The Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), signed into law on March 27, 2020, is meant to serve as a stimulus to individuals and businesses in response to the economic distress caused by the coronavirus (COVID-19) pandemic. Below is a brief summary on some of the key points to the CARES Act.
Paycheck Protection Program with Provisions to Forgive Qualifying Loans
The Paycheck Protection Loan Program will provide businesses (generally with less than 500 employees) that are struggling due to the coronavirus outbreak with an opportunity to borrow money only for the specific purposes described in the CARES Act, which include the following:
(i) payroll costs;
(ii) continuation of group health care benefits;
(iii) employee compensation;
(iv) mortgage interest payments;
(vi) utilities; and
(vii) interest on debt incurred before the “Covered Period” (defined as the period between 2/15/2020 and 6/30/2020).
* Note that “payroll costs” expressly exclude (i) compensation of an individual employee in excess of an annual salary of $100,000 pro-rated for the Covered Period; (ii) withholding taxes; and (iii) compensation for those whose principal residence is outside the U.S.
** Please note that recipients of economic injury disaster loans from the SBA for COVID-19 purposes cannot receive loans under the CARES Act program.
Eligibility for these loans is not based on revenue, only the number of employees (generally under 500). Also, a borrower’s creditworthiness is not to be taken into account. Instead, lenders are directed to only consider (i) whether the borrower was in operation on 2/15/2020 and (ii) if the borrower was paying salaries and payroll taxes to employees or paying independent contractors. The borrower must certify to the lender that the uncertainty of economic conditions created by COVID-19 justifies the loan request to support ongoing operations of the borrower, and acknowledge that the funds will be used for qualifying purposes.
The maximum amount for these loans is the lesser of (i) 250% of the average total monthly payments for payroll costs during the 1-year period before the loan is made or (ii) $10,000,000. The maximum interest rate for a loan cannot exceed 4%. Outstanding loan amounts after forgiveness (described below) will have a maximum maturity of 10 years from the date a borrower applies for loan forgiveness. Lenders are also required to provide payment deferment for a period not less than 6 months or greater than 1 year.
These loans will have no personal guarantees and will be nonrecourse if certain qualifications are met and the loans are used for qualified purposes.
Loan Forgiveness: An eligible borrower receiving the loan may have the loan forgiven (with no income tax effect on such forgiveness) in an amount equal to the total of all payroll costs, mortgage interest, rent payments and utility payments made by the borrower for the 8 week period beginning on the date of the origination of the loan (however, please note that there are some potential reductions to the forgiveness amount if employees are laid off or salaries and wages of employees are reduced during this 8 week period).
IF YOU DO NOT HAVE A CURRENT LENDER RELATIONSHIP, OR HAVE A CURRENT RELATIONSHIP BUT SEEK ALTERNATIVE LOAN SOURCES, PLEASE CONTACT US AS WE MAINTAIN EXCELLENT BUSINESS RELATIONSHIPS WITH LENDING INSTITUTIONS.
Emergency Injury Disaster Loans (EIDL)
A eligible borrower (must have been in operating on January 31, 2020) may request an advance of up to $10,000 to be paid within 3 days of applying. The advance may be used to provide paid sick leave to employees, maintain payroll, meet increased production costs due to supply chain disruptions, or pay business obligations, including debts, rent and mortgage payments.
The advance does not have to be repaid (even if the loan is subsequently denied).
Employee Retention Credit for Businesses Closed Due to COVID-19
Eligible employers will receive a refundable tax credit against Social Security Taxes imposed under Section 3111(a) of the Internal Revenue Code (or Railroad Retirement Tax Act taxes imposed under Section 3221(a) of the Code).
An eligible employer is defined as any employer which was carrying on a trade or business during calendar year 2020 and (i) whose operations were fully or partially suspended due to a COVID-19 mandated shut down order (unfortunately, the Act does not define the terms “fully or partially suspended”) or (ii) whose gross receipts declined by greater than 50% when compared to the corresponding calendar quarter of the prior year. When meeting the gross receipts test above, eligibility for the credit starts with the first calendar quarter in 2020 in which the employer’s gross receipts declined by greater than 50% of the corresponding calendar quarter of 2019 and ends with the calendar quarter following the calendar quarter in which the gross receipts exceed 80% of the corresponding calendar quarter of the prior year.
The credit is applicable for wages paid between March 12, 2020 and January 1, 2021. It is determined on a calendar quarter basis and equals 50% of “qualified wages” up to $10,000 paid to each employee (or $5,000 in actual credit). Please note that the credit is subject to potential reduction (including by any credit taken under the Families First Coronavirus Response Act (i.e., credits for paid sick leave and enhanced family and medical leave).
For employers with over 100 employees, qualified wages are wages paid to employees when they are not providing services due to coronavirus-related circumstances. For employers with 100 or fewer employees, all employees qualify for the credit, whether the employer is open for business or subject to a shut-down order.
Delay of Payroll Tax Payments
The CARES Act will allow for most employers to defer the employer portion of social security taxes from the time the CARES Act is signed into law through December 31, 2020. One-half of the deferred amount will be due no later than December 31, 2021 and the remainder will be due no later than December 31, 2022.
Net Operating Loss Treatment
The CARES Act provides for a 5 year carry back of NOLs. In 2018, 2019, and 2020. Note for C corporations: this could allow a corporation to carryback NOLs to years prior to 2018 in which the corporate tax rate was 35%.
The CARES Act provides for $1,200.00 to Americans making $75,000 or less ($150,000 for those who are married filing jointly) and $500 for each child, to be paid “as rapidly as possible.” Phaseouts apply to individuals making $75,000 or more ($150,000 in the case of those who are married filing jointly). There will be a total phase out for individuals making over $99,000 and married couples making above $198,000 (i.e. there will be no rebate).
Coronavirus-Related Distributions from Retirement Accounts
Coronavirus-related distributions made from both eligible employer sponsored retirement plans, individual retirement accounts (“IRAs”) are exempt from the 10% early distribution penalty tax. While not subject to early withdrawal penalty, these distributions will still be subject to ordinary income tax.
Required Minimum Distributions (“RMD”) Threshold
The CARES Act temporarily waives RMDs for 401(k) plans, Section 457(b) deferred compensation plans, and IRAs. This is applicable for required minimum distributions that otherwise would have been required to be made in 2020.
The CARES Act expands unemployment eligibility and offers workers an additional $600 per week for four months, on top of what state programs pay. It also extends UI benefits through Dec. 31 for eligible workers. The deal applies to the self-employed and independent contractors.
The CARES Act also covers the healthcare industry by expanding telemedicine initiatives, providing over $100 million of funding to hospitals and healthcare centers, expediting regulatory actions on treatments and vaccines, funding FEMA aid to help states and localities with medical responses, and increasing Medicare payments for coronavirus patients.