After intense negotiations, Congress passed the $2.2 trillion Coronavirus Aid, Relief, and Economic Security Act (“CARES”) to provide direct assistance to individuals, businesses, and state and local governments to help them address the coronavirus (“COVID-19”) pandemic. President Trump signed CARES into law.
CARES provides relief to businesses in two ways: (1) business interruption loans through the SBA, and (2) increase in unemployment benefits. Both are summarized below.
The Business Interruption Loan
- CARES authorizes $349 billion in loans for nonprofits and small businesses, including sole proprietors and other self-employed individuals, with 500 or fewer employees (with some exceptions).
- Qualified SBA lenders can loan money directly to eligible customers, who can apply for loans directly through those lenders rather than through the Small Business Administration and its on-site portal.
- The general formula applying to most employers for purpose of calculating the maximum amount of the loan (which cannot exceed $10 million) is as follows: The maximum loan amount shall be the lesser of: (i) the average total monthly payments by the applicant for payroll costs incurred during the 1-year period before the date on which the loan is made, multiplied by 2.5; or (ii) $10,000,000. Note, there is pro-rated formula uses in determining payroll costs and a $100,000 cap on the amount of salary that can be considered in determining payroll costs.
- Proceeds of a covered loan may be used for, among other things, (i) payroll costs; (ii) group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums; (iii) employee salaries, commissions, or similar compensations; (iv) mortgage payments; (v) rent; (vi) utilities; and (vii) interest on any other debt obligations that were incurred before the “covered period” (beginning on February 15, 2020 and ending on June 30, 2020).
- No collateral and no personal guarantee are required for the covered loan. During the covered period, small businesses may still obtain credit elsewhere.
- Loans may be forgiven up to the sum of these costs incurred and payments made during the eight week period beginning on the date of the loan origination: (i) payroll costs; (ii) interest on certain mortgage obligations; (iii) rent; and (iv) utility payments. Notably, the loan forgiveness may be reduced if there is a reduction in the number of full-time equivalent employees during the covered period. The amount of canceled indebtedness will not be taxable. All unforgiven portions of the loan will carry an interest rate not to exceed 4% over a maximum maturity of 10 years.
Tax Relief In the Alternative to The Business Interruption Loan
If a business does not desire to take advantage of or can’t take advantage of the business interruption loan, taxpayers may avail themselves of the following relief in the CARES Act in lieu of the business interruption loan.
Employee Retention Credit ––
- A fully refundable tax credit will now be available for retaining employees. The credit is tied to employee wages and the employer portion of employment taxes paid. Notably, this credit is not available to businesses if it has a business interruption loan outstanding.
- All eligible employers would be permitted to claim a 50% credit of wages paid up to $10,000 per employee, but the credit is only available to employers whose (1) operations were fully or partially suspended due to a Covid-19-related shut-down order, or (2) gross receipts declined by more than 50% when compared to the same quarter in the prior year. Qualified employers can take the employee retention credit if gross receipts are less than 50% for the same quarter in the previous year and until such gross receipts are 80% of the amount for the same quarter for the prior year.
- For 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 described above.
- For eligible employers with 100 or fewer full-time employees, all employee wages qualify for the credit, whether the employer is open for business or subject to a shut-down order. The credit is provided for the first $10,000 of compensation, including health benefits, paid to an eligible employee. The credit is provided for wages paid or incurred from March 13, 2020 through December 31, 2020.
Payroll Deferral —
- CARES offers payroll deferral (and estimated tax deferral) allowing an employer to defer the employer portion of FICA through the end of the year. This includes estimated tax payments as well.
- The deferred FICA taxes must be paid 50% by December 31, 2021, and 50% by December 31, 2022.
- The tax deferral will not be taxed if an eligible business receives a business interruption loan. There does not appear to be any threshold requirements for this deferral.
Other Tax Relief
- CARES lifts the net operating loss (“NOL”) limits and establishes a five-year carryback period of certain 2018, 2019, and 2020 losses.It also temporarily allows businesses to fully offset income.
- The corporate alternative minimum tax (“AMT”) credits are adjusted to accelerate their refundability.
- CARES loosens the interest deduction cap from 30% of EBITDA to 50% of EBITDA for taxable years beginning in 2019 and 2020.
- The charitable contribution deduction limitation for businesses is increased from 10% to 25% of taxable income. This provision also increases the limitation on deductions for contributions of food inventory from 15% to 25%.
INDUSTRY SPECIFIC RELIEF:
Health Care Industry Relief
- CARES includes $100 billion in relief to hospitals on the front lines of the Covid-19 pandemic. It makes $100 billion available to reimburse “eligible health care providers” for health care expenses or lost revenues directly attributable to Covid-19 that are not otherwise reimbursed. Eligible health care providers include public entities, Medicare and Medicaid suppliers, and providers including hospitals, and other nonprofit and for-profit entities as specified by the Secretary of Health and Human Services.
- Health care providers caring for Medicare patients will see these benefits: (1) elimination of the Medicare sequester from May 1, 2020 – December 31, 2020; (2) a 20% add on to the DRG rate for Covid-19 patients treated at inpatient prospective payment system hospitals; (3) expanded ability of hospitals to request and receive accelerated Medicare payments; (4) waiver of the 50% Rule and Site-Neutral payment policies for post-acute care providers so they can increase the capacity of the healthcare system without penalty.
- CARES opens up $10 million in loans for organizations with less than 500 employees that could be used to pay salaries, benefits, and retirement obligations. These loans are available to small nonprofit and for-profit hospitals (among other businesses), although small hospitals affiliated with larger health networks may not qualify as a small business eligible for those loans.
- CARES also provides additional funding for the prevention, diagnosis, and treatment of Covid-19; limits liability for volunteer health care professionals; prioritizes Food and Drug Administration (FDA) review of certain drugs; allows emergency use of certain diagnostic tests that are not approved by the FDA; expands health-insurance coverage for diagnostic testing and requires coverage for preventative services and vaccines; and revises other provisions regarding telehealth services.
Banking Industry Impacts
- The CARES Act reduces the community bank leverage ratio from 9% to 8% until the end of the national emergency or Dec. 31, 2020, whichever comes first.
- The bill provides temporary relief from troubled debt restructurings (“TDRs”) beginning March 1, 2020, and this relief extends for 60 days after the end of the COVID-19 national emergency, allowing banks to suspend GAAP principle requirements for loan modifications related to COVID-19 that would otherwise be categorized as TDRs.
- CARES gives banking institutions the ability to delay implementing the current expected credit loss standard until the national emergency ends or Dec. 31, 2020, whichever comes first.
- The bill temporarily waives certain lending limits until the end of the national emergency or Dec. 31, 2020, whichever comes first.
- CARES modifies the Dodd-Frank Act to give the FDIC authority to establish a temporary program to guarantee bank debt. The bill also provides $500 billion in economic stabilization funding through the Treasury Department to provide sufficiently collateralized loans, loan guarantees, and other investments to eligible entities.
State and Local Government Relief
- CARES provides $25 billion for the nation’s transit systems, $10 billion for airports, $7 billion for affordable housing and homelessness assistance programs, and $15.85 billion for veteran’s assistance. $850 million in Byrne-JAG grants will be allocated for law enforcement and jails to purchase equipment, medical supplies, and pay overtime.
- The relief bill allocates $6.5 billion for Economic Development Administration and related programs.
- CARES provides $400 million for FEMA grant programs, including the Assistance to Firefighters Grants and the Emergency Management Performance and Emergency Food and Shelter Program.
- CARES also provides $450 million for The Emergency Food Assistance Program (TEFAP) to assist food banks and $400 million in election assistance related to the 2020 election cycle.
Educational Institution Impacts
- The relief bill provides $30.75 billion for schools and universities to provide education services to students.
- Student loan borrowers with federally held loans will be excused from making their monthly payments, without interest on their balances accruing, for six months, through September 30, 2020. CARES does not include any debt cancellation, but it does forgive debt incurred in an academic term that ends up being disrupted by the pandemic.
- CARES relieves Pell Grant recipients of their obligation to repay the federal government if they had to leave school because it closed due to the crisis. Disrupted academic terms will not count toward the lifetime limit on receiving Pell Grant funds. The bill also provides canceled classes will not count against a student’s satisfactory academic progress calculation.
- CARES allocates $3.5 billion in funding for Child Care Development Block Grants to assist with child care for first responders and healthcare workers.
Bankruptcy Impacts
- CARES amends the Small Business Reorganization Act of 2019 (“SBRA”) to increase the eligibility threshold for businesses filing under new subchapter V of chapter 11 of the U.S. Bankruptcy Code from $2,725,625 of debt to $7,500,000, although the eligibility threshold returns to $2,725,625 after one year.
- The bill amends the definition of “income” in the Bankruptcy Code for chapters 7 and 13 to exclude Covid-19-related payments from the federal government from being treated as “income” for purposes of filing bankruptcy. Additionally, disposable income for purposes of confirming a chapter 13 plan shall not include coronavirus-related payments.
- CARES permits individuals and families currently in chapter 13 to seek payment plan modifications if they are experiencing a material financial hardship due to the Covid-19 pandemic, including extending their payments for up to seven years after their initial plan payment was due.