Tax Notes logo

Promoting Healthy Businesses With Tax Credits

Posted on Sep. 24, 2020

A new, temporary tax credit for businesses that purchase safety equipment, supplies, and training to mitigate employee and customer exposure to COVID-19 is one of the few widely popular pandemic relief provisions still under discussion in Congress. It isn’t a panacea for businesses that are still struggling to adjust and stay afloat, but it's an important step in fully reopening businesses that limited their operations. 

The key features of the healthy workplace tax credit were laid out in a bill (H.R. 7615) introduced in July by House Ways and Means Committee member Tom Rice, R-S.C. Under that proposal, an employer would receive a credit against employment taxes each quarter equal to 50 percent of the amount spent on qualified employee protection expenses, qualified workplace reconfiguration expenses, and qualified workplace technology expenses. The credit would be refundable to the extent that it exceeds the employer-side payroll tax obligations and available for expenses paid or incurred during the quarter. It has a per-employee cap of $1,000 for up to 500 employees, $750 for the next 500 employees, and $500 for any employees over 1,000. Senate Finance Committee member Rob Portman, R-Ohio, introduced a similar measure on July 20 (S. 4214) and Sen. Ted Cruz, R-Texas, included it in his recent bill (S. 4537).

Qualified employee protection expenses include testing for employees, personal protective equipment, and cleaning products or services for preventing the spread of COVID-19. Obtaining the credit for these items should be straightforward because the proposed statutory language is reasonably specific on what’s covered — “employee protection expenses” means personal items including masks, gloves, and disinfectants, for example — and the IRS could put out guidance with a list of even more specific items that it will accept as qualifying for the credit. 

The reconfiguration expenses category could be more challenging for both employers to use and the IRS to administer. Under the proposal, employers that reconfigure their workplaces with the primary purpose of preventing the spread of COVID-19 can claim the associated expenses as long as they have a reconfiguration plan that doesn’t look like one that was in place before March 13; the changes are “commensurate with the risks faced by the employees or customers” or are consistent with recommendations made by the Centers for Disease Control and Prevention or the Occupational Safety and Health Administration; the remodeling doesn’t change the purpose of the property; and the reconfiguration is complete by January 1, 2021. The physical space that is reconfigured must also be located in the United States and owned or leased by the employer. Congress directed the IRS and Treasury to put out guidance defining both “primary purpose” and “reconfiguration plan.” If the proposal passes, getting that guidance out expediently will become a top priority. 

The requirements for reconfiguration expenses are designed to prevent employers from using the credit for general remodeling or business expenses, although they could get credit for some general expenses if the changes have the primary purpose of making the space safer by reducing the likelihood of COVID-19 transmission. That would include items that don’t fit into the PPE category, such as plexiglass shields, which were mentioned in the example of how the credit would work in Rice’s announcement.

However, the proposed language provides some flexibility for employers to use the credit for other items that aren’t specific to COVID-19 as well, which should be useful for some businesses such as restaurants that want to provide outdoor dining options into the winter and need items like space heaters or tents to make that feasible. A restaurant that wants to claim space heaters would have to be able to show that it didn’t put them on the patio as a matter of course in prior fall and winter seasons, because the clear goal of the statute is to target the added costs attributable to the pandemic, not routine costs. 

The IRS would likely be flexible about what it would accept as a reconfiguration plan because of the nature of the emergency that the statute aims to address, and because the credit is written to cover qualifying expenses employers have incurred since March 13. The need for a reconfiguration plan should therefore have a fairly low bar in the guidance the IRS and Treasury would put out. A formal plan probably would be unnecessary, at least for expenses before the enactment of the statute. Employers would likely need some documentation that shows that they were making an effort to reduce the risks of contagion or be consistent with CDC or OSHA recommendations, and that the expenses were incurred after March 13.

Technology purchases for employees or customers to use in the ordinary course of the employer’s trade or business that have a primary purpose of preventing the spread of COVID-19 by limiting physical contact between customers and employees are also qualified expenses. 

There could still be some debate about the credit's size. In testimony before the Ways and Means Committee on September 11, Alex Brill of the American Enterprise Institute endorsed the proposal but suggested that setting a $500 cap per employee instead of the scale based on number of employees would help simplify the credit and reduce the associated revenue loss. Portman said the stepped approach was in recognition that small- and medium-size businesses had experienced a disproportionate impact from COVID-19. 

The proposal enjoys support from heavily affected industries. Notably, the National Restaurant Association implored congressional leaders to enact four items, including the healthy workplace credit, in a September 14 letter. The group estimated that the industry could lose $240 billion in sales by the end of the year and is particularly concerned about the effect of cooler weather in much of the United States on restaurants’ operations when outdoor dining will no longer be as feasible. The Ways and Means Committee is holding a hearing September 25 on the impact of COVID-19 on restaurants, and it’s likely to feature further appeals to enact the healthy workplace credit.

Copy RID