CARES Act Extends $2T in Spending and Tax Breaks Aimed at Bolstering U.S. Economy Amid COVID-19 Pandemic

03.27.2020

The Coronavirus Aid, Relief, and Economic Security Act or the “CARES Act” was officially enacted into law on March 27, 2020.  It is being touted as a historic rescue package worth more than $2 trillion in spending and tax breaks that are aimed to bolster the U.S. economy and fund a nationwide effort to stem the Coronavirus.

The CARES Act is 880 pages long, consisting of different Divisions and Titles:

  1. Division A—Keeping Workers Paid and Employed, Health Care System Enhancements, and Economic Stabilization
    1. Title I—Keeping American Workers Paid and Employed Act, which includes paycheck protection and loan forgiveness, and small business contracting relief.
    2. Title II—Assistance for American Workers, Families, and Businesses, which includes unemployment insurance and tax relief.
    3. Title III—Supporting America's Health Care System in the Fight Against the Coronavirus, which includes provisions related to medical supplies, health care coverage, and paid sick and family medical leave.
    4. Title IV—Economic Stabilization and Assistance to Severely Distressed Sectors of the United States Economy, including relief to airlines, financial institutions, and sectors critical to national security.
    5. Title V—Coronavirus Relief Funds.
    6. Title VI—Miscellaneous Provisions.
  2. Division B—Emergency Appropriations for Coronavirus Health Response and Agency Operations

Because time is of the essence, this alert is meant to summarize some of the main points of the topics listed above.  Additional information, updates, and analysis regarding the CARES Act will continually be posted on AALRR’s Website. Please check back frequently for updates.

AALRR is available to assist your business and help you find ways to claim and/or use the available funding for your business. 

Top Takeaways of the Cares Act

  • Provides stimulus to individuals, businesses, and hospitals in response to the economic distress caused by the Coronavirus
  • Authorizes $349 billion for the Paycheck Protection Program, which authorizes the Small Business Administration (“SBA”) to provide forgivable loans to small businesses, 501(c)(3) nonprofits, 501(c)(19) veterans organizations, and certain tribal entities. The loans may be used for payroll expenses, such as employee salaries, paid sick or medical leave, insurance premiums, and mortgage, rent, and utility payments. The loan forgiveness option is structured to incent employers to keep their employees on the payroll.
  • Allocates $500 billion for assistance to businesses, states, and municipalities.
  • Allocates $130 billion to medical and hospital industries, including for medical supplies and drug and device shortages.
  • Authorizes $10 billion to provide emergency grants up to $10,000 for small businesses under the Small Business Act’s Economic Injury Disaster Loans ("EIDL") program.
  • Provides $1,200 to individuals making $75,000 or less ($150,000 in the case of joint returns and $112,500 for head of household) and $500 for each child. Those making $99,000 or less will receive a lesser amount. 
  • Expands eligibility for unemployment insurance and provides people with an additional $600 per week on top of the unemployment amount determined by each state.
  • Creates an Employee Retention Credit which is a refundable payroll tax credit worth 50% of employee wages paid during the Coronavirus
  • Permits employer payroll tax delay whereby employers and self-employed individuals may defer payment of the employer share of the Social Security tax.
  • Allocates resources for Entrepreneurial Development - the SBA may provide additional financial awards to resource partners (including Small Business Development Centers and Women’s Business Centers) for counseling, training and education on SBA resources and business resiliency to small business owners affected by the Coronavirus pandemic.

The following is an overview of some of the key provisions of the CARES Act.

Small Business Act – Business Loan Program

In general

The CARES Act amends the Small Business Act (“SBA”) to create a new Business Loan Program category (the “SBA Loan Program”). 

For the period beginning on February 15, 2020 and ending June 30, 2020 (the “Covered Period”), the Small Business Administration may provide 100% federally-backed loans up to a maximum amount to eligible businesses to help pay operational costs.  Subject to certain conditions, loan payments can be deferred and under certain circumstances the loan amount may be forgivable (discussed below).

The SBA Loan Program does not require collateral or a personal guarantee. The interest rate on the covered loans is not to exceed four percent (4%) with a maximum of a 10-year term. 

Additionally, there is no personal liability against any individual, shareholder, member, or partner of a covered loan recipient for nonpayment unless the individual, shareholder, member, or partner uses the loan proceeds for unauthorized purposes.

Moreover, an economic injury disaster loan (“EIDL”) that was made under the SBA’s Disaster Loan Program on or after January 31, 2020, may also be refinanced under the terms and conditions of this new SBA Loan Program, provided that the EIDL was not used for purposes other than what the SBA Loan Program loan would cover.

SBA Loan Program Eligibility

During the Covered Period, small businesses or nonprofit organizations[1] with fewer than 500 employees (includes full-time, part-time, or other basis employees), or any business that falls within the definition of “small business concern” as defined by Section 3 of the Small Business Act,[2] are eligible to receive a loan made under the SBA Loan Program. 

There is a special rule for businesses in the hospitality and dining industries with multiple physical locations.  Specifically, a hospitality and dining business is eligible to receive a loan made under the SBA Loan Program during the Covered Period if it employs 500 or fewer employees per location and is assigned to the “accommodation and food services” sector under the North American Industry Classification System.

Lastly, sole proprietors, independent contractors, and eligible self-employed individuals (as defined the Families First Coronavirus Response Act) are also eligible to receive a loan made under the SBA Loan Program during the Covered Period if certain documentation requirements are met.

For purposes of this alert, if a business meets the eligibility requirements above, it shall be referred to as an “Eligible Business” hereafter.

Maximum Amount of Loan

During the Covered Period, the maximum loan amount that an Eligible Business may receive is the lesser of –

1. The sum of —

a. 2.5 times 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, 2019 to June 30, 2019);

b. 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 as part of this new SBA Loan Program.

or

2. If requested by an Eligible Business that was not in existence during the period from February 15, 2019 to June 30, 2019 —

a. 2.5 times the average total monthly payroll payments from January 1, 2020 to February 29, 2020;

b. 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 as part of this new SBA Loan Program

or

3. $10,000,000.

Allowable Uses of Loan

During the Covered Period, the Eligible Business may use the proceeds of the loan for the following expenses:

  1. Payroll costs;
  2. Costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;
  3. Employee salaries, commissions, or similar compensation;
  4. Payments of interest on any mortgage obligation (prepayment or payment of principal on a mortgage obligation is not a permitted use);
  5. Rent (including rent under a lease agreement);
  6. Utilities; and
  7. Interest on any other debt obligations that were incurred before the Covered Period.

In evaluating the eligibility of a borrower for a loan, a lender shall consider whether the borrower was operating on February 15, 2020, and had employees for whom the borrower paid salaries and payroll taxes or independent contractors.

Certification of an Eligible Business

An Eligible Business shall make a good faith certification —

  1. The loan is needed to continue operations during the Coronavirus emergency;
  2. Funds will be used to retain workers and maintain payroll or make mortgage, lease, and utility payments;
  3. The Eligible Business does not have any other application pending under this SBA Loan Program for the same purpose; and
  4. From February 15, 2020 until December 31, 2020, the Eligible Business has not received duplicative amounts under this SBA Loan Program.

Deferment of Loan Repayment

Eligible Businesses that were operating on or before February 15, 2020 and that have a pending or approved loan application under this SBA Loan Program qualify for complete payment deferment relief for a period of not less than 6 months, including payment of principal, interest, and fees, and not more than 1 year.   Note, however, that within 30 days after March 27, 2020, further guidance will be issued regarding this deferment.

SBA Loan Program and Economic Injury Disaster Loans ("EIDL")

Nothing in the SBA Loan Program prohibits a recipient of an EIDL during the period beginning on January 31, 2020 and ending on the date on which covered loans are made available to the Eligible Business that are used for a purpose other than paying payroll costs and other obligations from receiving assistance under this SBA Loan Program. 

Loan Forgiveness

An Eligible Business may be eligible for forgiveness of indebtedness on a covered 7(a) loan made under the SBA Loan Program discussed above (hereafter referred to as a “Covered Loan”).  

The amount of indebtedness on a Covered Loan shall be equal to the sum of the costs incurred and payments made during the covered period (hereafter referred to as the “Loan Forgiveness Covered Period”), as identified below. 

The Loan Forgiveness Covered Period means the 8-week period beginning on the date of the origination of the Covered Loan.  In other words, the Loan Forgiveness Covered Period is the 8-weeks after the Covered Loan originates. 

The amount of indebtedness forgiven on a Covered Loan shall be equal to the sum of the following costs which were incurred during the Loan Forgiveness Covered Period:

  1. Payroll Costs (as defined in paragraph (36) of section 7(a) of the SBA);
  2. Interest payments on a mortgage incurred in the ordinary course of business that —
    1. is a liability of the borrower;
    2. is a mortgage on real or personal property; and
    3. was incurred before February 15, 2020
  3. Rent obligations under a leasing agreement in force before February 15, 2020; and
  4. Utility Payments which started before February 15, 2020.

Reduction of Loan Forgiveness Based on Reduction in Number of Employees

The amount of loan forgiveness for non-seasonal employers shall be reduced, but not increased, by –

  1. The maximum amount of the Covered Loan that may be forgiven during the Loan Forgiveness Covered Period (“Maximum Forgivable Loan”) by —
    1. the average number of full-time equivalent employees (“FTEEs”) per month – calculated by the average number of FTEEs for each pay period falling within a month – during the Loan Forgiveness Covered Period divided by either of the following which the borrower shall decide:
      1. Average number of FTEEs per month employed from February 15, 2019 to June 30, 2019; or
      2. Average number of FTEEs per month employed from January 1, 2020 until February 29, 2020

Equation: (Maximum Forgivable Loan) x ((a)/(i)) or (Maximum Forgivable Loan) x ((a)/(ii))

Reduction of Loan Forgiveness Based on Reduction Relating to Compensation

The amount of loan forgiveness shall be reduced by the amount of any reduction in total salary or wages of any “employee” during the Loan Forgiveness Covered Period that is in excess of 25 percent (25%) of the total salary or wages of the “employee” during the most recent full quarter during which the employee was employed before the covered period.

“Employee” is limited, for purposes of this subsection, Reduction of Loan Forgiveness Based on Reduction Relating to Compensation, to any employee who did not receive, during any single pay period during 2019, a salary or wages at an annualized rate of pay over $100,000.

Exemption for Re-Hires

There is relief from the reduction penalties described above for employers who rehire FTEEs or make up for wage reductions by June 30, 2020. Specifically, the forgiveness reduction rules described above will not apply to an employer between February 15, 2020 and 30 days following March 27, 2020 if —

  1. The employer reduces the number of FTEEs in the period described above (February 15, 2020 and 30 days following March 27, 2020) and, not later than June 30, 2020, the employer has since eliminated the reduction in FTEEs; or
  2. There was/is a salary reduction in the period described above (February 15, 2020 and 30 days following March 27, 2020) for one or more employees and that reduction is eliminated by June 30, 2020.

Employers with Tipped Employees

Employers with tipped employees (as described in section 3(m)(2)(A) of the Fair Labor Standards Act of 1938) may receive forgiveness for additional wages paid to those employees.

Forgiveness of indebtedness on EIDL under the SBA Disaster Loan Program

Emergency advances received under the expanded SBA Disaster Loan Program discussed below will be excluded from forgiveness amounts.

Applying for Loan Forgiveness

An eligible recipient seeking loan forgiveness shall submit to the lender —

  1. Documentation verifying FTEEs on payroll and their pay rates;
  2. Documentation on covered costs/payments (e.g., documents verifying mortgage, rent, and utility payments);
  3. Certification from a business representative that the documentation is true and correct and that forgiveness amounts requested were used to retain employees and make other forgiveness-eligible payments; and
  4. Any other documentation the administrator may require.

Amounts Forgiven Excluded from Gross Income

Amounts which have been forgiven during the Loan Forgiveness Covered Period shall be considered cancelled indebtedness by the lender under 7(a) of the SBA and excluded from gross income.  In addition, the amount forgiven cannot exceed the amount of the Covered Loan.

Disaster Loan Program and Emergency EIDL Grants

The CARES Act also expands the SBA’s Disaster Loan Program under 7(b)(2) of the SBA.  

Background of the Disaster Loan Program and the Economic Injury Disaster Loan (EIDL)

EIDLs are working capital loans designed to help small businesses, small agricultural cooperatives, small businesses engaged in aquaculture, and most private, non-profit organizations of all sizes to meet their ordinary and necessary financial obligations that cannot otherwise be met as a direct result of the disaster. These loans are intended to assist through the disaster recovery period.

EIDLs offer loan amounts up to $2,000,000 and can come with long-term repayment periods, up to a maximum of 30 years. The exact loan terms and interest rates are determined on a case-by-case basis, according to individual borrower’s ability to repay.

Applicants may apply online, as well as receive additional disaster assistance information and download applications at https://disasterloan.sba.gov/ela.

Eligible Entities

In addition to Eligible Business described above,[3] the following entities are also eligible to receive an EIDL —

  1. A business with 500 or fewer employees;
  2. Sole proprietorships, with or without employees, and independent contractors;
  3. Cooperatives with 500 or fewer employees;
  4. ESOPs (as defined in section 3 of the SBA) with 500 or fewer employees; and
  5. Tribal small business concerns (as described in section 31(b)(2)(C) of the SBA) with 500 or fewer employees.

Expansion to EIDL and the Disaster Loan Program

The CARES Act makes several additional changes to the EIDL under the SBA’s Disaster Loan Program during the “covered period” for loans made in response to the Coronavirus pandemic.  The “covered period” for purposes of this EIDL expansion is January 31, 2020-December 31, 2020 (hereafter referred to as the “EIDL Covered Period”).

The following additional changes to the SBA Disaster Loan Program were made —

  1. Waives the rules related to personal guarantees on advances and loans of $200,000 or less for all applicants;
  2. Waives the "1 year in business prior to the disaster" requirement (except the business must have been in operation on January 31, 2020);
  3. Waives the requirement that an applicant be unable to find credit elsewhere; and
  4. Allows lenders to approve applicants based solely on credit scores (no tax return submission required) or “alternative appropriate methods to determine an applicant’s ability to repay.”

Up to $10,000 Emergency Grant

During the EIDL Covered Period, an entity described above that applies for an EIDL under the Disaster Loan Program in response to Coronavirus may request an emergency advance from the SBA administrator of up to $10,000. 

The applicant shall not be required to repay any amounts of an advance provided, even if the EIDL application is later denied.  Advances are to be awarded within three days of the application. 

As discussed above, if an applicant receives an advance and is also approved for a loan made under the SBA Loan Program, the advance amount shall be reduced from the loan forgiveness amount. 

Use of Advances

Advances may be used for purposes already authorized under the Disaster Loan Program, including —

  1. Providing sick leave to employees unable to work due to direct effect of Coronavirus;
  2. Maintaining payroll during business disruptions during slow-downs;
  3. Meeting increased supply chain costs;
  4. Making rent or mortgage payments; and
  5. Repaying debts that cannot be paid due to lost revenue.

Employee Retention Credit

The CARES Act provides an eligible employer a refundable tax credit against payroll tax (Social Security and Railroad Retirement) liability for each calendar quarter an amount equal to 50% of the first $10,000 in wages with respect to each employee of such employer for such calendar quarter. 

An eligible employer, including a tax-exempt organization (but not government entities), means any employer which was carrying on a trade or business during calendar year 2020 and —

  1. Has business operations fully or partially suspended due to orders from a governmental entity limiting commerce, travel, or group meetings; or
  2. Experiences a significant decline in gross receipts of at least 50% beginning with the first calendar quarter beginning after December 31, 2019, compared against the same calendar quarter in the prior year, and ending when gross receipts exceed 80% year-over-year.

For employers with more than 100 full-time employees, only employees who are currently not providing services for the employer due to Coronavirus causes are eligible for the credit. 

In addition, the employee retention credit is effective for wages paid after March 12, 2020 and before January 1, 2021.

Credit Limited to Employment Taxes

The credit allowed with respect to any calendar quarter shall not exceed the applicable employment taxes (reduced by any credits allowed under subsections (e) and (f) of section 3111 of the Internal Revenue Code and sections 7001 and 7003 on the Families First Coronavirus Response Act) on the wages paid during the calendar quarter. 

Refundability of Excess Credit

If the amount of the credit exceeds the limitation described above, the excess amount shall be treated as an overpayment that shall be refunded under sections 6402(a) and 6413(b) of the Internal Revenue Code.

Payroll Tax Deferral

The CARES Act also delays the due date for depositing employer payroll taxes and 50% of self-employment taxes related to Social Security (and Railroad Retirement) and attributable to wages paid during 2020.

The deferred amounts would be payable over the next two years — the first half due December 31, 2021 and the second half due December 31, 2022. 

A taxpayer who has had indebtedness forgiven with respect to a loan made under the SBA Loan Program is not entitled to any deferment to payroll taxes and self-employment taxes.

Temporary Modifications for Net Operating Losses

The CARES Act makes certain changes to the loss provisions made by the Tax Cuts and Jobs Act (“TCJA”)[4].  Specifically, it allows for a five-year carryback of net operating losses (“NOL”) arising in 2018, 2019, or 2020 by a business.  In addition, businesses will be able to amend or modify tax returns dating back to 2013 in order to take advantage of the carryback. 

The CARES Act also eliminates the loss limitation rules applicable to sole-proprietors and pass-through entities.  Additionally, it suspends the TCJA’s 80% of taxable income limit on NOL carryovers for three years.  As a result, NOLs arising before January 1, 2021 can fully offset taxable income for tax years 2018, 2019 and 2020.  

Business Interest Expense Limitation

The CARES Act would temporarily increase the limitation on interest deductions imposed by the Tax Cuts and Jobs Act (“TCJA”).  Previously the TCJA limited the amount of allowable deductions for business interest (regardless of type of entity) for tax years beginning after 2017.  The limitation is generally the amount of business interest income plus 30% of the taxpayer’s adjusted taxable income. 

Now, the limitation increases the 30% of adjusted taxable income threshold to 50% of adjusted taxable income for tax years beginning in 2019 and 2020. (Special tax year 2019 rules would apply to partnerships.)  In calculating the limitation for 2020, the taxpayer may elect to use adjusted taxable income for 2019. 

Paid Sick Leave and Family Leave Modifications

The CARES Act clarifies and makes several changes to the Family Medical Leave Act (“FMLA”) provisions in the previous Families First relief package. 

Specifically, those changes include:

  1. Authority for the Office of Management and Budget to exclude certain government employers and executive branch employees for good cause from the expanded Coronavirus FMLA requirements.
  2. Creates a new rule for rehired employees by amending Section 110(a)(1)(A) of the Family and Medical Leave Act of 1993, as added by section 3102 of the Emergency Family and Medical Leave Expansion Act. The new rule states that an “eligible employee” (defined as employed for at least the last 30 calendar days) includes someone who:
    1. Was laid off by the employer March 1, 2020 or later;
    2. Had worked for the employer for at least 30 days in the last 60 calendar days prior to the lay-off; and
    3. Has been rehired by the employer.
  3. Lastly, the new rules would allow advances on anticipated tax credits for employers’ paid family leave costs, and provides penalty relief for failure to deposit tax amounts in anticipation of credits allowed under this section. (Note that the Department of Labor plans on providing further instructions describing these changes).

In addition to the new rules above, the CARES Act clarifies that the $200 per day and $10,000 cap on paid leave is per employee

Payroll Credit for Required Paid Sick Leave

The CARES Act amends section 7001 of division G of the Families First Coronavirus Response Act by allowing employers to receive an advance tax credit calculated through the end of the most recent payroll period in the quarter.  Presumably, this provision is intended to improve the ability of taxpayers to monetize the benefit of the recently-enacted sick and family leave credits.

Treatment of Deposits; Waiver of Penalty

The CARES Act provides that the penalty under section 6656 of the Internal Revenue Code for failure to make a deposit of the tax imposed by section 3111(a) or 3221(a) of the Internal Revenue Code is waived if the Treasury Secretary (or Treasury Secretary’s delegate) determines that such failure to make the deposit was due to the anticipation of the tax credits. 

Department of Labor regulations are expected in April to address additional questions and details under these Families First Coronavirus Response Act provisions.

Larger Business and Nonprofit Lending Programs

The CARES Act directs the Treasury Secretary to establish a program to provide low-interest loans (not higher than 2% per year) for eligible businesses (including nonprofit organizations) with between 500 and 10,000 employees. These loans will require no repayment for at least six (6) months.

Businesses and non-profit organizations seeking this support must provide a good-faith certification that they meet the following criteria —

  1. The business intends to maintain at least 90 percent of its current workforce;
  2. The business will not pay dividends or repurchase stock (or other equity securities)
  3. The business will not outsource or offshore jobs during the loan period or two years thereafter;
  4. The business will not abrogate existing collective bargaining agreements with labor unions; and
  5. The business will remain neutral regarding current or future union organizing activity.

[1] Must not be eligible for payment for items or services furnished under a state plan under Title XIX of the Social Security Act (42 U.S.C. 1396 et seq.). 

[2] A “small business concern” is one which is independently owned and operated and which is not dominant in its field of operation.  See 15 U.S.C. 632 § 3.

[3] Small businesses or nonprofit organizations with fewer than 500 employees (includes full-time, part-time, or other basis employees), or any business that falls within the definition of “small business concern” as defined by Section 3 of the Small Business Act.

[4] The TCJA eliminated the carryback of NOLs for tax years after 2017 and allowed for the indefinite carry forward for NOLs. 

These AALRR publications are intended for informational purposes only and should not be relied upon in reaching a conclusion in a particular area of law. Applicability of the legal principles discussed may differ substantially in individual situations. Receipt of this or any other AALRR presentation/publication does not create an attorney-client relationship. The Firm is not responsible for inadvertent errors that may occur in the publishing process.

©2020 Atkinson, Andelson, Loya, Ruud & Romo

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