Top negotiators from Congress and the Administration recently reached agreement on the third COVID-19 $2.2 trillion economic stimulus bill, and swiftly after that, the Senate unanimously passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) (P.L. 116-134). The House of Representatives followed, and the legislation was signed into law by President Trump shortly thereafter on March 27, 2020. The federal government faced an overwhelming pressure to get protections and relief in place quickly, which propelled this legislation forward. Below, you will find key takeaways from this historic legislation relevant to your operations. More details may become apparent with more thorough analysis and as various industries consider the full impact of all 880 pages of the new law.
Paycheck Protection Program Loans (Sections 1102, 1104, 1106, 1109, 1114)
The Paycheck Protection Program is administered by the Small Business Administration (SBA) to provide emergency lending under its 7(a) lending program. With $349 billion in new lending capacity, this program helps small businesses cover operating expenses and incentivizes employers to retain employees by providing that loans can be forgiven in whole or in part under certain circumstances.
- General Eligibility: Available to small businesses and nonprofits with 500 or fewer employees that existed on February 15, 2020, and had paid employees.
- Nonprofit Eligibility: Available for 501(c)(3) charitable organizations, 501(c)(19) veterans’ organizations, or tribal organizations. The final bill does not include provisions for other exempt entities such as 501(c)(6) trade associations, 501(c)(7) social clubs, or other exempt organizations to participate in the Paycheck Protection Program.
- Waiver of Affiliation Rules: Restaurants, food service, caterers, and hotels that employ 500 or fewer employees per physical location are also eligible to receive a single loan if they operate in North American Industry Classification System Sector 72 (Accommodation and Food Services). Eligibility is also extended to franchises that are approved on the SBA’s Franchise Directory and small businesses that receive financing through the Small Business Investment Company (SBIC) program.
- No Personal Guarantee: No personal guarantee or collateral will be required in securing a loan.
- No Credit Elsewhere Test: Existing standards shall be waived that require an extensive analysis to determine whether the borrower has the ability to obtain some or all of the requested loan funds from alternative sources, without causing undue hardship. That test could also have required borrowers to utilize those alternative sources rather than obtain the SBA loan.
- Loan Amount and Rate: The maximum loan amount is the lesser of 2.5 times the borrower’s average monthly payroll costs or $10 million, with a maximum interest rate of 1.0 percent.
- Loan Period: Covered loan period is defined as beginning on February 15, 2020, and ending on June 30, 2020.
- Loan Use: Businesses can apply the funds to payroll costs, including compensation to employees (up to $100,000 per year), paid leave, group health benefits, retirement benefits, state and local payroll taxes, and compensation to sole proprietors and independent contractors. In addition, the loan can be used to pay mortgage interest, rent, and utilities.
- Loan Forgiveness: Borrowers shall be eligible for loan forgiveness equal to the amount spent during an eight-week period after the origination date of the loan, essentially turning the loan into a grant. The amount of funds eligible for forgiveness will be reduced for employers terminating employees and cutting wages during the covered period. To encourage employers to rehire any employees who have already been laid off due to the COVID-19 crisis, borrowers that re-hire workers previously laid off will not be penalized for having a reduced payroll at the beginning of the period.
The CARES Act authorizes the SBA to award grants to associations or associations representing resource partners to develop online platforms for small businesses to access information and resources provided by the federal government for small businesses regarding COVID-19, and to provide training and education for small businesses.
The U.S. Department of the Treasury, the Farm Credit Administration, and other federal financial regulatory agencies are established to authorize bank and nonbank lenders to provide SBA paycheck protection loans for the duration of the president’s national emergency declaration.
The SBA is required to begin establishing regulations no later than 15 days after enactment.
Economic Injury Disaster Loans (EIDL) (Section 1110)
The CARES Act eliminates creditworthiness requirements and appropriates an additional $10 billion to the EIDL program so that eligible small businesses, nonprofits (including non-501(c)(3)s), and other applicants (including individuals operating as sole proprietors or independent contractors from January 31, 2020, to December 31, 2020) can get checks for $10,000 within three days. The emergency EIDL grant award of up to $10,000 would be subtracted from the amount forgiven under the Paycheck Protection Program.
Subsidy for Certain Loan Payments (Section 1112)
Immediate relief will be provided to those with non-disaster SBA loans, in particular 7(a), 504, and microloans. SBA will cover all loan payments on these SBA loans, including principal, interest, and fees, for six months even if the loan was sold on the secondary market. This relief will also be available to new borrowers who take out loans within six months of the president signing the bill into law. Paycheck Protection Program loans are not covered.
Economic Stabilization Fund (Section 4003)
A loan and loan guarantee program will be created for industries like airlines to keep them solvent through the crisis. The CARES Act sets aside $454 billion for “eligible business,” which is defined as “a United States business that has not otherwise received economic relief in the form of loans or loan guarantees provided under” the legislation. It is expected, but unclear, whether charitable nonprofits qualify under that definition for stabilization loans. Larger businesses and nonprofits that have between 500 and 10,000 employees are expressly eligible for loans under this provision. Although these loans will not be forgiven, the mid-size business loans would be charged an interest rate of no higher than 2 percent and would not accrue interest or require repayments for the first six months. Those accepting the mid-size business loans must retain at least 90 percent of their staff at full compensation and benefits until September 30, 2020.
Payroll Tax Relief (Sections 2301, 2302)
Employee Retention Payroll Tax Credit
Employers are now eligible for a refundable payroll tax credit of up to $5,000 for each employee on payroll when certain conditions are met. The credit is calculated as 50 percent of qualified wages and health benefits for each calendar quarter, not exceeding $10,000. The credit is provided for wages paid or incurred from March 13, 2020, through December 31, 2020. The employer had to have experienced a whole or partial shutdown, experiencing a decrease in revenue of at least 50 percent in the first quarter of 2020 compared to the first quarter of 2019. The availability of the credit would continue each quarter until the organization’s revenue exceeds 80 percent of the same quarter in 2019. For tax-exempt organizations, the entity’s entire operation must be considered when determining eligibility. Notably, employers receiving Paycheck Protection Program loans would not be eligible for these credits. For eligible employers with more than 100 full-time employees, qualified wages are wages paid to employees when they are not providing services due to the COVID-19-related circumstances. For eligible employers with 100 or fewer full-time employees, all employee wages qualify for the credit.
Delayed Payment of Payroll Taxes
Employers are now allowed to delay payment of the employer portion payroll taxes in 2020, payable in equal halves at the end of 2021 and 2022.
Other Business Provisions (Sections 2303‒2307)
For-profit businesses and nonprofits with unrelated business income (UBI) or for-profit subsidiaries should consider other business provisions of the CARES Act related to the following:
Modifications of Net Operating Losses (NOLs)
Current tax law limits NOLs to 80 percent of current year taxable income and may not be carried back to prior tax years (i.e., to generate refunds). The Act permits a loss from taxable years 2018, 2019, and 2020 to be carried back five years to generate refunds and removes the taxable income limitation to allow NOLs to fully offset income for tax years 2018, 2019, and 2020. Additionally, the Act removes the excess business loss limitation of Section 461(l), applicable to pass-through business owners and sole proprietors for tax years 2018, 2019, and 2020, so they can also benefit from the modified NOL carryback rules. These changes will allow companies and individuals to utilize losses and amend prior year returns, which will provide critical cash flow and liquidity.
Accelerated Recovery of Corporate Alternative Minimum Tax (AMT) Credits
The corporate AMT was repealed as part of the Tax Cuts and Jobs Act (TCJA), but corporate AMT credits were made available as refundable credits over several years, ending in 2021. The CARES Act accelerates the ability of companies to recover those AMT credits, permitting companies to claim a refund now and obtain additional cash flow.
Increase in Interest Deductions Permitted under IRC Section 163(j)
The TCJA limited interest deductions to a portion of an entity’s adjusted taxable income. The CARES Act generally raises the limit on interest deductions from 30 percent of ATI to 50 percent for taxable years beginning in 2019 and 2020, allowing taxpayers more leeway in deducting interest. As businesses look to weather the storm of the current crisis, this provision will allow them to increase liquidity, with a reduced cost of capital.
Qualified Improvement Property
A drafting error in the TCJA required a 39-year depreciable life for qualified improvement property (generally, certain improvements to a building’s interior). This provision enables businesses, especially in the hospitality industry, to write off immediately costs associated with improving facilities instead of having to depreciate those improvements over the 39-year life of the building. Not only does this increase companies’ access to cash flow by allowing them to amend a prior year return, but it also incentivizes them to continue to invest in improvements as the country recovers from the COVID-19 emergency.
Charitable Giving Incentive (Sections 2204, 2205)
A new above-the-line deduction (universal or non-itemizer deduction that applies to all taxpayers) will now be available for total charitable contributions of up to $300. The incentive applies to contributions made in 2020 and would be claimed on tax forms next year. The bill also lifts the existing cap on annual contributions for those who itemize, raising it from 60 percent of adjusted gross income to 100 percent. For corporations, the bill raises the annual limit from 10 percent to 25 percent. Food donations from corporations would be available up to 25 percent, up from the current 15 percent cap.
Unemployment Benefits (Sections 2101–2105)
The CARES Act’s unemployment insurance provisions provide additional benefits assistance to individuals unable to qualify for other unemployment compensation and establishes new federal-state programs to cover the first week of unemployment compensation and portions of short-time compensation through December 31, 2020.
The CARES Act creates a temporary Pandemic Unemployment Assistance program through December 31, 2020, to provide payment to those not traditionally eligible for unemployment benefits (self-employed, independent contractors, those with limited work history, and others) who are unable to work as a direct result of the coronavirus public health emergency.
Covered individuals will benefit from federal-state agreements that provide a recipient of unemployment compensation from a state with an additional $600 per week in federal pandemic unemployment compensation, and money will be allocated to states in order to reimburse nonprofits, government agencies, and Indian tribes for half of the costs they incur through December 31, 2020, to pay unemployment benefits.
Individual Rebates and Retirement Plans (Sections 2200‒2205)
The CARES Act provides assistance to individuals with direct payments to adults of $1,200 ($2,400 married) or less and $500 per child ($3,400 for a family of four). The amount of the payments phases out based on earnings of between $75,000 and $99,000 ($150,000 and $198,000 for couples).
The 10 percent early withdrawal penalty for distributions up to $100,000 from qualified retirement accounts for coronavirus-related purposes made on or after January 1, 2020, will be waived. In addition, income attributable to such distributions would be subject to tax over three years, and the taxpayer may recontribute the funds to an eligible retirement plan within three years without regard to that year’s cap on contributions. Further, the provision provides flexibility for loans from certain retirement plans for coronavirus-related relief.
A coronavirus-related distribution is one made to an individual (1) who is diagnosed with COVID-19, (2) whose spouse or dependent is diagnosed with COVID-19, or (3) who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19, or other factors, as determined by the Treasury Secretary.
Required minimum distribution rules will also be waived for certain defined contribution plans and IRAs for calendar year 2020. This provision provides relief to individuals who would otherwise be required to withdraw funds from such retirement accounts during the economic slowdown due to COVID-19.
Labor Provisions (Section 3602)
The CARES Act amends the new paid leave mandates by lowering the amounts that employers must pay for paid sick and family leave under the Families First Coronavirus Response Act (enacted March 19, 2020) to the amounts covered by the refundable payroll tax credit, i.e., $511 per day for employee sick leave or $200 per day for family leave. (See S.R. Snodgrass’s prior alert here.)
If you wish to discuss any of the matters in the attached update in more detail, please email Brian Bender or call him at 202-372-6305.
Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice to your specific situation.