which it has not yet received a loan under the CARES Act. We request that the Service interpret the eligibility restriction under Section 2301(j) to provide that the ineligibility for the credit only applies to periods after receipt of the loan and the ineligibility does not retroactively apply.

In the case of the employee payroll tax deferral, we believe that, even if a taxpayer obtains a loan that is forgiven, the applicable payroll taxes owed up to the date of the loan forgiveness should continue to be eligible for deferral. This is consistent with the policies of the CARES Act to provide immediate relief to taxpayers. Under this approach, only those payroll taxes for the period of time after the forgiveness through December 31, 2020, would not be eligible for deferral We believe that the statutory language in Section 2302(a)(3) of the CARES Act, which states that “this [payroll tax deferral] shall not apply to any taxpayer if such taxpayer has had indebtedness forgiven” under the CARES Act, is susceptible to this interpretation. Up until actual forgiveness of the debt, the taxpayer has not had any loan forgiveness at the time of the deferral. Therefore, the payroll taxes deferred prior to the loan forgiveness should continue to be eligible for deferral. Accordingly, we request that you issue guidance providing that a taxpayer is eligible for the payroll tax deferral for that portion of payroll taxes owed up until the time of loan forgiveness.

In the alternative, if the foregoing approaches are not adopted, we request that you issue guidance providing a grace period without penalties and interest for repayment of the tax benefits for companies that take advantage of the tax provisions, if such taxpayers are treated as retroactively ineligible for one or both. It is critical that guidance — whether permitting continued deferral or providing interest and penalty relief — be issued promptly. Businesses are in the process of applying for loans and cannot project their cash flow availability without understanding how the loan provisions and tax provisions will interact in practice. Moreover, it is in the interests of the sound administration of the tax laws that businesses can be confident that taxpayers are applying the rules in a consistent manner. As small business struggle to navigate the web of financial assistance to keep their companies afloat, easing the need to sacrifice one immediate source of cash for a potential future one would be welcome relief.

Sincerely,

Cameron Arterton
Vice President, Tax Policy
Biotechnology innovation Organization
Washington, DC