The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) has passed the U.S. Senate and the U.S. House and is expected to be signed into law by President Trump today, March 27, 2020. The following is a summary of the key provisions of the CARES Act that most impact businesses.
Dramatic Expansion of Small Business Administration (SBA) Loan Program to Include Limited Loan Forgiveness
The CARES Act appropriates $349 billion to the SBA to implement a dramatic expansion of the SBA loan program as a “paycheck protection program” for loans issued between a “covered period” of February 15, 2020 and June 30, 2020. The CARES Act makes the following important changes to the SBA loan program:
- Expands eligibility for SBA loans to all employers with 500 employees or less, including non-profits, independent contractors, and self-employed individuals. Businesses engaged in accommodation or food services with more than one physical location can qualify if they have 500 employees or less per physical location.
- Increases maximum amount of loan from $5 million to the lesser of $10 million or two and a half months payroll costs. Payroll costs include wages, commissions, income, and net earnings for any worker, including sole proprietors, independent contractors, and employees. However, payroll costs do not include any compensation of individual workers in excess of $100,000 per year, prorated for the covered period.
- Forgives indebtedness for the amount of principal that a borrower reasonably expects to spend for the first eight (8) weeks after origination of the loan on payroll for all workers, including sole proprietors, independent contractors, and employees (with any worker who makes in excess of $100,000 per year calculated as if the worker makes $100,000), the interest portion of mortgage obligations, rent payments, and utility payments. However, forgiveness is proportionally reduced based on any reduction in force or employee salary reductions in excess of 25% that occur in the eight (8) week period following the origination of the loan. The amount of any loan forgiven under the CARES Act will not be includible in gross income of the borrower.
- Expands the permitted uses of loan proceeds to include payroll costs, group health care benefit costs, employee salaries, the interest portion of mortgage payments, rent, utilities, and the interest portion of existing debt obligations
- Delegates to lenders the authority to make and approve loans; lenders can only consider for eligibility whether the borrower was in operation on February 15, 2020 and had employees or independent contractors
- Removes personal guarantee and collateral requirements and makes the loan non-recourse against the shareholder, member or partners of the loan recipient so long as the loan proceeds are used for an allowable use
- Requires borrowers to make good faith certification that the loan is required to support ongoing business operations and funds will be used to retain workers and maintain payroll or make mortgage, lease or utility payments
- Waives SBA origination fees that would otherwise apply
- Provides a maximum interest rate of 4 percent
- Defers repayment of existing SBA loans for six months to one year
- Increases the cap on loans in major disaster areas from $350,000 to $1 million for the rest of 2020
- Waives prepayment penalties on SBA loans made before December 31, 2020
The CARES Act also appropriates $17 billion to provide relief to borrowers with pre-existing SBA loans. Under this relief, the government will automatically make payments (including principal, interest, and fees) for a six month period on pre-existing SBA loans that are in a regular servicing status.
Finally, the CARES Act also appropriates $10 billion to expand the SBA’s disaster loan program for entities that have suffered a substantial economic injury as a result of COVID-19. This expansion includes emergency grants up to $10,000 and waiver of certain loan application requirements.
Payroll Tax Credit for Certain Employers
The CARES Act provides eligible employers (including tax-exempt organizations but not governmental entities) a refundable credit against payroll tax (Social Security and Railroad Retirement) liability equal to 50% of the first $10,000 in wages per employee (including value of health plan benefits). Eligible employers must have carried on a trade or business during 2020 and either:
- Have business operations fully or partially suspended due to orders from a governmental entity limiting commerce, travel, or group meetings; or
- Experience a year-over-year (comparing calendar quarters) reduction in gross receipts of at least 50% – until gross receipts exceed 80% year-over-year.
For employers with more than 100 full-time employees, only wages paid to employees who are currently not providing services for the employer due to COVID-19 causes are eligible for the credit. The employee retention credit is effective for wages paid after March 12, 2020, and before January 1, 2021. Employers who receive a loan under the new SBA payroll protection program are not eligible for this benefit.
Delay of Employer Payroll Taxes
The CARES Act postpones 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 – half due December 31, 2021, and half due December 31, 2022. Employers who receive loan forgiveness under the new SBA payroll protection program are not eligible for this benefit.
Expansion of Deduction for Net Operating Losses (NOLs)
The CARES Act suspends certain changes to the loss provisions in the Tax Cuts and Jobs Act (TCJA) to allow companies to utilize greater losses as well as to claim refunds for certain losses. Specifically, the CARES Act:
- Suspends the TCJA’s 80% of taxable income limit on net operating loss (NOL) carryovers for three years, so that the limit would not apply to tax years beginning in 2018, 2019, and 2020;
- Allows NOLs arising in 2018, 2019, and 2020 to be carried back five years; and
- Suspends the limitations on excess farm losses and on the use of a pass-through business’ losses against non-business income for three years, so that the limits would not apply to tax years beginning in 2018, 2019, and 2020.
Corporate AMT Credits
The CARES Act accelerates the ability for companies to recover refundable AMT credits.
Limitation on Business Interest Expense
The CARES Act would temporarily increase the limitation on interest deductions imposed by the TCJA. Specifically, the Act would increase the 30% of adjusted taxable income (ATI) threshold to 50% of ATI, for tax years beginning in 2019 and 2020. (Special tax year 2019 rules would apply to partnerships.) It would also allow a taxpayer to elect to use tax year 2019 ATI in lieu of tax year 2020 ATI for the purpose of calculating its tax year 2020 limitation.
Advance of Tax Credits for Paid Leave Due to COVID-19
The CARES Act allows employers to receive advances on employers’ anticipated tax credits for the paid family and sick leave provided by the Families First Coronavirus Response Act that Congress passed last week. It also waives penalties for the failure to deposit tax amounts if the failure was due to anticipation of these tax credits.
Additional $500 Billion for Governmental Loan Financing to Eligible Businesses and Others
The CARES Act provides up to $500 billion to allow the U.S. Government to provide loans and loan guarantees to “eligible businesses,” as well as States and municipalities. Under this part of the CARES Act, the U.S Government is authorized, subject to certain terms and conditions, to directly make loans and loan guarantees to large employers.
In addition, the U.S. Government is expected to provide financing to banks and other lenders to make direct loans to mid-sized eligible businesses (including nonprofit organizations) with between 500 and 10,000 employees. The provisions that would apply to these loans include:
- The interest rate on such a loan is not to exceed 2% per annum.
- No principal or interest would be due and payable during the first 6 months of the loan.
- The eligible business must make a good-faith certification that:
- The uncertainty of economic conditions as of the date of the application makes necessary the loan request to support the ongoing operations of the recipient;
- The funds it receives will be used to retain at least 90% of the recipient’s workforce, at full compensation and benefits, until September 30, 2020;
- The recipient intends to restore not less than 90% of the recipient’s February 1, 2020 workforce and to restore all compensation and benefits to the workers of the recipient no later than 4 months after the termination date of the COVID-19 public health emergency;
- The recipient is an entity or business that is domiciled in the United States with significant operations and a majority of its employees based in the United States;
- The recipient is not a debtor in a bankruptcy proceeding;
- The recipient will not pay dividends with respect to its common stock (and perhaps with respect to any comparable equity security), or repurchase its or its parent company’s listed equity security while the direct loan is outstanding;
- The recipient will not outsource or offshore jobs for the term of the loan and two years after completing repayment of the loan;
- The recipient will not abrogate any existing collective bargaining agreement for the term of the loan and two years after completing repayment of the loan; and
- The recipient will remain neutral in any union organizing effort for the term of the loan.
- It may be that any recipient of such a loan will be subject to restrictions on the compensation paid to any officer or employee whose total 2019 compensation exceeded $425,000. These restrictions would last until one year after the date on which the loan is no longer outstanding.
The CARES Act authorizes the Federal Reserve to establish a Main Street Lending Program or similar program that supports lending to small and mid-sized businesses. The CARES Act is not, however, clear as to whether the criteria described above, or other criteria, will need to be met by businesses seeking loans under such a program.
The CARES Act contains separate funding provisions for passenger air carriers, cargo air carriers, businesses critical to maintaining national security, and contractors that perform certain specified services for a passenger air carrier.
The CARES Act prohibits forgiveness of any loan made under the $500 billion part of the CARES Act.
Real Estate Provisions
The CARES Act also relaxes requirements for federally backed mortgages. These provisions include:
- Forbearance: A borrower with a federally backed mortgage home loan (FHA, VA, Dept. of Agriculture, Freddie, Fannie loans) may request forbearance (regardless of delinquency status) for up to 180-days (with allowance for a 180-day extension). The only documentation the loan servicer shall require is written borrower attestation to a financial hardship due to COVID-19.
- Forbearance – Multifamily Properties: A multifamily borrower with a federally backed mortgage loan (HUD, Freddie, Fannie loans) may request forbearance, but the borrower must have been current on its payments as of February 1, 2020, for up to 30-days (with allowance for up to two 30-day extensions). During the forbearance period, the multifamily borrower may not evict or initiate eviction of any tenants solely for nonpayment of rent or charge any tenants late fees or penalties.
- Foreclosure: Except a vacant or abandoned property, a loan servicer of a federally backed mortgage home loan may not initiate foreclosure proceedings, move for an order of sale, or execute a foreclosure related eviction for 60-days, beginning on March 18, 2020.
- Evictions: Any property that has a federally backed mortgage loan and is occupied by a tenant(s), for 120-days beginning on the date of enactment of the bill, the landlord may not evict or initiate eviction of any tenants for nonpayment of rent or charge any tenants late fees or penalties. The landlord may also not require a tenant vacate until 30-days after notice to vacate (the notice cannot be provided until expiration of the 120-day moratorium).
The attorneys at Wyche stand ready to assist you in analyzing and complying with this new law and assisting you with any other legal needs during these unprecedented times.