After a tense week of difficult negotiations, Congress passed, and the President signed into law, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) on Friday, March 27, 2020. The CARES Act is the third piece of federal legislation aimed at addressing the economic issues caused by COVID-19, and is designed to alleviate some of the economic strain being experienced by the country as COVID-19 cases increase and more employers and employees are affected by shelter-in-place orders that could extend into the summer. The Act is intended to provide extensive economic stimulus and relief through a variety of new or expanded programs/benefits including small business loans, unemployment insurance benefits, and federal tax breaks and incentives.
Click on the links below for details on what is included in each of the key provisions:
One component of the CARES Act is the Paycheck Protection Program (PPP). As part of the PPP, Congress has set aside roughly $350 billion to expand the Small Business Administration’s (SBA) existing Section 7(a) loan program to a wider range of borrowers. Loans made under the PPP are different in kind (and separate) from any loans made under the SBA’s Section 7(b) Economic Injury Disaster Loan Program. The period covered by the PPP is from February 15, 2020 to June 30, 2020.
Loans are available to private employers with fewer than 500 employees. Additionally, loans are available to Section 501(c)(3) non-profit employers with fewer than 500 employees. Sole proprietors, independent contractors, and self-employed persons are also eligible for loans under the PPP. Employers with more than one location but fewer than 500 employees at any one location are eligible if the employer’s business is in the accommodation or food service industry (i.e., NAICS code beginning with “72”). For the purposes of the PPP, the term “employee” includes full-time and part-time employees.
Under the PPP, available loans amounts are capped at the lesser of (1) two-and-a-half times the applicant’s average monthly payroll costs (based on the preceding twelve month period running from the date of the loan) or (2) $10 million. Includable payroll costs for the purpose of calculating the maximum loan amount include wages, paid forms of leave, healthcare benefits, and state and local taxes.
To establish their eligibility, employers are required to certify in good faith that (1) uncertain economic conditions because of the COVID-19 virus make the loan necessary to fund the employer’s ongoing operations; (2) the funds received will be used to retain workers, maintain payroll, or to make mortgage, rent, or utility payments; and (3) the employer has not already received a loan for the same purpose under the PPP.
Employers are not required to establish that they are unable to obtain credit from alternative sources to obtain a loan under the PPP. Collateral and personal guarantees are not required to obtain a loan; loans under the PPP are unsecured. The loans are fully guaranteed by the federal government. There is no prepayment penalty. The maximum interest rate for loans under the PPP is 4%.
Permissible Uses of Loan Proceeds
Amounts received by employers under the PPP may be used to cover (1) payroll costs; (2) costs related to the continuation of group health care benefits during period of paid leave (and insurance premiums); (3) salaries, commissions, and other wages; (4) mortgage interest; (5) rent; (6) utility costs; and (7) interest on pre-existing debt.
Loan Forgiveness and Repayment Terms
Notably, employers that receive loans under the PPP are eligible for partial loan forgiveness. The forgiveness terms are somewhat complicated, but employers may apply for loan forgiveness for those amounts paid during the first eight weeks following loan origination for (1) payroll costs; (2) mortgage interest; (3) rent; and (4) utility costs. Eligibility for partial loan forgiveness is reduced if an employer lays off employees or reduces employee pay during the loan period.
Loan amounts that are forgiven do not qualify as taxable income. Repayment of loans under the PPP may be deferred for at least six months.
The maximum maturity date for the unforgiven portion of a loan made under the PPP is ten years.
How to Apply
The SBA does not directly provide loans; instead, loans are provided by participating private lenders. As of the date of this writing, there is not yet a process for applying for a loan under the PPP. The SBA is currently engaged in the process of implementing the terms of the statutory provisions and drafting regulations to govern loans under the PPP.
Increased Weekly Benefit and Eligibility Period
Most notably, the CARES Act provides for additional unemployment benefits of up to $600 per week for individuals who are otherwise eligible for unemployment benefits under state or federal law. Moreover, individuals may begin receiving benefits immediately if the state agrees to waive the typical one-week waiting period, and the federal government will reimburse the state for the expense of that first week of benefits. The CARES Act also provides an additional 13 weeks of unemployment benefits to assist individuals who remain unemployed after their state employment benefits are no longer available, which (in most states) increases the total number of weeks that an individual may receive unemployment benefits from 26 weeks to 39 weeks. This benefit is scheduled to expire in July 2020.
Expanded Pool of Eligibility
The CARES Act further expands unemployment benefits by creating a temporary federally funded Pandemic Unemployment Assistance program. The program will provide unemployment benefits to previously ineligible individuals such as self-employed workers, independent contractors (including gig economy workers), persons with limited work history and individuals who are unable to work, or are partially unemployed, because of COVID-19. Individuals who will be considered unable to work because of COVID-19 include a person who:
- (a) has been diagnosed with COVID-19 or is experiencing symptoms of COVID-19 and is seeking a medical diagnosis;
- (b) is a member of a household in which a person has been diagnosed with COVID-19 and/or is providing care for a family/household member who has been diagnosed with COVID-19;
- (c) acts as the primary caregiver for a child/other person who is unable to attend school or another care facility that has been closed as a direct result of COVID-19 and such school or facility care is required for the individual to work;
- (d) is subject to a quarantine imposed as a direct result of COVID-19;
- (e) has been advised by a health care provider to self-quarantine due to COVID-19 concerns;
- (f) is scheduled to begin employment and does not have a job or is unable to work as a direct result of COVID-19;
- (g) has become the primary support for the household because the head of household has died as a direct result of COVID-19;
- (h) has been forced to quit a job as a direct result of COVID-19; or
- (i) whose place of employment is closed as a direct result of COVID-19.
Individuals are not required to be actively seeking employment in order to receive unemployment benefits under the program. However, individuals who are able to work remotely and receive compensation or who are currently receiving paid sick leave or other paid time off benefits are not eligible to receive benefits under this program. The program’s benefits are available for beginning retroactively on January 27, 2020 and are scheduled to end on December 31, 2020.
State Incentives to Avoid Layoffs
Finally, the CARES Act also expands eligibility by providing funding to states that currently have or begin implementing a Short-Time Compensation (STC) program. An STC program is designed to incentivize employers to reduce their employees’ hours instead of laying them off by allowing the employees to receive a pro-rated unemployment benefit (funded in full or part by the federal government) through December 31, 2020.
Employment Tax Credits
Eligible employers will receive a quarterly payroll tax credit equal to 50% of qualified wages paid to employees during the COVID-19 crisis. Eligible employers include those whose (1) operations were suspended (fully or partially) as the result of a COVID-19 governmental order, or (2) gross revenues declined by more than 50% when compared to the same quarter in the prior year. The credit applies to wages paid after March 12, 2020 and before January 1, 2021.
Delayed Payment Of Employer Payroll Taxes
Employers and self-employed individuals may defer payment of the employer share of the Social Security tax. Half of the deferred amount is required to be paid by December 31, 2021 and the other half by December 31, 2022.
Withdrawal Of Retirement Funds
The 10% penalty for early withdrawal is waived for certain distributions up to $100,000 from qualified retirement accounts. The distributions must be made on after January 1, 2020 and before December 31, 2020 by an individual who is diagnosed with SARS-CoV-2 or COVID-19, whose spouse or dependent is diagnosed, or who experiences financial hardship because of quarantine or other factors. The income attributable to such distributions would be subject to tax over the next three years or, alternatively, can be claimed in 2020. The withdrawn funds may be recontributed to an eligible retirement plan within three years without regard any cap on that year’s contributions, and if such amounts are recontributed, there will be no tax on the withdrawal.
Retirement Plan Loans
Loans from a qualified retirement account not to exceed $100,000 (up from $50,000) are allowed beginning on March 27, 2020 and ending 180 days thereafter. Such loans cannot exceed one-half of the present value of the vested balance. Any outstanding loans which have a repayment date between March 27, 2020 and December 31, 2020 are delayed for one year, and subsequent payments as well as interest accrual are adjusted accordingly.
Required Minimum Distribution
The required minimum distribution rules for IRAs and certain defined contribution plans have been waived for 2020.
Individuals who do not itemize will be eligible to receive a deduction up to $300 for cash contributions to eligible charities. In addition, the limitations on deductions for cash charitable contributions by individuals who itemize has been suspended for 2020, to allow individuals to deduct an amount up to 100% of their adjusted gross income. Corporations may now deduct up to 25% of their taxable income (increased from 10%).
Employer Payment Of Student Loans
Any employer contribution, up to $5,250 annually, toward an employee’s student loans will be excluded from the employee’s gross income as long as such payment is made after March 27, 2020 and before January 1, 2021.
Net Operating Loss Deductions
The current 80% limitation on net operating loss (NOL) deductions (applicable in taxable years beginning after December 31, 2017) no longer applies to any NOL carryforwards to taxable years beginning before January 1, 2021. In addition, the 80% limitation will not apply to any NOL carrybacks to taxable years beginning on or before December 31, 2017 if the net operating loss was generated in taxable years beginning after December 31, 2017. Taxpayers who file returns, including any amended return, for taxable years with beginning dates from January 1, 2018 through December 31, 2020, are entitled to use all NOL carryovers to offset taxable income regardless of the taxable year in which the NOL arose. Special rules were implemented for REITS and life insurance companies.
Other Tax Incentives
Prior Year Minimum Tax Liability Of Corporations. Recovery of corporate AMT credits has been accelerated.
Increased Limitation On Business Interest. The amount of deductible interest expense for businesses is increased to 50% of taxable income, with adjustments, for 2019 and 2020.
Exception From Excise Tax For Alcohol Used To Produce Hand Sanitizer. The federal excise tax is waived for 2020 on distilled spirits used in hand sanitizer produced and distributed in a manner consistent with guidance issued by the Food and Drug Administration.
State Of Tennessee COVID-19 Related Legislation. On March 24, 2020, the Tennessee Department of Revenue extended the due date for filing and paying franchise and excise tax from April 15, 2020 to July 15, 2020. The due date for filing and paying the Hall Income Tax has also been extended from April 15, 2020 to July 15, 2020.
Our attorneys at Burch, Porter & Johnson, PLLC will continue to monitor and advise you concerning breaking developments in the law as a result of the COVID-19 pandemic. We are also available to assist you in the interpretation of the CARES Act and are ready to help you find ways to claim and/or use funding made available under the Act. We are just a call away!