On Friday, March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act (Public Law 116-136), which is the largest liquidity/stimulus package in the history of the United States. The CARES Act provides more than $2 trillion in federal economic assistance for individuals, businesses, public health, and state and local governments to help address the significant economic disruptions caused by the COVID-19 pandemic. This is the third phase in the federal government’s legislative response to the COVID-19 pandemic, which previously included the Families First Coronavirus Response Act (Public Law 116-127) and the Coronavirus Preparedness and Response Supplemental Appropriations Act, 2020 (Public Law 116-123).
This Client Alert focuses primarily on relief provided to individuals, businesses, and state and local governments, including the Small Business Administration (SBA) lending programs, programs for assisting larger businesses, unemployment insurance programs, tax law changes, and assistance to state and local governments provided under the CARES Act. The provisions of the CARES Act relating to the public health programs will be discussed in a separate forthcoming Client Alert.
The CARES Act extends relief to small businesses through an expansion of SBA programs that includes debt relief for existing borrowers, a new Paycheck Protection Program (PPP) to facilitate loans for small businesses negatively impacted by the COVID-19 emergency, and an expansion of the Economic Injury Disaster Loan (EIDL) program.
The CARES Act extends debt relief to millions of existing 7(a), 504 and microloan borrowers (but not for PPP loans or disaster loans), and to new borrowers who receive a loan under one of these programs within six months of the date the CARES Act was signed into law. Under the debt relief program, the SBA will pay originating lenders all principal, interest and fees for a period of six months resulting in full satisfaction of the borrower’s responsibility for these payments. If the borrower’s payments under an existing SBA loan are already in deferment, the six months of payments shall commence once the existing deferral period ends.
In addition, the SBA is encouraging participating lenders to provide borrowers with deferments either before or after this payment relief. If a lender provides a deferral to a borrower at any time during the one-year period following the enactment of the CARES Act that results in a maturity date extension, the SBA must waive any statutory limits on the maximum loan maturities for the extended loan.
Congress created the PPP to provide capital to small businesses to help them meet their short-term operating costs and encourage employers experiencing a disruption in operations due to the COVID-19 emergency to retain employees. The PPP provides for loans of up to $10 million for payroll and eligible costs related to this goal incurred from February 15, 2020 through June 30, 2020, including mortgage interest and lease payments, and utilities. Certain exceptions apply, such as for employee compensation over $100,000 or for employees whose principal place of residence is outside of the United States.
The CARES Act has made PPP loans available to a broader group of borrowers than typical SBA loan programs. To qualify, a business must have been in operation on February 15, 2020, and must have had employees for whom it paid salaries and payroll taxes. Eligible businesses have 500 or fewer employees or fall within the applicable size standard in the number of employees for their industry under existing SBA standards, and include small businesses (subject to the SBA’s affiliation rules subject to certain waivers), 501(c)(3) tax-exempt organizations, 501(c)(19) veterans organizations and tribal business concerns described in Section 31(b)(2)(C) of the Small Business Act, as well as other businesses. PPP loans are also available to certain sole proprietors, independent contractors and self-employed individuals. Businesses in heavily impacted industries like hotels, motels and restaurants benefit from the PPP’s broadened scope, which has expanded to include business concerns in the accommodation or food industry (North American Industry Classification System (NAICS) code beginning with 72) that employs 500 or less employees at different physical locations. SBA-approved franchises also qualify assuming separate entities operate each location. Companies that receive funding through a Small Business Investment Company, which are less common, are also eligible. The SBA has committed to issuing additional eligibility guidance, particularly related to affiliation standards.
The PPP offers attractive features for both borrowers and lenders. Payment on PPP loans will be deferred for six months, upon which the PPP loans may be forgivable if the proceeds were allocated to the program’s permitted uses (subject to formula-based adjustments relating to employee retainage and compensation). Due to the expected demand for PPP loans, the U.S. Department of the Treasury (“the Treasury”) has clarified that otherwise forgivable non-payroll expenses will be capped at 25% of the amount forgiven. PPP loans shall have maturity dates of two years and will bear interest at a fixed rate of interest equal to 1% per annum. No loan fees or prepayment fees apply to PPP loans, and no personal guaranties or collateral are required. As distinguished from existing 7(a) SBA loan programs, PPP loans are 100% guaranteed by the SBA. Cancellation of debt income resulting from forgiveness of PPP loans will be excluded from the borrowers’ gross income and therefore not subject to federal income tax.
The PPP is a new program and the SBA may issue additional guidance in the coming days that Phillips Lytle is monitoring for updates as it informs the above description.
The EIDL is an existing program of the SBA typically targeted at a limited disaster-impacted geographic area. Due to the nationwide impact of the COVID-19 pandemic, the EIDL program offering emergency loans of up to $2 million is now applicable nationally for businesses enduring substantial economic injury.
The CARES Act expands historic eligibility for EIDLs between January 31, 2020 to December 31, 2020 to certain tribal small businesses; employee-owned businesses or cooperatives with fewer than 500 employees; most nonprofits, sole proprietors or independent contractors; and small business concerns and agricultural cooperatives that meet SBA size standards. A personal guaranty is not required for loans of up to $200,000. An interest rate of 2.75% applies to EIDLs to nonprofits while a rate of 3.75% applies to other businesses. The “credit elsewhere” criteria that usually applies to EIDLs is eliminated under the CARES Act as well as the requirement that a participant have been in operation for the prior year. One highlight of the expanded EIDL program is the option for a $10,000 emergency advance on funds (Emergency Economic Injury Grant), which remains available to applicants as a grant even if they are rejected for an EIDL. Finally, businesses can refinance EIDLs with PPP loans (which have more borrower-favorable terms).
The maximum loan amount for an SBA Express loan has been increased from $350,000 to $1,000,000.
In addition to the program details above, a few provisions of the CARES Act ease regulatory burdens on lenders, including a short-term relaxation of disclosure requirements relating to troubled debt restructuring. Additionally, PPP loans would have a zero percent risk weight for purposes of capital requirement compliance.
Below are a few frequently asked questions.
Q. Is there a deadline for obtaining a PPP loan?
A. PPP loans are available through June 30, 2020. Due to the expected demand, applicants are encouraged to apply as soon as possible because there is a funding cap on this program.
Q. I would like to apply for a PPP loan. What types of information will lenders request from my business?
A. The Treasury released the PPP loan application on its website on March 31, 2020. In addition to completing the application, applicants will need to supply verifiable payroll documentation, including relevant tax returns or other evidence such as payroll processor records. The SBA may provide additional guidance on the evidence businesses must provide to prospective lenders and documentation that the PPP will entail. Beginning on April 3, 2020, small businesses and sole proprietorships can apply for a PPP loan through approved SBA lenders. Beginning on April 10, 2020, independent contractors and self-employed individuals can apply for a PPP loan through approved SBA lenders.
Q. How do lenders determine the amount of a PPP loan?
A. Lenders will base the PPP loan amount determinations on the following formula: the lesser of (i) $10 million; (ii) twice the average total monthly payroll costs incurred in the one-year period before the loan is made (with adjustments for seasonal employers), plus 25% of that amount, plus the outstanding amount of an EIDL made between January 31, 2020 and the date any such EIDL is refinanced by a PPP loan; or (iii) for businesses that were not in existence from February 15, 2019 to June 30, 2019, twice the average total monthly payroll payments from January 1, 2020 to February 29, 2020, plus 25% of that amount, plus the outstanding amount of an EIDL made between January 31, 2020 and the date any such EIDL is refinanced by a PPP loan.
Q. I have already laid off some employees due to the emergency, but the PPP might be able to help me rehire some employees. Will the PPP loan still be forgivable?
A. PPP loans are forgivable in whole or in part subject to formula-based reductions proportional to any reduction in employees retained compared to the prior year, and to certain reductions in pay relative to prior year compensation. The PPP aims to incentivize businesses to rehire employees who have already been laid off due to the COVID-19 emergency. As such, borrowers that rehire workers who had been laid off due to the COVID-19 emergency will not be penalized for having a reduced payroll at the beginning of the period.
Q. Which lenders may participate in the PPP?
A. Current SBA 7(a) loan lenders are authorized to participate in the PPP, and new lenders may be authorized by the Treasury to meet the needs of businesses impacted by the COVID-19 emergency. Servicing fees for PPP loans are as follows: 5% for loans of not more than $350,000; 3% for loans of more than $350,000 and less than $2,000,000; and 1% for loans of at least $2,000,000.
Q. My business is not usually eligible for an SBA loan. Should I still apply?
A. The CARES Act expands the scope of the SBA program to provide relief for businesses that may not usually qualify for an SBA loan. For example, a business in the hard-hit hotel and restaurant industries may qualify for a PPP loan if the business has no more than 500 employees at any physical location. The expansion also allows some sole proprietors and independent contractors to participate in the PPP and EIDL programs. If your business has not qualified in the past, Phillips Lytle can provide guidance regarding changes to eligibility rules that may allow your business to participate.
Q. I want to apply for an EIDL, including the $10,000 advance. If I apply, but am rejected, what happens to the advance?
A. The $10,000 advance does not need to be repaid and may be used for payroll, sick leave or to pay other business obligations.
If you have any questions about the CARES Act in regards to SBA Lending Programs, please contact Rosa Alina Pizzi, Raymond L. Ruff or Alson James McKenna.
Title II, Section A of the CARES Act, “Relief for Workers Affected by Coronavirus Act (RWACA),” provides for a significant expansion of unemployment insurance benefits for persons out of work due to the COVID-19 crisis. Major aspects of the RWACA are described below.
Section 2101 of the RWACA creates a temporary Pandemic Unemployment Assistance (PUA) program effective from January 27, 2020 to December 31, 2020, which covers individuals out of work who would not otherwise be eligible for unemployment insurance benefits (e.g., self-employed individuals, independent contractors, gig workers and persons with an insufficient work history) who are unable to work as a direct result of the COVID-19 crisis. Persons covered under PUA will be eligible for unemployment benefits as long as they can self-certify that they are unemployed, partially unemployed, or unable or unavailable to work because:
Individuals who are able to telework with pay or are receiving paid sick leave or other paid leave benefits are ineligible for assistance under PUA.
Section 2104 of the RWACA provides for an additional payment of $600 per week in unemployment insurance benefits to all recipients of unemployment insurance, including those covered under PUA, through July 31, 2020. The $600 payment is on top of any unemployment benefits an unemployed worker might otherwise be entitled to under federal or state law. In some cases, the combination of regular unemployment benefits and the additional $600 in Federal Pandemic Unemployment Compensation may exceed an individual’s weekly wage while working.
Section 2105 of the RWACA creates funding to fully reimburse states that provide unemployment benefits for the first week of unemployment without a one-week waiting period through December 31, 2020. New York State had eliminated its one-week waiting period before enactment of the RWACA.
Section 2107 of the RWACA provides an additional 13 weeks of unemployment benefits, through December 31, 2020, to individuals who otherwise would be ineligible for benefits because they have exhausted the rights to regular unemployment compensation under applicable federal or state law.
Section 2103 of the RWACA establishes a program for the Treasury to pay states to reimburse nonprofits, governmental entities and Indian tribes for half the cost they incur to pay unemployment benefits through December 31, 2020.
If you have any questions about the CARES Act in regards to Unemployment Insurance Programs, please contact James R. Grasso.
Prior federal legislation provided for expanded emergency paid sick leave and family and medical leave. The CARES Act makes certain technical amendments to those programs. Those programs are summarized below.
The Emergency Paid Sick Leave Act (EPSLA) requires employers with fewer than 500 employees to provide all employees with the following sick leave:
Employers cannot require employees to use other paid leave time before using leave under the EPSLA.
The Emergency Family Medical Leave Expansion Act (EFMLEA) requires employers with fewer than 500 employees to provide employees employed for at least 30 days with the following leave:
The EPSLA and EFMLEA exempt health care providers and emergency responders from their coverage. Small businesses with fewer than 50 employees are also exempt from the EFMLEA and the EPSLA’s provision to provide leave to care for a child because of a school closure or the unavailability of a child care provider due to COVID-19 precautions, if granting leave would jeopardize the viability of the business as a going concern.
The DOL has announced that the EPSLA and EFMLEA are effective as of April 1, 2020.
Covered employers must post a DOL-issued notice in the workplace. In the case of employees who are teleworking, the posting requirement can be satisfied by e-mailing or direct mailing the notice to employees, or posting the notice on an employee information internal or external website. The DOL has also issued guidance about complying with the laws’ notice requirements.
If you have any questions about the CARES Act in regards to EPSLA or EFMLEA, please contact James R. Grasso.
The CARES Act temporarily suspends the required minimum distribution (RMD) rules for qualified retirement plans and individual retirement accounts (“retirement accounts”). Participants/owners of retirement accounts, as well as beneficiaries of inherited retirement accounts, are not required to take RMDs in 2020. This temporary suspension also applies to RMDs for 2019 required to be taken by April 15, 2020 that have not yet been taken. For participants/owners of retirement accounts who have already taken RMDs in 2020, the distributions received can be rolled over into any account to which a rollover would otherwise be eligible, without income tax consequence, within 60 days of receipt of the distribution.
The CARES Act permits qualified retirement plans, including, for example, 401(k) plans, 403(b) plans and individual retirement accounts to make “coronavirus-related distributions” to eligible participants regardless of other tax code provisions that may limit in-service distributions from such plans. A “coronavirus-related distribution” is a distribution made during calendar year 2020 not exceeding $100,000 to an eligible participant. To be eligible for a coronavirus-related distribution, a participant/owner of a retirement account must be an individual (known as a “qualified individual”):
The CARES Act provides special tax treatment for coronavirus-related distributions:
To the extent that a participant in an employer plan or owner of an IRA who receives a coronavirus-related distribution does not repay the distribution to an eligible retirement plan within three years, the participant or owner may elect to include the amount not repaid (and therefore currently taxable) in income ratably over the three-year period beginning with the year in which the coronavirus-related distribution was received.
In determining whether any distribution is a coronavirus-related distribution, a plan administrator may rely on an employee’s certification that he or she is a “qualified individual.”
The CARES Act also increases (i) the dollar amount that a qualified individual may borrow from a qualified plan from $50,000 to $100,000, and (ii) the percentage that a qualified individual may borrow, from one-half of the present value of the participant’s accrued benefit under the plan to the entire present value of the participant’s accrued benefit under the plan. The increased borrowing limits apply to new loans taken within 180 days after the passage of the CARES Act.
In the case of any loan from a qualified plan for which quarterly or more frequent repayments are due between the date of enactment of the CARES Act (March 27, 2020) and December 31, 2020, the Act extends the due date for each such repayment by one year, regardless of when the loan was taken. However, interest will continue to accrue on the loan during the repayment delay and be taken into account when repayments resume. The period during which repayments are delayed is disregarded in applying the five-year limit (or longer limit in the case of principal residence loans) within which the loan must be repaid.
The CARES Act provisions concerning coronavirus-related distributions from employer plans and new plan loans up to $100,000, and repayment delays for existing or new plan loans, are not mandatory. The provisions are voluntary and will require plan amendment; however, the Act provides that these provisions may be given effect immediately, and the plans need not be amended before the last day of the plan year beginning in 2022.
If you have any questions about the CARES Act in regards to Retirement Plan Loans and Distributions, please contact David H. Kernan or Kenneth A. Grossberg.
The CARES Act includes limited tax relief for businesses in the form of payroll tax credits, deferred payment of payroll taxes and increased ability to deduct losses, as well as technical amendments to certain provisions of the Internal Revenue Code that were amended under the Tax Cuts and Jobs Act of 2017 (TCJA).
Section 2301 of the CARES Act provides a refundable payroll tax credit to employers with operations which are fully or partially suspended as a result of COVID-19, or which experience significant decreases in revenues. Specifically, an “eligible employer,” for each calendar quarter, is allowed a credit against the employer-portion of Social Security taxes (after reduction for certain other credits) equal to 50% of “qualified wages” of each employee. The amount of qualified wages, including group health benefits, with respect to any employee for all calendar quarters taken into account for purposes of this credit, may not exceed $10,000.
An eligible employer is an employer carrying on a trade or business during calendar year 2020 (including an employer which is a tax-exempt organization described in Internal Revenue Code Section 501(c)), and with respect to any calendar quarter, (i) that trade or business “is fully or partially suspended due to orders from an appropriate governmental authority limiting commerce, travel or group meetings” because of COVID-19, or (ii) the calendar quarter is within a period beginning with the first calendar quarter in which gross receipts are less than 50% of the gross receipts for the same calendar quarter in 2019, and ending with the calendar quarter thereafter for which the employer’s gross receipts are greater than 80% of the gross receipts of the same calendar quarter in 2019.
For an eligible employer with more than 100 full-time employees, qualified wages are generally wages paid by an eligible employer to an employee who is not providing services due to the circumstances described above. For eligible employers with 100 or fewer full-time employees, qualified wages are those paid to any employee, regardless of whether the employee is providing services to the employer.
This credit is available for wages paid after March 12, 2020 through December 31, 2020. The credit is not available, however, for any eligible employer that receives a PPP loan through the SBA. In addition, an employee is not taken into account for purposes of the CARES Act payroll tax credit if the employer receives a Work Opportunity Credit with respect to such employee. Furthermore, if wages are taken into account for purposes of the CARES Act payroll tax credit, they cannot be taken into account for purposes of the Employer Credit for Paid Family and Medical Leave.
Section 2302 of the CARES Act permits extended due dates for the payment of the employer-portion of Social Security taxes and 50% of the corresponding portion of self-employment taxes for the period beginning March 27, 2020 and ending on December 31, 2020. Fifty percent of the deferred amounts of the employer-portion of Social Security taxes or self-employment taxes will be due December 31, 2021, and the remainder will be due December 31, 2022. Deferral of employment tax payments is not available to taxpayers who have a PPP loan forgiven.
Section 2303 of the CARES Act amended Section 172 of the Internal Revenue Code with respect to limitations on the amount of net operating losses (NOLs) that can be deducted. Generally, the amount of NOLs a taxpayer may deduct is limited to 80% of its taxable income. For taxable years beginning before January 1, 2021, the 80% limitation is suspended, generally allowing taxpayers to utilize NOLs to offset their entire taxable income for a year. In addition, NOLs arising in a taxable year beginning after December 31, 2017, and before January 1, 2021, may be carried back to each of the preceding five taxable years, potentially providing a refund opportunity for some taxpayers. The CARES Act also makes changes to the limitations on deductibility of NOLs for taxable years beginning on or after January 1, 2021.
The limitation on the deduction of excess business losses enacted as part of the TCJA is postponed for 2020 under Section 2304 of the CARES Act, thereby providing non-corporate taxpayers an increased deduction opportunity for 2020. That limitation is now effective for taxable years beginning after December 31, 2020 and before January 1, 2026. The CARES Act also makes certain technical amendments to the definition of “excess business losses” effective as of December 22, 2017.
The TCJA limited the deductibility of business interest to a taxpayer’s business interest income for a taxable year, plus 30% of the taxpayer’s adjusted taxable income for the taxable year, plus the taxpayer’s floor plan financing interest for the taxable year. For taxable years beginning in 2019 and 2020, Section 2306 of the CARES Act increases the percentage of adjusted taxable income to 50%. As a result, taxpayers may deduct a larger amount of business interest.
Section 2307 of the CARES Act makes certain technical amendments to the depreciation rules, including classifying qualified improvement property as 15-year property (or 20-year property under the alternative depreciation system (ADS)) effective as of December 22, 2017. As a result of these amendments, qualified improvement property (not depreciated under ADS) is now eligible for 100% bonus depreciation if it was placed in service after September 27, 2017 and before January 1, 2023. Taxpayers should consider amending their 2017, 2018 or 2019 tax returns to claim refunds with respect to costs that were being depreciated over time but are now eligible for bonus depreciation.
Under the CARES Act, distilled spirits used or contained in hand sanitizer are exempt from an excise tax for 2020.
If you have any questions about the CARES Act in regards to Tax Provisions, please contact Kelly E. Marks.
Title IV, Subtitle A of the CARES Act, “Coronavirus Economic Stabilization Act of 2020,” authorizes the Secretary of the Treasury (“the Secretary”) to make up to $500 billion of loans, loan guarantees and other investments to, or for the benefit of, businesses, states and municipalities. Material provisions of this section of the CARES Act are summarized below.
Section 4003 of the CARES Act allocates $500 billion made available to the Secretary as follows:
The Secretary is given broad authority under the CARES Act to deploy these funds amongst the groups identified above. That authority extends to the terms and conditions of each loan, loan guarantee or other investment, which in each case shall be determined as the Secretary determines appropriate. The balance of this section of the Client Alert will summarize the material terms associated with loans, loan guarantees and other investments to be made available to businesses, states and municipalities from the Economic Stabilization Fund. In addition to the material terms summarized below, the CARES Act requires that the Secretary publish procedures for application and minimum requirements for making loans, loan guarantees and other investments from these funds no later than April 6, 2020.
Section 4003 of the CARES Act provides that, as a general matter, in order for a business to receive loans, loan guarantees or other investments from the Economic Stabilization Fund, the business recipient must agree to the following restrictions:
The Secretary may waive any of the requirements noted above with respect to any program made available using funds from the Economic Stabilization Fund upon a determination that such waiver is necessary to protect the interests of the federal government. In the event that the Secretary elects to waive any of these requirements, the Secretary is required to make himself available to testify before the Senate Committee on Banking, Housing and Urban Affairs and the House of Representatives Committee on Financial Services regarding the reasons for such waiver.
Loans, loan guarantees and other investments made by the Secretary from the Economic Stabilization Fund must be made exclusively to businesses that are created or organized in the United States, and that have significant operations and a majority of their employees based in the United States.
Additionally, Section 4003 of the CARES Act provides that the Secretary shall seek the implementation of a program which will use funds from the Economic Stabilization Fund to provide financing to banks and lenders that will make direct loans to businesses and nonprofit organizations that have between 500 and 10,000 employees.
Each of the loans under this program will include the following terms:
Though the foregoing are the general standing restrictions for loans, loan guarantees and other investments from the Economic Stabilization Fund, the Secretary is empowered to waive any of the requirements listed above with respect to any program.
Borrowers will be required to make the following certifications in connection with entering into loans under this program:
Section 4003 of the CARES Act permits, but does not require, the Board of Governors of the Federal Reserve System to establish a “Main Street Lending Program” that supports lending to small and mid-sized businesses on terms and conditions in accordance with certain provisions of the Federal Reserve Act.
Section 4003 of the CARES Act also states that the Secretary shall endeavor to implement a loan program funded by the Economic Stabilization Fund, which will provide liquidity to the financial system that supports lending to states and municipalities.
If you have any questions about the CARES Act in regards to the Economic Stabilization Act, please contact Benjamin M. Farber.
States, tribes and local governments are incurring massive costs and budget shortfalls as they seek to contain and treat COVID-19, and address its corresponding effects on unemployment, the economy and the demand for human services. The CARES Act establishes a $150 billion “Coronavirus Relief Fund” (“Fund”) for state, local and tribal governments to use to cover costs related to COVID-19 that had not been previously budgeted for and are incurred during the period beginning March 1, 2020 and ending December 30, 2020. The $150 billion in the Fund is primarily allocated by population, but with $3 billion reserved for United States territories and the District of Columbia, and $8 billion set aside for tribal governments, along with a guarantee that each state receives a minimum of $1.25 billion even if its population share would indicate a lesser amount.
Local governments with populations of 500,000 or more are also eligible for payments from the Fund. If a local government applies for and is approved by the Treasury to receive a payment from the Fund, it will be made directly to the local government, and the amount received is subtracted from the allocation amount otherwise available to its state’s government. In states with no county or city over 500,000 people, the state government will receive the entire allocation.
Payments from the Fund will be rapidly disbursed and must be made to governments and tribes within 30 days of the date of enactment of the CARES Act. The CARES Act authorizes the Inspector General of the Treasury to monitor and oversee the receipt, disbursement and use of payments from the Fund, and to recoup misused funds.
If you have any questions about the CARES Act in regards to State, Local and Tribal Governments, please contact Craig R. Bucki or Lisa L. Smith.
For further assistance, please contact a member of the Coronavirus (COVID-19) Response Team or the Phillips Lytle attorney with whom you have a relationship.
Should you need to contact your relationship attorney or any other Phillips Lytle attorney who can assist you during these times of uncertainty.