COVID-19 Alert: Coronavirus Aid, Relief, and Economic Security Act

After protracted negotiations, Congress has reached an agreement with respect to the Coronavirus Aid, Relief, and Economic Security Act, commonly referred to as the CARES Act (the “Act”), an unprecedented stimulus package aimed at combating the economic impact of COVID-19 on American businesses, individuals and families. Initially introduced on March 19, 2020 and unanimously passed by the Senate on March 25, 2020, the $2 trillion package intends to provide relief to millions of Americans, with the goal of bolstering the struggling U.S. economy and supporting small businesses, workers, public health services and industry sectors disproportionately impacted by COVID-19.

Below is a summary of the key provisions of the proposed Act in its current form:

1. Direct Payments to Individuals: The Act provides for a one-time, direct payment of $1,200 to individuals making up to $75,000 in adjusted gross income, or $2,400 for couples making up to $150,000. Such amount is subject to decrease for individuals with net income in excess of $75,000, and subject to increase based on the number of qualifying dependents ($500 per child under the age of 17). Individuals with income exceeding $99,000, and couples with joint income exceeding $198,000 (without children) are not eligible to receive such payments.

2. Business Interruption Loans: The Act appropriates approximately $350 billion to fund the advancement and/or guaranty of small business loans to impacted businesses, including paycheck protection loans.

• • Eligible Recipients. During the period beginning on February 15, 2020 and ending on June 30, 2020 (the “Covered Period”), businesses and non-profits with no more than 500 employees are eligible to apply to the Small Business Administration (“SBA”) for loans intended to fund ordinary course operating expenses, as further described below. The Act extends eligibility to any business concern that employs no more than 500 employees per physical location of any business assigned a NAICS Code beginning with 72 (i.e., restaurant and hospitality industry). Sole proprietorships, individuals acting as independent contractors and certain eligible self-employed individuals are deemed eligible as well.

The Act waives the SBA’s affiliation rules with respect to eligibility during the Covered Period for (i) accommodation and food service enterprises, (ii) any business concern operating under an SBA franchisor identifier code, and (iii) any business concern that receives financial assistance from a small business investment company licensed by the SBA under the Small Business Investment Act of 1958, as amended.

• • Maximum Loan Amount. The aggregate loan amount for each applicant will be equal to the lesser of
    • 2.5 times the average total monthly payments made by such applicant for payroll costs incurred during the 1-year period before the date on which the loan is made plus the outstanding amount of a loan made under the SBA’s Disaster Loan Program between January 31, 2020 and the date on which such loan may be refinanced under the Act; or
    • For businesses that were not in existence during the period from February 15, 2019 to June 30, 2019, 2.5 times the average total monthly payments made by such applicant for payroll costs from January 1, 2020 to February 29, 2020 plus the outstanding amount of a loan made under the SBA’s Disaster Loan Program between January 31, 2020 and the date on which such loan may be refinanced under the Act; or
    • $10,000,000.

The interest rate on any such loan shall not exceed 4% and shall not be subject to prepayment penalties. The obligations under the loan are not permitted to be secured by any collateral or personally guaranteed, and all loans are nonrecourse against any individual shareholder, member or partner of an eligible recipient.

• • Use of Proceeds. Loan proceeds may be used for (i) payroll costs, (ii) costs related to the continuation of group healthcare benefits during periods of paid sick, medical or family leave and insurance premiums, (iii) employee salaries, commissions or similar compensations, (iv) payments of interest on any mortgage obligation, (v) rent, (vi) utilities, and (vii) interest on any other debt obligations that were incurred prior to the Covered Period.

“Payroll costs” include the sum of all compensation paid to an employee, such as salaries, wages, commissions, payment for vacation, parental, family, medical or sick leave, payment required for the provisions of group health care benefits, including insurance premiums, retirement benefits, or payment of State or local tax assessed on the compensation of employees. For sole proprietorships or independent contractors, such costs are not to exceed $100,000 in 1 year, as prorated for the Covered Period. The definition of payroll costs specifically excludes individual employee compensation in excess of $100,000 per year (as prorated), taxes imposed or withheld under chapters 21, 22 or 24 of the Internal Revenue Code, any compensation to an employee whose principal residence is outside of the U.S., qualified sick leave wages and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act.

• • Loan Deferral and Forgiveness. Covered SBA §7(a) loans made during the period from February 15, 2020 to June 30, 2020 are eligible for repayment deferral for six months to one year, and forgiveness in an amount equal to the cost of maintaining payroll continuity during the Covered Period. The amount of the loan forgiveness shall not exceed the sum of (i) total payroll costs incurred by the recipient during the Covered Period and (ii) the amount of payments made during the Covered Period on debt obligations that were incurred prior to the Covered Period.

Forgiveness amounts are subject to reduction for any reductions in workforce and individual employee compensation reductions in excess of 25%. Workforce reduction is measured against the period from February 15, 2019 to June 30, 2019 or January 1, 2020 to February 29, 2020 at the borrower’s option, and the compensation reduction is measured against the employee’s most recent full quarter and only applies to employees whose salary never exceeded $100,000 during 2019. The Act offers relief from these forgiveness reduction penalties for employers who rehire employees or make up for wage reductions by June 30, 2020.

3. Expanded Unemployment Benefits; Paid Leave: The Act expands unemployment benefits to an increased maximum of $600 per week (over and above State allowances) and provides workers who have been laid-off due to COVID-19 with full pay for four months (including self-employed workers). The Act caps an employer’s paid leave obligation at $200 per day and $10,000 in the aggregate per employee and provides similar limitations with respect to paid sick leave obligations.

4. Corporate Assistance Loan: In an effort to provide liquidity to eligible businesses that incurred losses as a direct result of COVID-19, the Treasury Department is authorized to make or guarantee over $500 billion in corporate assistance loans.

• • A portion of these loans are earmarked specifically for larger businesses in distressed industry sectors, including $25 billion for passenger airlines, $17 billion for businesses critical to maintaining national security and $454 billion for loans, loan guarantees and investments in support of facilities established by the Federal Reserve to support lending to eligible businesses, states and municipalities.
  • In order to participate in such funding programs, a borrower must agree not to pay dividends or repurchase equity interests, and to cap all employee compensation (including salary, stock, and bonuses) during the term of the loan and for the period ending one year after the obligations under the loan are repaid in full. Employees and executive officers receiving compensation in excess of $425,000 per year and $3 million per year in 2019, respectively, are prohibited from receiving certain salary increases and/or severance benefits for the period from March 1, 2020 through March 1, 2022.
  • The Act also proposes the “Main Street Lending Program,” encouraging the Federal Reserve to provide access to loan facilities for businesses and non-profits with no less than 500 and no more than 10,000 employees. The interest rate on such loans shall not exceed 2%, and no payments will be due within the first six months of the term. Any eligible borrower must make a good-faith certification that, among other things, (i) the loan request is necessary in light of uncertainty of economic conditions and the funds are required to support ongoing operations, (ii) such funds will be used to retain at least 90% of its workforce until September 30, 2020, (iii) recipient is not a debtor in any bankruptcy proceeding, and (iv) the recipient is a U.S. domiciled enterprise with significant operations and employees located in the U.S.

5. Residential Mortgages and Foreclosure Actions: The Act permits holders of federally-backed mortgage loans to request forbearance by submitting a request to the loan servicer and providing a certification with respect to financial hardship due to COVID-19. Forbearance must be granted for up to 180 days (or up to 30 days for multifamily borrowers), subject to extension. The Act also prohibits servicers of such federally-backed loans from initiating foreclosure proceedings for at least 60 days beginning on March 18, 2020. Further, with respect to government subsidized housing, the Act prevents landlords from bringing actions to recover possession from tenants due to nonpayment for 120 days.

6. Tax Provisions: The Act contains various tax related provisions as well as credits to employers in connection with payroll tax liability.

• • Extension of Filing Deadlines. The Act extends the federal income tax filing deadline for individual 2019 tax returns to July 15, 2020, as well as the due date for estimated payments for 2020 to October 15, 2020.
  • Refundable Payroll Tax Credit. The Act creates a refundable Social Security tax credit equal to 50% of qualified wages paid by an “eligible employer” from March 12, 2020 through December 31, 2020.  The maximum credit is $5,000 per employee (based on maximum qualified wages of $10,000 per employee).

Eligible employers must have either (i) had its operations fully or partially suspended due to orders from a governmental authority due to COVID-19, or (ii) experienced a decline in gross receipts in 2020 of at least 50% of the gross receipts from the same quarter in 2019. Eligibility ends in the 2020 calendar quarter in which its gross receipts are more than 80% of the gross receipts for the same 2019 calendar quarter.

For eligible employers with a 100 or less Full Time Employees (“FTEs”), all wages are includable up to the maximum. For employers having more than 100 FTEs, qualified wages are limited to wages paid to employees that not working either due to a COVID-19 related government order or due to a significant decline in business. Tax-exempt organizations are eligible for the credit as well.

• • Postponement of Payroll Tax Deposits. The Act postpones the due date for the payment of an employer’s share of payroll taxes (i.e. Social Security taxes) from wages due through December 31, 2020.  The due date is also postponed for self-employed individuals for up to 50% of self-employment taxes.  The deferred taxes shall be payable in two equal installments – the first half of which is due on December 31, 2021, and the second half of which is due on December 31, 2022.
  • Charitable Contributions. The Act relaxes limitations on certain contributions to qualified charitable organizations during calendar year 2020 as follows:
    • The Act allows a taxpayer that does not itemize deductions to deduct up to $300 of cash contributions to a charitable organization.
    • The Act allows individuals to deduct up to 100% of such taxpayer’s adjusted gross income (increased from 50%).
    • The Act allows C corporations to deduct up to 25% of such corporation’s taxable income (increased from 10%) and increases the limitation with respect to food inventory contributions for C corporations and other taxpayers to 25% (increased from 15%).
  • Net Operating Loss Rules Relaxed. The Act relaxes limitations on the use of net operating losses (“NOLs”) adopted under the 2017 Tax Cuts and Jobs Act (“2017 Tax Act”) by temporarily removing the 80% taxable income limitation for NOL deductions taken in 2018, 2019 and 2020.  In addition, NOLs from 2018, 2019, or 2020 tax years will be allowed to be carried back up to five taxable years.  The Act suspends the limitations on the use of pass-through business losses against non-business income for three years, such that there would be no limit for tax years beginning in 2018, 2019, and 2020.  This will allow companies to utilize greater losses as well as to claim refunds for certain losses.
  • Business Interest Limitation Rules Relaxed. The 2017 Tax Act adopted limitations on the ability to claim deductions for business interest.  The Act relaxes the limitations on the ability to claim deductions for business interest that was adopted under the 2017 Tax Act by allowing excess business interest to offset up to 50% of adjusted taxable income for taxable years beginning in 2019 and 2020, rather than the current 30%.  The Act also allows taxpayers to elect to use 2019 adjusted taxable income for purposes of computing the interest limitation for 2020. These changes do not apply to partnerships for 2019, but a special rule allows 50% of excess 2019 interest limitation to be treated as paid or accrued by the partner in 2020.
  • Treatment of Leasehold Improvements. The Act allows qualified improvement property to be eligible for bonus depreciation for property placed in service after September 27, 2017.
  • Corporate Alternative Minimum Tax. The Act modifies the corporate alternative minimum tax (“AMT”) credits made available as part of AMT repeal to allow up to 100% of the credits to be refunded in 2018 tax year.
  • Tax Incentive for the Production of Hand Sanitizer. The Act provides an exception from the alcohol excise tax for the use of alcohol to make hand sanitizer.
  • Excess Business Loss Limitation. The Act repeals the restrictions on the ability of a non-corporate taxpayer to take a deduction for excess business losses for 2018, 2019 and 2020 taxable years.

7. Retirement Account Provisions: The Act contains various provisions related to retirement accounts and advanced distributions and withdrawals.

• • Special Use of Retirement Funds. The Act allows taxpayers to access funds in their qualified retirement plans if the taxpayer (i) is diagnosed with COVID-19 by a Centers for Disease Control (“CDC”) approved test, (ii) has a spouse or dependent who is diagnosed with COVID-19 by a CDC approved test, or (iii) experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, or having suffered reduced working hours, or is unable to work as a result of lack of child care.
    • The Act allows a taxpayer to withdraw up to $100,000 from a qualified retirement plan before December 31, 2020 without being subject to the 10% additional tax on early distributions. Any amounts withdrawn may be repaid within three years from the date of such withdrawal without any income tax inclusion.  Any amounts not repaid within such three-year period will be subject to income tax that shall be included ratably over the three-year period.
    • The Act allows a taxpayer to take a loan from their qualified retirement plan of the lesser of (i) $100,000 (increased from $50,000), and (ii) the greater of the present value of the nonforfeitable accrued benefit under the plan (increased from 50% of the present value of the nonforfeitable accrued benefit under the plan) and $10,000. If repayment of the loan is due before December 31, 2020, repayment can be delayed one year from the original due date.
  • Required Minimum Distributions. The Act permits a one-year delay for individuals who are obligated to take required minimum distributions (“RMDs”) from a defined contribution plan.  The Act permits the delay for (i) RMDs that are required to be taken before April 1, 2020 for the 2019 tax year, and (ii) RMDs required to be taken for the 2020 tax year.

8. Support for Healthcare Providers: The Act provides for $150 billion in support to healthcare facilities, hospitals and medical centers, and implement various monitoring and reporting measures with respect to the medical product supply chain.

• • Medical Supplies. The Act outlines conservation measures with respect to medical products and supplies, including certain drugs, medical devices, personal protective equipment and ancillary medical supplies. In addition, the Act provides for the development and marketing of diagnostic testing.
  • Insurance Coverage. The Act provides for extended coverage under group health plans and/or health insurance policies for any qualifying COVID-19 preventative service, which is defined as any item, service or immunization intended to prevent or mitigate COVID-19.
  • Supplemental Awards. The Act authorizes appropriation of $1.32 billion of Treasury Department funds for fiscal year 2020, for supplemental awards for the detection, prevention, diagnosis and/or treatment of COVID-19.

9. State and Local Government Funding; Education: The Act provides for $150 billion in disaster relief funds for the immediate needs of state and local governments deploying resources to combat COVID-19. The Act also includes $400 million in election security grants to help states prepare for upcoming elections and an additional $30 billion to help states keep universities and educational institutions open and operating remotely. The Act also provides relief for student borrowers, students engaged in work study programs and students unable to remain enrolled in school due to COVID-19.

The House is expected to convene on Friday, March 27, 2020 at 9:00 am to vote on the measure. Once passed, President Trump is expected to approve the Act, upon which the federal government will be tasked with the expedient administration and implementation of its provisions.

We are continuing to monitor any progress and will update this Alert promptly upon receipt of new information. Please do not hesitate to contact us with any specific questions.