Congress Passes Historic Coronavirus Relief Act
The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was passed by Congress and signed by the President on March 27, 2020. This stimulus package is more than double the amount provided by the American Recovery and Reinvestment Act that was passed during the Great Recession. The 880-page bill includes substantial aid for both employed and unemployed Americans, the public health system, and employers of all sizes, including nonprofit organizations.
The CARES Act provides $500 billion in loans to support severely distressed businesses. Of that $500 billion, up to $25 billion may be used for loans and loan guarantees for passenger air carriers and related organizations. Up to $4 billion is allocated specifically for cargo air carriers, and $17 billion for businesses critical to maintaining national security.
The remaining $454 billion (plus any funds in the foregoing paragraph not expended) is available for loans to all other industries and eligible businesses and nonprofits of all sizes. The employer must be located in the United States or governed under the laws of the United States, and must have significant operations and a majority of its employees in the United States. Within ten days of the Act’s enactment, the Secretary of the Treasury will publish the procedures for applying for these loans.
Among other requirements, the loan agreements will provide that the eligible business may not purchase its own stock or pay dividends or make other capital distributions of common stock during the term of the loan plus one additional year. While the legislation does not expressly provide for the making of tax distributions for pass through entities, in prior similar circumstances, such as the troubled asset relief program, government agencies have provided consents to permit such tax distributions for pass through entities. The loan agreements will similarly require that, until September 30, 2020, the business in receipt of the loan or loan guarantee must maintain its employment levels as of March 24, 2020, “to the extent practicable,” and in no instance may the business reduce its employment levels by more than 10 percent from March 24, 2020. The interest rates on the loans will be determined, at least in part, on the collateral that can be provided for the loan. Borrowers must agree to compensation limits for executives making more than $425,000 per year during the term of the loan plus one additional year. These loans are also subject to a congressional oversight board and review by an independent inspector general.
Other relevant provisions of the CARES Act are directed at individuals and include:
- Most individuals earning less than $75,000 will receive a one-time cash payment of $1,200. Married couples filing jointly would each receive a direct payment of $2,400 and families will receive $500 per child. That means a family of four earning less than $150,000 can expect a payment of $3,400. The payments phase down after that and disappear completely for individuals making more than $99,000 and couples making more than $198,000.
- The cash payments are based on either the individual’s or couple’s 2018 or 2019 tax filings, whichever have been filed as of the date of the payments. People who receive Social Security benefits are also eligible for the cash payments.
- Individuals may also receive $600 per week in additional unemployment insurance benefits, for four months. This amount will be added to the base amount of unemployment benefits the individual is eligible for in their home state. The legislation also adds thirteen weeks of additional unemployment insurance.
- Qualified charitable contributions of up to $300 can be treated as an “above the line” deduction, in addition to the standard deduction.
The Act is also designed to inject cash flow into small and mid-size businesses and nonprofits. Under the Act’s Paycheck Protection Program (PPP), businesses and nonprofit organizations that have less than 500 employees and who otherwise satisfy the eligibility criteria will have access to nearly $350 billion in business loans authorized under section 7(a) of the Small Business Act during the covered period (February 15, 2020 through June 30, 2020). Under the program, interest rates will not exceed 4%, payments will be deferred for at least six months, and personal guarantees and collateral pledges are not required. Loan funds may be used for qualified salaries and payroll costs, rent, utility costs, and interest on mortgage and certain other debt incurred prior to February 15, 2020. The loans will cover payments made for these expenses during the eight-week period following the loan origination.
The maximum loan amount under the PPP may be up to $10 million and is based on the borrower’s payroll costs for the prior year. For purposes of calculating the maximum loan amount, "payroll costs" does not include wages for employees with salaries over $100,000. However, it does include salaries, state and local taxes, health care costs and retirement benefits for employees who make $100,000 or less.
Borrowers are eligible for loan forgiveness under the PPP based on the amounts paid for maintaining payroll continuity during the covered period, not to exceed the loan amount. The loan forgiveness may be reduced if the employer reduces its workforce during the covered period or reduces employee salaries or wages by more than 25% during the covered period, although the loan forgiveness will not be reduced if any such workforce and pay reductions are cured by June 30, 2020. The forgiven debt amounts will not be included in taxable income.
The CARES Act also provides employers with other tax benefits. For example, employers can obtain some payroll tax relief through the use of a payment deferral period. Half of the deferred payment amounts would be due by December 31, 2021, and the other half by December 31, 2022. Companies will also have an increased ability to deduct losses.
While the full impact of the legislation’s effect on employers won’t be known for some time, the Act should provide at least some relief either in the form of tax breaks or cash assistance. As with all new legislation, especially legislation as complex as this Act, questions will be inevitable. Rest assured that our experienced legal team is prepared to help you navigate this challenging time.
This material has been prepared by Lewis Roca Rothgerber Christie LLP for informational purposes only and is not legal advice. Specific issues dealing with COVID-19 are fluid and this alert is intended to provide information as it is currently available. Readers should not act upon any information without seeking professional legal advice. Any communication you may have with a Lewis Roca Rothgerber Christie LLP attorney, through this announcement or otherwise, should not be understood by you to be attorney-client communication unless and until you and the firm agree to enter into an attorney-client relationship.