CARES Act: What it Means for Business
The CARES Act for Businesses
This memorandum is designed as a primer and resource of relevant provisions of the CARES Act for businesses. We explain the key terms relating to the available loan programs and modifications to employment, bankruptcy and foreclosure and eviction laws. We also provide links to governmental resources to facilitate access to the financial programs that will provide a lifeline to tens of thousands of businesses. We are continuously monitoring developments of programs and regulations relating to the CARES Act. These developments will be incorporated into this memorandum in real time. As a result, we urge you to routinely consult this memorandum on a regular basis for updates.
Beyond the CARES Act, we are assisting clients daily on matters relating to the pandemic, including obtaining emergency financing, assisting clients with ongoing construction projects and interfacing with governmental employees and inspectors, ensuring that financing and real estate matters may close and, of course, advancing the interests of our clients in all aspects of ongoing litigation matters.
If there is anything that the pandemic has taught us, it is that we are all in this together. Please do not hesitate to reach out to us should you have any question or concern regarding any aspect of your business. We are here to assist and serve.
Federal Loan Programs
Overview: The CARES Act authorizes over $2 trillion of relief aimed at combating the COVID-19 pandemic through various financial aid programs to businesses. We anticipate significant regulatory guidance that will further clarify the CARES Act’s provisions by the Department of Treasury, Department of Labor, Internal Revenue Service, and other government agencies. Below is a summary of the key provisions of the available Federal loan programs and other provisions that may impact your business.
(1) SBA Small Business Interruption Loans (Paycheck Protection Program Loans)
- Purpose: The Paycheck Protection Program ($349 billion) covers the period of 2/15/20 through 6/30/20 and provides loans to encourage certain qualified small businesses to retain employees through the COVID-19 pandemic. The loans may be forgiven provided that employers retain their employees during the pandemic.
- Eligibility: Any business in operation as of 2/15/20 that employed up to 500 employees. All businesses are presumed to be adversely impacted by COVID19.
- Businesses in certain industries can have more than 500 employees if they meet applicable SBA employee-based size standards for those industries.
- For this program, the SBA’s affiliation standards are waived for small businesses (1) in the hotel and food services industries; or (2) that are franchises in the SBA’s Franchise Directory; or (3) that receive financial assistance from small business investment companies licensed by the SBA.
- Maximum Loan Amount: Up to 2.5 times the employer’s average monthly payroll costs for the trailing twelve months, capped at $10 million, without the need for collateral or a personal guaranty. Payroll costs exclude compensation for employees whose annual salary exceeds $100,000.
- Loan Uses:
- Payroll costs, including benefits;
- Interest on mortgage obligations, incurred before February 15, 2020;
- Rent, under lease agreements in force before February 15, 2020; and
- Utilities, for which service began before February 15, 2020.
- Payroll costs include:
- Salary, wages, commissions, or tips (capped at $100,000 on an annualized basis for each employee);
- Employee benefits including costs for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payments required for the provisions of group health care benefits including insurance premiums; and payment of any retirement benefit;
- State and local taxes assessed on compensation (state unemployment taxes); and
- For a sole proprietor or independent contractor: wages, commissions, income, or net earnings from self-employment, capped at $100,000 on an annualized basis for each employee.
- The PPP Covers Paid Sick Leave with a Caveat:
- Yes, the PPP covers payroll costs, which include employee benefits such as costs for parental, family, medical, or sick leave. However, it is worth noting that the CARES Act expressly excludes qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act (FFCRA) (Public Law 116– 127).
- Payment deferral: All payments are deferred for 6 months; however, interest will continue to accrue over this period
- Loan Forgiveness: The loan will be fully forgiven if the funds are used for payroll costs, interest on mortgages, rent, and utilities (at least 75% of the forgiven amount must have been used for payroll) over the 8 week period after the loan is made. Forgiveness is based on the employer maintaining or quickly rehiring employees and maintaining salary levels. Forgiveness will be reduced if full-time headcount declines, or if salaries and wages decrease.
- You will owe money if you do not maintain your staff and payroll.
- Number of Staff: Your loan forgiveness will be reduced if you decrease your full-time employee headcount.
- Level of Payroll: Your loan forgiveness will also be reduced if you decrease salaries and wages by more than 25% for any employee that made less than $100,000 annualized in 2019.
- Re-Hiring: You have until June 30, 2020 to restore your full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020.
- You will owe money if you do not maintain your staff and payroll.
- Loan Maturity/Interest Rate: The loan has a maturity of 2 years and an interest rate of 1.00% fixed rate.
- When Can You Apply:
- Starting April 3, 2020, small businesses and sole proprietorships can apply for and receive loans to cover their payroll and other certain expenses through existing SBA lenders.
- Starting April 10, 2020, independent contractors and self-employed individuals can apply for and receive loans to cover their payroll and other certain expenses through existing SBA lenders.
- Other regulated lenders will be available to make these loans as soon as they are approved and enrolled in the program.
(2) SBA Economic Disaster Loans
- Purpose: The Economic Injury Disaster Loan Program under Section 7(b) of the Small Business Act provides funds to small businesses to cover economic injury resulting from the disaster, such as lost revenue.
- Eligibility: For the period between January 31, 2020 and December 31, 2020, eligibility is expanded to include businesses with not more than 500 employees (determined together with affiliates). Applicant must demonstrate ability to repay the loan.
- Loan Uses: Working capital for businesses suffering economic injury as a result of COVID-19.
- Loan Amount: Up to $2 million.
- Interest Rate: The interest rate is 3.75% or 2.75% for non-profits.
- Term: Up to 30 years (determined on a case-by-case basis, based upon each borrower’s ability to repay).
- Loan Advance: Up to $10,000. Funds will be made available within three days of a successful application. This loan advance will not have to be repaid.
(3) Prior SBA Loans
- SBA loans existing at the time of enactment of the CARES Act may qualify for a sixmonth deferment of principal and interest.
(4) Assistance to Severely Distressed Sectors (Coronavirus Economic Stabilization Act of 2020)
- Purpose: Business Loans (up to $500 billion) for companies with over 500 to 10,000 employees:
- $208 billion for passenger air carriers ($50 billion) and cargo air carriers ($8 billion) (the Secretary of the Treasury may require airlines to continue to provide air service to designated cities), and $150 billion for other eligible businesses.
- Eligibility: Loans made at the discretion of the Secretary of the Treasury based on (a) the obligor being a business in which credit is not reasonably available; (b) the intended obligation by the obligor is prudently incurred; and (c) the loan is sufficiently secured. Loan terms are at the Secretary of the Treasury’s discretion.
- Treasury Guidelines: Within 10 days after the CARES Act’s enactment, the Secretary of the Treasury shall publish procedures for application and minimum requirements for the making of loans and loan guarantees.
- Security for Loan: The Secretary of the Treasury is tasked with ensuring that the Federal government is compensated for the risk assumed in making loans and loan guarantees, including participating in the gains of the eligible business or its security holders through warrants, stock options, common or preferred stock or other appropriate equity instruments.
- Loan Conditions: Employer must maintain at least 90 percent of current workforce and remain neutral regarding any union organizing activity.
- Compensation Limitations: During the 2-year period beginning March 1, 2020 and ending March 1, 2022, no officer or employee of the eligible business whose total compensation exceeded $425,000 in calendar year 2019 (other than an employee whose compensation is determined through a collective bargaining agreement entered into prior to March 1, 2020) – (1) will receive from the eligible business total compensation which exceeds, during any 12 consecutive months of such 2-year period, the total compensation received by the officer or employee from the eligible business in calendar year 2019; and (2) will receive from the eligible business severance pay or other benefits upon termination of employment with the eligible business which exceeds twice the maximum total compensation received by the officer or employee from the eligible business in calendar year 2019. Similarly, compensation of employees over $3,000,000 is capped at $3,000,000 plus 50% of the excess over $3,000,000 received in 2019.
- Limitations on Dividends: Businesses that receive these loans (a) cannot pay dividends or repurchase stock during the life of the loan and for 12 months after the loan is repaid (waivable by Secretary of Treasury).
Modifications to Loans and Withdrawals from Retirement Accounts and Tax Rebates
- Purpose: To provide employees with greater flexibility in withdrawing retirements funds or taking hardship loans from retirement accounts to assist with pandemicrelated costs.
- Plan Sponsor: Plan sponsors must amend their retirement plans no later than the end of the 2020 plan year to allow plan participants to take advantage of CARES Act amendments for hardship loans and distributions. Plan sponsor must communicate any changes to plan participants. Plan fiduciaries determine which options plan participants may qualify for depending on the nature of each participant’s hardship.
- Limitation on Hardship Loans: For loans relating to coronavirus (e.g., participant or immediate family member has tested positive for the coronavirus or plan participant has been adversely impacted economically by quarantine, layoff, child care, business closure), the loan may be made up to $100,000 or 100% of the vested account balance. For loans unrelated to the coronavirus, the limit is $50,000 or the greater of $10,000 or 50% of the present balance of the participant’s vested account balance.
- Limitation on Withdrawals: Hardship withdrawals are available to those impacted by the coronavirus (tested positive, immediate family member tested positive, business impacted). For hardship withdrawals, the 10% early withdrawal penalty does not apply (up to $100,000). Withdrawals are still subject to income tax. Further, any income tax owed by participants may be spread out over three years. Participants may elect to repay the distribution within three years rather than paying taxes on the withdrawal.
- Other Employer Provisions: Employers are not required to pay more $200 per day and $2,000 in the aggregate for each employee for paid leave caused by the employee taking care of an individual subject to federal, state or local quarantine order or for an individual advised to self-quarantine. Employers are not required to pay more than $511 per day and $5,110 in the aggregate for each employee, when the employee is taking leave because the individual is subject to quarantine or experiencing symptoms of COVID-19.
- Tax Rebates: $1,200 per individual or $2,400 in the case of joint tax filers (plus $500 per child). The rebate is reduced by 5% of a tax payers adjusted gross income from $75,000 to $99,000 (and between $150,000 and $198,000 for married couples filing jointly).
- Purpose: To afford more businesses the opportunity to utilize streamlined chapter 11 Procedures for small businesses. The Small Business Reorganization Act (effective February 2020), as amended by the CARES Act, enables businesses with debts up to $7.5 million to take advantage of streamlined provisions for small-business chapter 11 bankruptcy cases. The debt limit will decrease back to $2,725,625 after one year from passages of the CARES Act.
- Income calculations: Where relevant, the CARES Act excludes from the definition of “income” federal funding relating to COVID-19.
- Chapter 13 plans: Chapter 13 plans may be modified, for one year after enactment of the CARES Act, if the debtor experiences material financial hardship due to COVID-19, and plan payments may be extended for up to 7 years after the initial plan payment was due.
- Purpose: To provide protections from foreclosures and evictions during the pandemic.
- Forbearance: 90-day forbearance period for multifamily borrowers of federallybacked loans (Fannie Mae, Freddie Mac or HUD) experiencing financial hardship. Limitations on evicting or charging late fees to tenants during forbearance period.
- Evictions: Landlords with loans backed by Fannie Mae, Freddie Mac or HUD cannot evict tenants for 120 days following Act’s enactment.
- Purpose: The SBA may provide financial assistance in the form of grants to resource partners to provide education, training, and advising to covered small business concerns (e.g., businesses located in an area substantially affected by COVID-19), and minority-owned businesses.
- Benefits: Covered small businesses may seek grants for accessing and applying for SBA and Federal resources relating to accessing capital and business resiliency, such as supply chain issues caused by COVID-19 and implementing telework to reduce possible transmission of COVID-19.
- Metrics: The SBA will make available goals and metrics for the available funds.
Other Financial Relief for All Businesses
(1) Employee Retention Credit
- A refundable payroll tax credit for 50% of wages paid by eligible employers (including nonprofits) to certain employees during the COVID-19 crisis.
- The credit applies to wages paid after March 12, 2020 and before January 1, 2021.
(2) Delay of payment of employer payroll taxes
- Taxpayers (including the self-employed) can delay paying the employer portion of certain payroll taxes through the end of 2020. Specific percentages and applicable dates apply.
- The Employer Retention Credit or employer payroll tax deferral is not available to employers receiving Small Business Interruption Loans under the Act.
(3) Delay of estimated tax payments for corporations
- Corporations that file or owe tax payments on April 15 may postpone both the filing and tax payments until July 15, 2020.
(4) Modifications for net operating losses (NOL)
- Prior to CARES Act, a corporation’s NOLs were subject to a taxable income limitation, and they could not be carried back to reduce income in a prior tax year. With the CARES Act, a loss from 2018, 2019 or 2020 can be carried back five years.
- The taxable income limitation will be temporarily removed in order to allow businesses to use an NOL to fully offset income.
- This loss limitation also applies to pass-through businesses and sole proprietors, so they can benefit from the NOL carryback rules and access critical cash flow to maintain operations and payroll for their employees.
(5) Modifications for Sec. 461(l) Excess Business Loss Limitations
- New law temporarily modifies the loss limitation for noncorporate taxpayers, applicable to tax years beginning after December 31, 2017 to allow deductions of excess business losses arising in 2018, 2019, and 2020.
- Act clarifies that wages not considered business income when provision returns in 2021.
(6) Accelerated corporate alternative minimum tax credits (AMT)
- Corporations may claim outstanding minimum tax credits (subject to limits) for tax years before 2021, at which time any remaining minimum tax credit may be claimed as fully refundable. The minimum tax credit is refundable for any tax year beginning in 2018 or 2019 (in an amount equal to 50% ( 100% for tax years beginning in 2019) of the excess minimum tax credit for the tax year, over the amount of the credit allowable for the year against regular tax liability. It also provides for an election to take the entire refundable credit amount in 2018. Application for a tentative refund must be filed with the IRS before December 31, 2020.
(7) Interest expense deduction increased
- Businesses may temporarily increase the amount of interest expense they can deduct on their tax returns, to 50% of the taxable income for 2019 and 2020. The current allowable amount is 30%. Partnerships, however, do not get to change their limit during 2019. Instead, any interest disallowed at the partnership level is passed out to the partners and is suspended at the partner level under the normal rules. In 2020, however, 50% of the suspended interest “frees up,” and will be fully deductible, while the other 50% will remain suspended until the partnership allocates excess taxable income or excess interest income to the partner (or the partnership is no longer subject to Section 163(j)).
(8) Qualified improvement property
- The CARES Act makes a technical correction to the Tax Cuts & Jobs Act of 2017 by designating qualified improvement property placed in service after December 31, 2017 as 15-year property for depreciation purposes. This is especially beneficial for those in the hospitality and retail industries, as it makes qualified improvement property eligible for 100% bonus depreciation, allowing them to immediately write off costs associated with improving facilities instead of having to depreciate those improvements over the 39-year life of the building.
(9) Charitable Contributions
- Limitation on the deductibility of cash charitable contributions during 2020 in increased from 10% to 25% of taxable income.
- The limitation on deductions for contributions of food inventory is increased from 15% to 25%.