On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act).
There is no shortage of coverage and commentary on the CARES Act, so we are focusing here on provisions most likely to provide immediate cash flow to small and medium-sized businesses.
I. Lending Programs
a. Paycheck Protection Program (PPP) and Loan Forgiveness.
The CARES Act creates the PPP which allows the Small Business Administration (SBA) to provide $349,000,000 of federally backed loans to eligible businesses. The SBA must issue regulations regarding the PPP within 15 days after the enactment of the CARES Act. More details:
1. Timing. The loans can be made through June 30, 2020.
2. Lenders. The loans will be made by lenders under Section 7(a) of the SBA and other designated lenders. Borrowers should reach out to their normal banking contacts as a first point of contact.
3. Eligible Borrowers. Businesses, self-employed individuals, independent contractors and non-profits with less than 500 employees as well as certain businesses in the accommodation or food services industries with multiple locations if no one location employs 500 employees are eligible.
4. Forgiveness/Repayment. The loans are eligible for forgiveness. Any unforgiven amount will be repayable within 10 years, with optional payment deferral lasting between 6 months and 1 year.
i. PPP loans can be forgiven (and excluded from gross income) if the loan proceeds are used for the following purposes during the eight-week period following loan origination (the “covered period”): payroll costs (i.e., payroll costs for employees up to $100,000 per employee on annualized basis), mortgage interest payments, rent, and utility payments.
ii. If the borrower reduces salaries or its number of employees during the covered period (i.e., the eight-week period following loan origination), then the forgivable loan amount is reduced proportionately:
1. A reduction in the number of employees will be determined by comparing the average number of full-time equivalent employees (FTEEs) per month during the covered period to (ii) either (at the borrower’s election):
a. The average number of FTEEs per month employed from February 15, 2019 to June 30, 2019, or
b. The average number of FTEEs per month employed from January 1, 2020 until February 29, 2020, or
c. For seasonal employers, the average number of FTEEs per month employed from February 15, 2019 until June 30, 2019.
2. Only reductions in wages in excess of 25% of an employee’s salary or wages during the employee’s most recent full quarter of employment before the covered period are considered. Additionally, employees receiving compensation in excess of $100,000 are excluded.
iii. If you have already reduced salaries or workforce, you can rehire employees or end salary reductions before June 30, 2020 and receive full loan forgiveness.
iv. The SBA must issue guidance and regulations regarding PPP loan forgiveness within 30 days after the enactment of the CARES Act.
5. Other Loan Terms. The loans bear interest at a maximum rate of 4%, have no pre-payment penalty, and require no personal guarantees or collateral. If borrowers use the loan proceeds for the intended purposes, the SBA will have no recourse against the borrower.
6. Required Certifications. Borrowers must certify, among other things, that current economic conditions make the loan necessary, and that the loan proceeds will be used to retain workers and maintain payroll, or make mortgage payments, lease payments, or utility payments.
7. Maximum Loan Amount. Each loan is capped at the lesser of (i) $10 million or:
i. The average total monthly payroll costs incurred in the one-year period before the loan is made (or for seasonal employers the average monthly payroll costs for the 12 weeks beginning on February 15, 2019, or from March 1 to June 30, 2019) multiplied by 2.5, plus the outstanding amount of any SBA Disaster Loans received this year, or
ii. Upon request by an applying business that was not in business during the period from February 15 to June 30, 2019, the average total monthly payroll payments from January 1 to February 29, 2020, multiplied by 2.5, plus the outstanding amount of any SBA Disaster Loans received this year.
b. Economic Stabilization to Distressed Industries.
1. Overview. Title IV of the CARES Act provides $500 billion for loans, loan guarantees, and other investments to support states, municipalities, and “eligible businesses” (i.e., any air carrier or U.S. business that has not otherwise received adequate economic relief in the form of loans or loan guarantees). Out of such amount, $454 billion is designated for loans, loan guarantees, and other investments in Federal Reserve programs or facilities to support to eligible businesses, states, and municipalities. Such “programs and facilities” include the Primary Market Corporate Credit Facility (PMCCF), the Secondary Market Corporate Credit Facility (SMCCF) and the Term Asset-Backed Securities Loan Facility (TALF). The remainder of the $500 billion amount is designated for air carriers specifically ($25 billion), cargo air carriers ($4 billion), and businesses critical to national security ($17 billion).
2. Mid-Sized Business Lending Facility. Title IV of the CARES Act requires the Treasury Secretary to endeavor to seek the implementation of a federal loan program or facility that provides financing to banks and other lenders that make direct loans to eligible businesses including, nonprofit organizations, with between 500 and 10,000 employees. More details:
i. Maximum annual interest rates will be 2%, and for the first 6 months of the loans (or for such longer period as the Treasury Secretary may determine) no principal or interest will be due or payable.
ii. Borrowers must certify that:
1. Due to economic conditions the loan is necessary to support the recipient’s operations,
2. The funds will be used to retain at least 90% of the recipient’s workforce, at full compensation and benefits, until September 30, 2020,
3. The recipient intends to restore at least 90% of its workforce that existed as of February 1, 2020, and to restore all compensation and benefits to its workers no later than four months after the termination date of the public health emergency declared by the Secretary of Health and Human Services on January 31, 2020 relating to COVID-19,
4. The recipient is an entity or business domiciled in the United States with significant operations and employees located in the United States,
5. The recipient is not a debtor in bankruptcy proceedings,
6. The recipient will not outsource or offshore jobs through the period ending two years after repayment of the loan,
7. The recipient will not abrogate existing collective bargaining agreements through the period ending two years after repayment of the loan, and
8. The recipient will remain neutral in any union organizing effort for the term of the loan.
iii. Through the period ending one year following repayment of the loan, the recipient must comply with the following limitations on compensation:
1. With respect to employees whose total compensation exceeded $425,000 in 2019 the borrower cannot: (i) pay compensation in any 12 consecutive months exceeding their total 2019 compensation and (ii) make severance payments or other benefits upon termination that exceeds twice the total 2019 compensation amount;
2. With respect to officers or employees whose total 2019 compensation exceeded $3 million, the borrower cannot pay total compensation in excess of $3 million plus 50% of the excess over $3 million of that person’s total 2019 compensation.
iv. Also through the period ending one year following repayment of the loan, the recipient must not (i) buy back any of its (or any parent company’s) stock that is listed on a national securities exchange, except to the extent required under a contractual obligation that is in effect as of the date of enactment of the CARES Act or (ii) pay dividends or make other capital distributions with respect to the common stock of the business.
3. Main Street Lending Facility. The Federal Reserve will establish a Main Street Business Lending Program to support small and mid-sized businesses, complementing efforts by the SBA. We will provide additional information when it becomes available.
II. Tax Relief
a. Net Operating Loss Carrybacks. When a taxpayers’ total deductions exceed its gross income, the taxpayer has a Net Operating Loss (or NOL). Taxpayers who incurred NOLs in tax years 2018 and 2019 were not permitted to carryback those losses to generate a refund of taxes previously paid. The CARES Act will provide taxpayers a 5-year carryback of NOLs incurred in 2018, 2019 or 2020. Accordingly, if your business generated an NOL in 2018 or 2019 and had earned taxable income in prior years, you may be able to amend your tax returns and receive an immediate tax refund. Similarly, any 2020 NOL can be used to generate a refund of prior year taxes when tax returns are filed next year.
b. Retail Glitch / Qualified Improvement Property Fix. “Qualified Improvement Property” is essentially any improvement made to an existing non-residential building. The 2017 Tax Cuts and Jobs Act inadvertently eliminated bonus depreciation for Qualified Improvement Property. The CARES Act includes a technical correction reinstating the bonus depreciation deduction for taxpayers effective as of tax year 2018. Taxpayers can immediately amend their 2018 and/or file 2019 tax returns and claim these additional deductions to produce a tax refund. According to the Wall Street Journal, this provision could deliver as much as $30 billion dollars in tax refunds to restaurateurs, retailers, and hoteliers.
c. Employee Retention Tax Credits. Eligible employers will receive a refundable credit against payroll taxes. To be eligible, the employer must have had its business operations fully or partially suspended by governmental order. The credit can be as much as $5,000 per employee. This credit cannot be used by certain SBA loan recipients.
d. Deferral of Employer’s Share of Payroll Taxes. Employers and self-employed individuals will be permitted to defer payment of the employer share of social security taxes for the remainder of the year. One-half of deferred payroll taxes must be paid the end of 2021 and the remainder must be paid by the end of 2022. Recipients of loan forgiveness under the SBA PPP loan program will not be permitted to defer payment of payroll taxes.
e. Losses incurred by Owners of Pass-through Entities. Owners of businesses operated through pass-through entities can use an uncapped amount of losses from those entities to offset personal non-business income through 2021. Taxpayers who incurred significant businesses losses in 2018 or 2019 which they were previously unable to offset against capital gains and other non-business income can file amended returns to claim refunds.
f. Modification of Limitation on Business Interest. Current tax law limits taxpayers’ interest expense deduction to 30% of adjusted taxable income. The CARES Act will increase this deduction for tax years 2019 and 2020 to 50% of adjusted taxable income.
g. Retirement Plans. Taxpayers with certain retirement plans may withdraw up to $100,000 free of 10% early withdrawal penalties. Ordinary income taxes payable with respect to any distributions can be paid over a three-year period. Alternatively, the taxpayer can repay the distribution within a three-year period.