President Donald Trump signed the $2.2 trillion Coronavirus Aid, Relief and Economic Security Act (CARES) into law to help struggling Americans deal with the effects of the coronavirus. Below is a brief summary of certain key provisions of CARES. We anticipate additional procedures and guidance to follow.
Phelps will be publishing more nuanced articles and targeted guidance as programs are implemented. In the meantime, our team is here to help businesses and individuals navigate the rapidly changing coronavirus landscape.
Title I – Keeping American Workers Paid and Employed Act
Small Business Relief Through (Sometimes Forgivable) Loans
CARES provides for $349 billion in payment protection program (PPP) forgivable loans for small businesses. Certain small businesses and nonprofit organizations with generally not more than 500 employees, as well as sole-proprietors, independent contractors and other self-employed individuals may be eligible for a PPP loan. To be eligible, a business must have been operational on Feb. 15, 2020, and had employees for whom the business paid salaries and payroll taxes or paid independent contractors. Drafters contemplate a streamlined loan process, so we expect it to be shorter than a typical Small Business Administration (SBA) loan. Eligible businesses will not qualify for both a PPP loan and an economic injury disaster loan (EIDL) through the SBA relating to the coronavirus if the EIDL is being used for payroll-related purposes*, so it is important to evaluate which loan program better fits the needs of your business.
PPP loans are to be used for payroll support, employee compensation, paid leave, insurance premiums and mortgage interest, rent and utility payments. And while CARES provides a formula in determining the size of the loan based on a business’s monthly average payroll costs (multiplying this figure by 2.5), PPP loans are capped at $10 million.
Eligible businesses may seek deferment of PPP loan payments for a period of six months to one year, and they may also apply for loan forgiveness. Businesses may be eligible for loan forgiveness in the amount spent on certain allowable expenses (including certain payroll costs, interest payments on mortgages, rent and utility payments) during the period beginning on Feb, 15 and ending June 30 (the “covered period”). The forgiveness feature is intended to encourage businesses to retain as many employees as they can to get through this uncharted coronavirus territory, and the benefits of the forgiven amount are reduced if a business fails to maintain certain employee figures and wage amounts during the covered period.
CARES also provides for the SBA to offer up to $240 million in financial grants to small business development centers and women’s business centers for education, training and education regarding, among other things, business resiliency and the hazards, prevention, and potential effects of coronavirus. CARES also provides for up to $10 million in financial grants to Minority Business Centers and Minority Chambers of Commerce.
CARES allows through EIDL loans employee stock ownership plans (ESOPs) tribal businesses and cooperatives with fewer than 500 employees, sole proprietors and independent contractors access to EIDL loans through Dec. 31, 2020. Eligible businesses may also request an advance of up to $10,000 on a qualified existing EIDL loan, subject to certain repayment requirements. EIDL loans through CARES represent an expansion of the regular SBA disaster loan program with relaxed qualification requirements.
CARES further changes the Small Business Reorganization act (SBRA) that went into effect in February 2020. The SBRA presently applies to small business debtors that have approximately $2.7 million or less in secured and unsecured debt, which is available to both businesses and individuals that have debts primarily from commercial or business activities. CARES increases this limit to $7.5 million for a one-year period. The definition of “income” for purposes of the SBRA will temporarily exclude federal government payments related to the coronavirus.
Title II – Assistance For American Workers, Families, and Businesses
Consistent with the goal to help struggling Americans deal with coronavirus, CARES provides several unemployment-related benefits (with certain benefits dependent on state action).
CARES provides payment for unemployment benefits to certain eligible individuals, and others who would not traditionally qualify for regular unemployment or extended benefits from Jan. 27, 2020, up to Dec. 31, 2020. States may hire temporary staff, rehire former or retired employees, or engage in other measures to quickly process unemployment claims covered by this provision.
CARES provides for an additional weekly amount of $600 in traditional unemployment benefits (over and above the standard benefit amount) until July 31, 2020. CARES also creates the Pandemic Emergency Unemployment Compensation program, which provides for an additional 13 weeks of unemployment benefits to individuals who are available and actively seeking work but have exhausted all rights to traditional unemployment benefits.
The federal government will pay all the costs incurred by employers as a result of providing “short-time compensation” where employers reduce employee hours (with the employee receiving pro-rated unemployment benefits) in lieu of employee layoffs. CARES also provides grants of up to $100 million to states if they chose to enact short-time compensation programs.
Relief for Individuals
All U.S. residents with adjusted gross income up to $75,000 ($150,000 married filing jointly) who are not a dependent of another taxpayer and have a work-eligible social security number are eligible for a tax credit in the form of a $1,200 ($2,400 married) rebate. They are eligible for an additional $500 per child. This is true even for those who have no income, as well as those whose income comes entirely from non-taxable means-tested benefit programs. For most Americans, no action on their part will be required to receive a rebate check or direct deposit. Many low-income individuals who file a tax return to take advantage of the refundable Earned Income Tax Credit and Child Tax Credit are included as well. The rebate amount is reduced by $5 for each $100 that a taxpayer’s income exceeds the phase-out threshold. The amount is completely phased-out for single filers with incomes exceeding $99,000, $146,500 for head of household filers with one child and $198,000 for joint filers with no children.
CARES waives the 10 percent early withdrawal penalty for distributions up to $100,000 from qualified retirement accounts for coronavirus-related distributions, which are considered distributions made to an individual:
Additionally, the income attributable for 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. The provision also provides flexibility for loans for coronavirus relief from certain retirement plans.
CARES also waives the required minimum distribution rules for certain defined contribution plans [including 403(a) plans, 403(b) plans, and 457(b) plans maintained by an employer described in section 457(e)(1)(A)] and IRAs for calendar year 2020. It relieves individuals of the obligation to withdraw funds from their retirement accounts during the economic slowdown resulting from COVID-19.
For individuals who do not itemize, CARES allows an above-the-line deduction of up to $300 for charitable donations, which is expected to provide a giving incentive to middle-class families typically claiming the standard deduction ($12,000 for individuals and $24,000 for couples) under the 2017 tax law.
CARES is aimed at helping charities assist families who have suffered economic damage due to the coronavirus and increases the limitation on deductions for charitable contributions by individuals who itemize, as well as corporations. For individuals, the 60 percent adjusted gross income limitation is suspended for 2020. For corporations, the 10 percent limitation is increased to 25 percent of taxable income. CARES also increases the limitation on deductions for contributions of food inventory from 15 percent to 25 percent.
Employers will also be able to provide student loan repayments to employees as additional benefits on a tax-free basis. Under the provision, the employer may contribute up to $5,250 annually toward an employee’s student loans, with such payment being excluded from the employee’s income. The $5,250 cap applies to both the new student loan repayment benefit as well as other educational assistance.
Business Relief Through Tax Changes
Eligible employers shall receive a refundable payroll tax credit equal to 50 percent of qualifying wages paid by such employer. Employers eligible to receive credits are those whose (1) operations were fully or partially suspended due to a coronavirus-related-shut-down order, or (2) gross receipts declined by more than 50 percent in a particular quarter as compared to the same quarter in 2019. The credit is tied to the payment of “qualified wages.” If an employer employs more than 100 full-time employees, “qualified wages” is limited to wages paid to employees who are not providing any services to the employer. For eligible employers with less than 100 full-time employees, generally all wages paid will be “qualified wages.” Only the first $10,000 of “qualified wages” paid to an employee will be considered in calculating an employer’s tax credit. The key terms are as follows:
Employers and self-employed individuals may defer payment of employment taxes due under sections 3211(a) and 3221(a) of the Code until 2021 and 2022. At least 50 percent of employment taxes deferred in 2020 must be paid by Dec. 31, 2021, with the remaining portion to be paid by Dec. 31, 2022. If an employer receives loan forgiveness with respect to a loan received under paragraph (36) of section 7(a) of the Small Business act (as added by section 1102 of CARES), under either sections 1106 or 1109 of the act, such employer is ineligible for deferral under this provision. Takeaways:
CARES modifies Section 172 of the Internal Revenue Code (the code) to allow taxpayers to carry back net operating losses (NOL) occurring in 2018, 2019 or 2020, up to five years. The provision also temporarily removes the taxable income limitation, thereby allowing an NOL to fully offset taxable income. NOLs generated in 2018, 2019 and 2020 are permitted to be carried back up to five years from the tax year the NOL was generated to offset taxable income up to 100 percent.
CARES amends Section 461 of the code to expand applicable pass-through businesses’ and sole proprietors’ ability to utilize “excess business losses” to offset taxable income. This provision removes the limitation on “excess business losses” enacted in the Tax Cuts and Jobs Act (TCJA). “Excess Business Losses” incurred by non-corporate taxpayers in 2020 may be fully utilized to offset taxable income. “Excess Business Losses” incurred in 2021 will be subject to the limitations imposed by the TCJA.
CARES accelerates corporate taxpayers’ ability to utilize 100 percent of refundable alternative minimum tax (AMT) credits for tax years beginning in 2019. The TCJA repealed the corporate AMT but allowed corporate taxpayers to carry forward AMT refundable credits and utilize such credits in 2018-2022. It also accelerates corporate taxpayers ability to utilize 100 percent (as opposed to 50 percent) of refundable AMT credits for tax years beginning in 2019.
CARES reduces the limitations imposed on the deductibility of “business interest” by section 163(j) of the Code. In taxable years beginning in 2019 and 2020, the 30 percent adjusted taxable income (ATI) limit is increased to 50 percent of ATI. Special rules apply for tax partnerships. Takeaways:
CARES provides for certain businesses, particularly health care providers, to immediately write off costs associated with improving facilities, as opposed to having to depreciate such improvement costs over the 39-year life of the facility.
CARES temporarily waives excises taxes imposed under 5214(a) of the Code on distilled spirits used for or contained in hand sanitizer that is produced and distributed in a manner consistent with guidance issued by the Food and Drug Administration (FDA).
Title III – Supporting America’s Health Care System in the Fight Against the Coronavirus
CARES shields manufacturers of respiratory equipment from certain liability. The FDA is required to expedite the review of drug applications and inspections, and drug manufacturers are required to report on supply interruptions, drug volume and drug shortage contingency plans.
Medical device manufacturers must report to the FDA any device or device component shortage or an interruption in device manufacturing. Private insurance plans are required to provide rapid coverage of COVID-19 testing, treatment and vaccines.
CARES funds programs to enhance the nursing workforce and geriatric health care training and treatment.
CARES provides for $1.32 billion in supplemental funding for community health centers. Grant programs are authorized to aid in online health visits and rural health care outreach. CARES notes that volunteer medical providers have liability protection resulting from their treatment of coronavirus cases.
CARES allows Health Savings Accounts to be used for remote access health care. “Telehealth” funding and Medicare eligibility have been greatly expanded, along with Medicare with respect to inpatient hospital and post acute-care related to coronavirus. Medicare payments cannot be reduced for durable medical equipment that allows people to transition from the hospital to home, and refills of Medicare Part-D drugs are extended to three months.
Uninsured patients are assured coronavirus testing under Medicare Part B with no cost-sharing. State Medicaid is authorized to fund support professionals and caregivers, and Medicare advance payments will be accelerated.
Over-the-counter drugs may be approved administratively but may not be misbranded. They also must still comply with federal monograph requirements.
Additionally, health care employers shall not be required to pay more than $200 per day or $10,000 in the aggregate for each employee placed on leave. Sick leave and child care expenses are also limited. Unemployment assistance is to be provided by phone or in person. Rehired employees have access to paid family and medical leave if they had worked for their employer at least 30 days prior to being laid off.
Title IV – Economic Stabilization and Assistance To Severely Distressed Sectors of the United States Economy
Additional Business Relief
CARES provides $500 billion to the Treasury Department’s Exchange Stabilization Fund. The Treasury is authorized to provide: loans, loan guarantees and other investments directly to certain eligible businesses, including passenger air carriers, cargo air carriers and businesses critical to maintaining national security; and loans, loan guarantees and other investments in Federal Reserve lending facilities to certain eligible businesses, states and municipalities.
CARES also implores the Treasury to establish a Federal Reserve lending facility to specifically address nonprofit organizations and mid-size businesses with 500 to 10,000 employees. A temporary exception to the Office of the Comptroller of the Currency (OCC) lending limits exists for nonbank financial companies, as well as any transaction exempted by the OCC for the benefit of the public interest.
CARES outlines temporary relief for community banks, as federal banking agencies are directed to reduce the Community Bank Leverage Ratio to 8 percent and provide for a grace period for community banks that do not meet the required ratio. Financial institutions can take an optional reprieve from GAAP requirements for coronavirus-related loan modifications. These financial institutions are also allowed to choose to temporarily suspend any coronavirus-related loan modification determinations. Bank holding companies and other institutions can temporarily delay taking credit loss measurements on financial instruments.
CARES also provides temporary protections for real estate owners. A foreclosure moratorium has been imposed on federally backed mortgage loans for 60 days from March 18, and borrowers who have suffered coronavirus-related financial hardship can be provided up to 180 days of forbearance. Further, CARES states that multifamily borrowers with federally backed mortgage loans and suffering financial hardship can be provided up to 90 days of forbearance. Eviction or late fees may not be levied upon any tenants during such forbearance, and CARES provides for a moratorium on eviction filings by landlords in the instance where the landlord’s loan is a federally backed mortgage loan.
Title V – Coronavirus Relief Funds
Assistance for Governments
CARES provides for $150 billion in payments to state and local governments for necessary expenditures incurred through 2020 due to the coronavirus.
About $562 million in funding is provided to the SBA for administrative expenses and subsidy related to the SBA Disaster Loans Program.
Additional funding, estimated at $25 million, is available for telemedicine grant programs. These programs help provide telecommunications-enable information, audio and video equipment, and advanced technologies access in rural communities. CARES also provides for $1.5 billion to the Economic Development Administration to support grants for suffering communities in the wake of the coronavirus. About $17.4 billion is designated for the Department of Housing and Urban Development. These funds are distributed among various programs, including the Community Development Block Grant (CDBG), Homeless Assistance Grants and Tenant-Based Rental Assistance.
The FDA receives $80 million in funding for necessary developments related to the medical field. Further, $200 million is earmarked for the Federal Communications Commission for the provision of necessary services and devices to health care providers in their efforts to provide telehealth services. About $127 billion is set aside for the Public Health and Social Services Emergency Fund and $4.3 billion for the Centers for Disease Control and Prevention. Additionally, CARES provides $19.6 billion to the Department of Veterans Affairs in responding to its needs related to medical health care services, care and facilities.
The Department of Justice is provided $1 billion, including for, in part, the safe return of individuals stationed abroad as a result of the coronavirus. Additionally, $7.5 million is appropriated to the Judiciary to facilitate remote workplace operations by the federal courts, including the U.S. Supreme Court. The Department of Homeland Security is provided $45.9 billion, which includes $178 million in funding for department personnel’s personal protection equipment (e.g. gloves, goggles, hand sanitizer, respirators and surgical masks) and $45.4 billion in funding to the Federal Emergency Management Administration.
*Supplemented as of March 31, 2020