Coronavirus Aid, Relief and Economic Security Act (CARES Act)

On Friday, March 27, 2020 the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) became law. The CARES Act (the Act) is an emergency stimulus package intended to provide financial assistance and relief to individuals, businesses and certain industries particularly affected by the ongoing COVID-19 pandemic. This is the third bill that was passed, and most significant one, with the cost exceeding two-trillion dollars.

The Act has two distinct areas, one for individuals and the other for businesses. The business section is segregated into large businesses and small business, which is defined as less than 500 employees. This discussion below will focus only on small businesses and individuals.

Executive Summary

Individuals:

• Direct cash payments based on income thresholds
• Enhanced unemployment benefits
• Delay in deadlines for tax filing and retirement plan contributions
• Waivers of penalty for early retirement plan distributions
• Waivers of Required Minimum Distributions (RMDs) for 2020
• Mortgage payment relief
• Student loan relief

Businesses:

• Payroll tax credits and grants for large businesses (over 500 employees), depending on the industry
• Up to $10K in emergency grants and up to $200K in loans for small businesses
• Payroll protection for small businesses – in essence, the federal government covers the small business’s payroll for up to two months with some relief for other operating expenses

Individuals/Non-Business Owners

The first part of the Act provides direct assistance to middle and lower income families and individuals via cash payments and unemployment benefits. Additionally, many other individual tax code provisions have changed, as noted below.

Direct Cash Payments

1. The direct cash payments will be for all U.S. residents with adjusted gross income up to $75,000 ($150,000 joint filers). These individuals will be eligible for a $1,200 ($2,400) payment, as well as an additional $500 per child (under age 17).
2. This amount is reduced by $5 for every $100 over the income limit above, so it would be fully phased out for those with incomes over $99,000 (single) and $198,000 (joint filers) with no children.
3. There is no minimum income requirement for the payment. Individuals with little or no income are eligible provided they are not a dependent of another taxpayer and have a work-eligible Social Security number.

Increased Unemployment Assistance:

1. Provides an additional $600/week payment to each recipient of unemployment insurance for up to four months.
2. Provides an additional 13 weeks of unemployment benefits through Dec. 31, 2020, for those who remain unemployed after state unemployment benefits are no longer available.

Delay in Tax Filing Deadlines:

Individuals now have until July 15, 2020 to file their 2019 tax returns instead of April 15th. This also allows individuals to delay their IRA/retirement plan contributions for 2019 until July 15th to the extent they were originally due by April 15th.

Retirement Account Changes:

The following changes apply to qualifying individuals who are diagnosed with COVID-19, have a spouse or dependent who is diagnosed with COVID-19 or experience adverse financial consequences as a result of COVID-19, including quarantines, layoffs, business closures or child-care responsibilities.

1. Elimination of Early Withdrawal Penalty: Waives the 10% early withdrawal penalty for withdrawals up to $100,000 from qualified retirement accounts for plan participants who qualify for COVID-19 relief. Income tax on the distribution would still be owed but could be paid over a three-year period. Individuals could “recontribute” the funds to the plan within three years without regard to contribution limits. While the law allows for these types of penalty-free distributions, individual plans can set more restrictive policies.
2. Increase in the Retirement Plan Loan Amount: Increases the amount that can be taken as a loan from a qualified retirement plan from $50,000 to $100,000 for 2020.
3. Temporary Waiver of RMDs for 2020 for All Retirement Savers: Waives the required minimum distributions for 2020. Individuals do not need to meet COVID-19 qualifying criteria to temporarily waive RMDs for 2020. This may create financial planning opportunities for our clients who don’t need their RMD’s for living expenses. We can use this opportunity for Roth conversions.

Enhanced Tax Benefits for Charitable Gifts:

1. $300 Deduction of Cash Contributions: Ability to deduct up to $300 of cash contributions to charities, regardless of whether the individual itemizes deductions or takes the standard deduction. This means it is an above the line deduction. This allows many folks to take both the standard deduction and also deduct the charitable contribution.
2. Changes to Limits on Charitable Contributions: For those who itemize their deductions for charitable giving, the 50% of adjusted gross income limit is suspended for 2020. This will allow for charitable contributions up to 100% of AGI.

Mortgages:

1. Mortgage Relief for Homeowners: Requires the servicers of federally backed mortgages to postpone mortgage payments at the request of the borrower, provided the borrower affirms financial hardship due to COVID-19. The postponement must be granted for up to 180 days and extended for an additional period of up to 180 days at the request of the borrower.
2. Foreclosure Moratorium: Prevents the servicer of a federally backed mortgage loan to initiate any foreclosure process for at least 60 days beginning on March 18, 2020.
3. Eviction Relief for Renters: For 120 days after the CARES Act date of enactment, landlords with mortgages backed by the U.S. Department of Housing and Urban Development (HUD), Fannie Mae, Freddie Mac, and other federal entities cannot pursue eviction for their tenants. Landlords also can’t charge any fees or penalties related to nonpayment of rent.

Student Loans/Education:

1. Loan Payment Suspension: Suspends payments automatically for federal student loans through Sept. 30, 2020, with no interest accruing or penalties during the period of suspension.
2. Additional Provisions: Contains a variety of other emergency-relief provisions related to education, and specifically the impact of many students being sent home mid-semester. For example, it allows universities to make payments to students who were unable to complete work-study programs.

Small Business (less than 500 employees) Programs and Provisions

The Act will make available, through the Keeping American Workers Paid and Employed Act, $349 billion in Paycheck Protection Loans and an additional $10 billion for relief under an expanded version of the economic injury disaster loan program (EIDL Program).

Paycheck Protection Loan Program (PPP)

Through an expansion of the existing Small Business Administration’s (SBA) 7(a) small business loan guaranty program, PPP Loans will be made available to small businesses and other eligible recipients for the purpose of paying payroll costs, utilities, rents and certain existing debt service payments and will be 100% guaranteed by the US government. A portion of the Paycheck Protection Loan may be forgiven. Businesses that wish to obtain a Paycheck Protection Loan will need to confirm that they are a small business or other eligible recipient, use the proceeds for only authorized purposes and, assuming they wish to take advantage of loan forgiveness, determine how much of the Paycheck Protection Loan will be forgivable. Paycheck Protection Loans will be made by participating lending institutions approved by the SBA.

1. Paycheck Protection Loan Amount. The actual amount of any Paycheck Protection Loan (subject to a $10 million cap) will be determined by a formula based on the business’s average monthly Payroll Costs (defined below) during the 12-month period before the loan is made (adjusted for seasonal employees) multiplied by 2.5, plus the amount of any EIDL Loan (defined below) made after January 31, 2020 that is refinanced with the Paycheck Protection Loan. Notably, these calculations are made after excluding any compensation paid to any individual in excess of an annual salary of $100,000, as prorated for the covered period. The payroll can include W2 employees as well as 1099 contractors.
2. Use of Paycheck Protection Loan Proceeds. Paycheck Protection Loan proceeds are to be used for Payroll Costs (as defined below), mortgage interest (but not principal) payments and rent payments, utility payments, and interest (but not principal) payments on debt obligations incurred before February 15, 2020, as well as other uses currently allowed under the 7(a) Program.
3. Payroll Costs:
   • The loan proceeds can be used for employee compensation, consisting of the following (Payroll Costs):
     • salary, wage, commission or similar compensation (subject to a limit of $100,000 in wages paid per year (prorated for the covered period) paid to any employee and for payments to any independent contractor)
     • a cash tip or equivalent,
     • payment for vacation or parental, family, medical or sick leave,
     • allowance for dismissal or separation, and
     • payments for group healthcare benefits (including insurance premiums), retirement benefits, and state and local taxes assessed on employee compensation (prorated for the covered period) consisting of permitted wages, commissions, income, and net earnings from self-employment of sole proprietors or independent contractors.
4. Paycheck Protection Loan Eligibility:
   • Under the Paycheck Protection Loan program, eligible recipients include:
     • any business that meets the applicable small business size standard for the North American Industry Classification System (NAICS) industry code in which it operates,
     • individuals who operate under a sole proprietorship or as an independent contractor, or eligible self-employed individuals,
     • any other business, nonprofit organization, veteran organization or tribal business with 500 employees or fewer, or a higher employee head count for the industry as based on the entity’s NAICS code, if applicable, and
     • accommodation and food service businesses with more than 500 employees, but no more than 500 employees per physical location.
     • For recipients where eligibility is based on employee head count, the employee number includes any individual employed on a full-time, part-time or other basis. Under the SBA’s affiliation rules, when assessing eligibility, the employee head count or average annual receipts must include all of the entity’s foreign and domestic affiliates that have control or the power to control the business.
   • Loan Forgiveness. Borrowers may apply to their lender for forgiveness of Paycheck Protection Loans. The amount that may be forgiven will be equal to amounts from the loan used by the borrower during the eight-week period beginning on the date the loan is initially funded for the following:
     • Payroll Costs,
     • mortgage interest payments,
     • rent payments, and
     • utility payments.
   • The amount forgiven may not exceed the principal amount of the loan and will be reduced:
     • proportionately for any reduction in employees (by full-time equivalent) during the eight-week period following initial funding of the loan as compared to the average number of employees per month during the period of either (i) February 15, 2019 to June 30, 2019, or (ii) January 1, 2020 to February 29, 2020 (with adjustments for seasonal employers), and/or
     • by the amount of any reduction in total salary or total wages for employees who earned less than $100,000 in wages or salary during 2019 (with certain exceptions for rehired employees) during the eight-week period following initial funding of the loan, if such reduction is in excess of 25%.
   • Borrowers that rehire employees will not be penalized for having a reduced payroll. Specifically, the amount of loan forgiveness will not be reduced as a result of a reduction in employees or in wages and salaries that occurs between February 15, 2020 and 30 days after the enactment of the CARES Act, if the reduction is reversed by June 30, 2020. Any amounts forgiven under a Paycheck Protection Loan will be excluded from income for tax purposes.
5. Other Requirements to Obtain a Paycheck Protection Loan.
   • For Paycheck Protection Loans, the CARES Act waives the collateral and personal guarantee requirements and the requirement that recipients be unable to obtain credit elsewhere. However, eligible businesses will be required to make the following good faith certifications:
     • that the uncertainty of the current economic conditions makes the loan necessary to support ongoing operations,
     • that the funds will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments or utility payments, and
     • that it has not received a loan between February 15, 2020 and December 31, 2020 and does not have any other application pending for a loan for the same purpose.
   • Paycheck Protection Loan Terms. The key economic terms of Paycheck Protection Loans are
     • Interest Rate: The maximum interest rate on Paycheck Protection Loans will be 4%, and there will be no prepayment fee.
     • Fees: Borrower and lender fees in connection with participation in the Paycheck Protection Loan Program will be waived. There will be a cap on fees to agents that assist borrowers in loan preparation.
     • Principal and Interest Payments: Payment of principal, interest and fees will be deferred for six months and may be further deferred for up to one year.
     • Repayment: The maximum term of a Paycheck Protection Loan will be 10 years from the date on which the borrower applied for the loan.

Economic Injury Disaster Loan Program Expansion

The CARES Act also expands the SBA’s existing EIDL Program by relaxing the eligibility requirements under the program and increasing the funding available through December 31, 2020. Under the EIDL Program, the SBA offers loans (EIDL Loans) of up to $2 million for small businesses to recover from temporary losses following a statewide economic injury declaration, including losses they are experiencing due to the COVID-19 outbreak. EIDL Loans are not forgivable and are available to pay fixed debts, payroll, accounts payable and other bills that cannot be otherwise paid. Until December 31, 2020, the key provisions of the EIDL Program will be changed in the following ways:

1. EIDL Eligibility.
   • The eligibility requirements will be relaxed. Specifically, in addition to small businesses, entities eligible for an EIDL loan will be expanded to include:
     • private nonprofit organizations,
     • small agricultural cooperatives,
     • sole proprietorships, with or without employees, and independent contractors, and
     • any business, cooperative, employee stock ownership plan or tribal small business with not more than 500 employees.
   • Eligible businesses will be permitted to apply for an EIDL Loan if the business was in existence on January 31, 2020 and has suffered substantial economic injury as a direct result of COVID-19. The following requirements will be waived: (i) the personal guarantee for loans of not more than $200,000, (ii) that the business be in operation for at least a year prior to the COVID-19 outbreak and (iii) that the business or its affiliates be unable to obtain credit elsewhere.
2. Use of EIDL Loan Proceeds. EIDL Loan proceeds can only be used for certain purposes. Prior to the CARES Act, EIDL Loans could be used for working capital necessary until resumption of normal operations and expenditures necessary to alleviate economic injury, but not beyond that which the business could have provided had the injury not occurred. The CARES Act expands these uses to include paying sick leave to employees unable to work due to the direct effect of COVID-19; maintaining payroll to retain employees; meeting increased costs to obtain materials unavailable from the business’s original source because of supply chain issues, rent or mortgage payments; and repaying certain obligations that cannot be met due to revenue losses.
3. EIDL Loan Interest Rate. The maximum interest rate for EIDL Loans is 4%. However, for small businesses impacted by COVID-19, the interest rate will be 3.75% and for nonprofit organizations impacted by COVID-19, the interest rate will be 2.75%.
4. EIDL Grants. The CARES Act appropriates $10 billion for emergency EIDL Grants (as defined below). While a business’s application for an EIDL Loan is pending, the applicant may apply for a grant of up to $10,000 (EIDL Grant), which shall be paid within three days of application. Awarded EIDL Grants will not need to be repaid, even if the business’s application for an EIDL Loan is denied.
5. Interplay of EIDL with Paycheck Protection Program Loans. If a borrower has received an EIDL Loan unrelated to the COVID-19 outbreak, it may apply for a Paycheck Protection Loan due to COVID-19. Borrowers that have received an EIDL Loan in connection with the COVID-19 outbreak may not receive a Paycheck Protection Loan for the same purpose, but they may refinance their existing EIDL Loan with a Paycheck Protection Loan if they meet the eligibility requirements. EIDL Grants awarded under the EIDL Program would be subtracted from amounts ultimately forgiven under the Paycheck Protection Loan Program.

WHAT YOU SHOULD DO NOW

Any business that believes it could potentially benefit from the relief offered by the CARES Act should take steps now to prepare.

1. Determine eligibility. To determine eligibility, a potential applicant must first consider whether it falls within the definition of “small business concern” based on the head count or annual receipts thresholds for the entity’s NAICS code. If not eligible as a small business, an entity may still be eligible based on its employee head count. These eligibility assessments must include foreign and domestic affiliates except where waived for Paycheck Protection Loan applicants in the accommodation and food service industry, certain franchises, and recipients of SBIC financial assistance. In addition to determining whether your business falls within the eligibility criteria, confirm that you will be able to make the necessary certifications.
2. Select a lender. For purposes of the Paycheck Protection Loan Program, you will apply through an approved third-party lender. You should talk with your existing bank and/or lender to determine whether they are participating in the Paycheck Protection Loan Program. If not, you may find a participating lender by using the SBA’s online Lender Match tool available at https://www.sba.gov/funding-programs/loans/lender-match. For purposes of the EIDL Program, you will apply directly to the SBA. https://www.sba.gov/funding-programs/disaster-assistance
3. Prepare information. Prepare the financial and other information you will need to submit your loan application, including documentation needed to determine the amount of your loan.
4. Determine what to apply for. Given the forgiveness feature of a Paycheck Protection Loan, any business that is seeking relief should consider applying for such a loan. While working through the possibility of applying for, and receiving, a Paycheck Protection Loan, also consider whether to apply for an EIDL Loan and/or EIDL Grant, which could be refinanced by a subsequent Paycheck Protection Loan.

As of the date of this article, April 3rd is when applications open up for small businesses (S=Corp, LLC, C-Corp, etc) and sole proprietorships. April 10th is the date for independent contractors and the self-employed.

As you can imagine, this Act is extremely complex, and many of the government agencies haven’t issued their final guidelines and fine-print. Before deciding which program is right for you, please contact your CPA or us for more details and assistance.