SPECIAL REPORT: CARES Act
The Senate passed a bill for the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) late Wednesday evening, and it is anticipated that the House will pass it today and President Trump will sign it into law. While unlikely, it is possible that the below provisions may change before the bill is passed by the House and signed into law. We will provide an updated upon the release of the final passed bill.
Keeping America Workers Paid and Employed ACT:
The CARES Act amends the Small Business Act (SBA) to allow the Small Business Administration (“Administration”) to provide 100% federally-backed loans for the period beginning February 15, 2020 to June 30, 2020 (“Covered Period”). A small business, nonprofit organization, or veteran’s organizations that employs the greater of 500 employees or the applicable size standard for the industry as provided by the SBA. Individuals who operate under a sole proprietorship or as an independent contractor and other self-employed individuals are also eligible to receive a covered loan.
The maximum loan amount under this section is determined by a formula that is tied to payroll costs, and is not to exceed $10 million. A recipient may use loan proceeds for payroll costs; costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums; employee salaries, commissions or similar compensations; payments of interest on any mortgage obligation (which shall not include any prepayment of or payment of principal on a mortgage obligation); rent (including rent under a lease agreement); utilities; and interest on any other debt obligations that were incurred before the covered period.
In evaluating the eligibility of a borrower the lender should consider only whether the borrower was in operation on February 15, 2020 and had employees for whom the borrower paid salaries and payroll taxes or paid independent contractors. In addition, an eligible recipient applying for a loan will be required to make a good faith certification stating that the loan request is necessary to support their ongoing operation and acknowledging that funds will be used to retain workers and maintain payroll and pay other debt obligations.
As for administration of these loans, borrower and lender fees are waived, and no personal guarantee or collateral will be required under this program. Any portion of a loan not used for forgiveness purposes will have a maximum maturity date of 10 years from the date on which the borrower applies for loan forgiveness. The interest rate of any loan shall not exceed 4 percent, and lenders are required to provide complete payment deferment relief for a period of not less than 6 months and not more than 1 year. Lastly, borrowers who have received an economic injury disaster loan between January 13, 2020 and February 15, 2020 are not prohibited from applying for a loan under this program.
Recipients will be eligible for loan forgiveness in an amount equal to the costs incurred and the payments made during an 8-week period after the origination date of the loan. These costs and payments include payroll costs; any payment of interest on any mortgage incurred in the ordinary course of business that is a liability of the borrower and was incurred before February 15, 2020; payments on any rent obligation under a leasing agreement that was in force before February 15, 2020; and utility payments for which service began before February 15, 2020. The amount of forgiveness shall not exceed the principal amount of the loan and will be reduced proportionally by any reduction in employees retained compared to the prior year and reduced by the reduction in pay of any employee beyond 25 percent of their prior year compensation. Borrower which re-hire workers previously laid off will not be penalized for having reduced payroll at the beginning of the period.
A recipient seeking loan forgiveness will need to submit an application to the lender. The application should include various documentation including verification of the number of fulltime employees and pay rates; payments made during the period; and any other documentation the Administrator deems necessary. Not later than 60 days after the date on which a lender receives an application for loan forgiveness the lender will issue a decision on an application, and a safe harbor protects the lenders from liability. Lastly, any amount of forgiveness will be excluded from gross income of the recipient.
The Administration may also provide financial assistance in the form of grants to resource partners (small business development centers and women’s business centers) to provide education, training, and advising to small businesses that have been impacted by COVID-19. In addition, the Minority Business Development Agency within the Department of Commerce may provide grants to Minority Business Centers for the purpose of providing counseling, training, and education on federal resourced and business response to COVID-19 for small businesses.
In addition to the loans mentioned above, entities will be eligible for an Economic Injury Disaster Loan (EIDL). Any rules related to personal guarantees on advances and loans below $200,000; requirements that an applicant needs to be in business for a 1-year period before the disaster; and the credit elsewhere requirement are waived. The Administrator may approve an applicant based solely on their credit score or an appropriate alternative method to determine an applicant’s ability to repay. This section also established an Emergency Grant to allow an eligible entity who has applied for an EIDL to request an advance on that loan, of not more than $10,000, which the Administrator must distribute within 3 days. The advance payment may be used to provide sick leave to employees unable to work due to the direct effect of COVID-19; maintain payroll to retain employees during business disruptions or substantial slowdowns; meet increasing costs to obtain materials unavailable from the applicant’s original source due to interrupted supply chains; making rent or mortgage payments; and repaying obligations that cannot be met due to revenue loses. Applicants will not be required to repay any amount of an advance, even if subsequently denied for a loan under this section. An emergency involving Federal primary responsibility determined to exist by the President under the Stafford Disaster Relief and Emergency Assistance Act qualifies as a trigger for EIDL loans and in such circumstances, the Administrator shall deem that each State has sufficient economic damage to small businesses to qualify for assistance under this section and the Administrator shall accept application for such assistance immediately.
Changes to the Bankruptcy Code: Under the Small Business Reorganization Act that became effective in February, a business qualifies to file a case under Subchapter 5 if its debts are in the amount of $2,725,625 or less. Subchapter 5 aims to give businesses a less expensive option to reorganizing under Chapter 11. Section 1113 of the CARES Act increases the debt limit from $2,725,625 in debts to $7.5 million in debts. Therefore, businesses with debts of $7.5 million or less will now qualify to file cases under Subchapter 5. This change in the debt limit applies only to cases filed after the CARES Act becomes effective and is applicable for one year. After one year, the debt limit for cases under Subchapter 5 will return to $2,725,625 absent an extension by Congress. The CARES Act also makes changes to Chapter 7 and Chapter 13 of the United States Bankruptcy Code.
Assistance for American Workers, Families, and Businesses:
Unemployment Insurance Provisions: This section creates a temporary Pandemic Unemployment Assistance program through December 31, 2020 to provide payment to those not traditionally eligible for unemployment benefits who are unable to work as a direct result of the COVID-19 public health emergency. The total number of weeks for which an individual may receive assistance under this section shall not exceed 39 weeks. The CARES Act also provides an additional $600 per week to each recipient of unemployment insurance or Pandemic Unemployment Assistance. An additional 13 weeks of unemployment benefits may also be given to those who remain unemployed after state unemployment benefits are no longer available. Grants will be awarded to States that enact short-time compensation programs to help them administer these programs.
Recovery Rebates & Other Individual Provisions: A tax credit in the amount of $1,200 ($2,400 in the case of individuals filing jointly) will be given to individuals with an adjusted gross income of up to $75,00 ($150,00 in the case of a joint return and $112,500 in the case of head of house-hold filling status). An additional $500 will be given for every child. The IRS will base these amounts on the taxpayer’s 2019 tax return if filed, or 2018 tax return if they have not yet filed. The rebate amount will be reduced by 5% of so much of the taxpayer’s adjusted gross income as exceeds $75,000 ($150,000 in the case of a joint return and $112,500 in the case of head of house-hold).
Special Rules for Use of Retirement Funds: The 10 percent early withdrawal penalty is waived for distributions up to $100,000 from qualified retirement accounts for specific COVID-19 related purposes. In addition, income attributable to such distributions would be subject to tax over three years, and the taxpayer may recontribute the funds to an eligible retirement plan within three years without regard to that year’s cap on contributions.
Charitable Contribution Provisions: Up to $300 of cash contributions to charitable organizations can be an above the line deduction, whether or not you itemize. In addition, limitations on deductions for charitable contributions by individuals who itemize as well as corporations have been increased. For individuals, the 50-percent of adjusted gross income limitation is suspended for 2020. For corporations, the 10-percent limitation is increased to 25-percent of taxable income.
Business Provisions: Employers and self-employed individuals can defer payments of the employer share of the Social Security tax. The deferred employment tax should be paid over the following two years, with half of the amount required to be paid by December 31, 2021 and the other half by December 31, 2022. The CARES Act, also provides changes to the Net Operating Losses of a business, which are currently subject to a taxable income limitation, and cannot be carried back to reduce income in a prior tax year. Under the CARES Act, a loss from 2018, 2019, or 2020 can be carried back five years, and the taxable income limitation to allow a loss to fully offset income is temporarily removed. There is also a temporary increase in the amount of interest expense businesses are allowed to deduct, by increasing the 30-percent limitation to 50-percent of the taxable income for 2019 and 2020. Lastly, businesses, especially in the hospitality industry, may immediately write off costs associated with improving facilities instead of having to depreciate those improvements over the life of the building.
CONTACT:
Andrew J. Annes, Esquire
aannes@satclaw.com
mobile: (312) 246-3110
John W. Campbell, Jr., Esquire
jcampbell@satclaw.com
mobile: (312) 391-3126