On March 27, 2020, President Donald Trump signed the Coronavirus Aid, Relief and Economic Security (CARES) Act, a historic piece of legislation intended as a measure in response to the coronavirus pandemic and its effect on businesses of all sizes. The legislation includes a payroll tax credit and expansion of unemployment benefits for workers impacted by the outbreak while also extending eligibility. Notably for some business owners and executives, the legislation will allow small- and medium-sized businesses to receive federal loans to cover payroll and other expenses—including some loans that may ultimately be forgiven.
We have identified key provisions of interest to employers of all sizes, and have analyzed these below.
The most significant provision of the CARES Act for employers establishes new “paycheck protection” loans administered by the Small Business Administration (SBA) to help employers continue to cover payroll costs and other expenses during the COVID-19 crisis. The covered period for loans is February 15, 2020 through June 30, 2020.
To be eligible, businesses and entities must have been in operation on February 15, 2020.
Further eligibility guidelines are as follows:
Note: Affiliation rules are also waived for any business concern operating as a franchise that is assigned a franchise identifier code by the Administration, and company that receives funding through a Small Business Investment Company. Affiliation rules become important when the SBA is deciding whether a business’s affiliations preclude them from being considered “small.” Generally, affiliation exists when one business controls or has the power to control another or when a third party (or parties) controls or has the power to control both businesses.
The SBA determines affiliation based on stock ownership pursuant to 13 C.F.R. § 121.103(c) as follows:
Example: Company A owns Companies B, C and D (54.5 percent, 81 percent and 60 percent, respectively). Company A has the power to control Companies B, C and D. The companies are all affiliated. The receipts and/or number of employees of all four companies will be aggregated in determining the size of any one of them.
Loan Size and Scope
Loan amounts will be available based on a formula. The amounts available will be the lesser of average 2.5-times monthly payroll costs during the prior year or $10 million.
Restrictions on Use
Businesses may apply loans secured under this provision of the act for payroll costs, healthcare, rent, utilities, and other debts incurred by the business. Note that the definition of “payroll” costs excludes leave payments made pursuant to the FFCRA.
The federal government will forgive the loans in an amount equal to the amount of qualifying costs spent during an eight-week period after the origination of the loan. These qualifying costs include payroll costs (except of wages above $100,000 per employee), interest on secured debt obligations, and rent and utilities in place prior to February 2020.
Note: The amount of the forgiveness for the loans will be reduced if the employer reduces its workforce during the eight-week period compared to prior periods or reduces the salary or wages paid to an employee by more than 25 percent during the eight-week period (compared to the most recent quarter).
If the employer re-hires all employees laid off (going back to February 15, 2020), or increased their previously reduced wages, no later than June 20, 2020, the employer can eliminate any reduction in loan forgiveness.
The CARES Act expands unemployment assistance by creating a Pandemic Unemployment Assistance program applying to weeks of unemployment, partial unemployment, or inability to work caused by COVID-19 between January 27 and December 31, 2020. The Act provides covered individuals with unemployment benefit assistance when they are not entitled to any other unemployment compensation or waiting period credit. The weekly benefit amount will be the amount determined under state law plus $600 until July 31, 2020. The act also expands the maximum entitlement from 26 weeks (the maximum in most states) to 39 weeks.
Expanded Coverage and Eligibility
For eligibility, individuals must self-certify that they are otherwise able to work and available to work but are currently unemployed, partially unemployed, or unable to work for one or more of the following reasons:
The Act also expands unemployment to cover those who traditionally are not eligible to receive such benefits. Specifically, this provision also covers individuals who are:
However, the act excludes those who would otherwise be a covered individual if they have the ability to telework with pay or if they receive paid sick leave or other paid leave benefits.
The act does provide additional flexibility to the “actively seeking work” requirement in cases where the individual is unable to search for work due to COVID-19, whether due to illness, quarantine, or movement restriction.
Funding, Incentives, and Direction to States
The federal government will be offering various grants and funding to states to facilitate these expanded unemployment benefits. The act also incentivizes states to provide compensation without any waiting period. Similarly, the act amends the Railroad Unemployment Insurance Act, waiving its seven-day waiting period and enhancing benefits.
Any employer whose business was fully or partially suspended in 2020 due to government orders associated with COVID-19 or that experienced a significant decline in gross receipts (or that is a tax-exempt organization) may be eligible to receive this refundable employment tax credit. A significant decline in gross receipts is generally established when a business’s gross receipts in a calendar quarter in 2020 are less than 50 percent of the gross receipts of the same calendar quarter in 2019.
The tax credit is provided for the first $10,000 of qualified wages paid to an eligible employee, which may include the employer’s contribution to the employees’ health insurance costs but will exclude any amounts that the employer already received a tax credit for under the Emergency Paid Sick Leave Act (EPSLA) and Emergency Paid Family and Medical Leave Expansion Act (E-FMLEA). For employers with more than 100 full-time employees, “qualified wages” will be further limited to wages paid to employees when they are not providing services due to the reasons specified above. For employers with 100 or fewer employees, employee wages may qualify for the credit, whether the employer is open for business or subject to a shut-down order.
Employers ordinarily have to pay certain employment taxes—known as Federal Insurance Contributions Act (FICA) taxes—with respect to their employees. The employer is responsible for paying its share (6.2 percent) of social security taxes and its share (1.45 percent) of Medicare taxes for each employee’s covered wages (separate from withheld amounts covering the employee’s portion of each and separate from ordinary income tax withholding), generally depositing such amounts to the U.S. Treasury electronically either semi-weekly or monthly.
The CARES Act will allow employers (and self-employed individuals) to defer paying their portion of the social security payroll tax (6.2 percent) otherwise due, effective from the moment President Trump signed the legislation through December 31, 2020. Employers will ultimately have to pay these amounts over to the U.S. Treasury in two installments. Half of the deferred amount of payroll taxes from 2020 will be due December 31, 2021, with the remaining half due December 31, 2022. The Social Security Trust Fund will be held harmless by way of transfers from the general fund, as if the payroll tax payments were never deferred.
However, employers who received Small Business Act loans that were forgiven under the CARES Act (so that the Federal government effectively gave them cash—that they did not have to pay back—to fund as much as eight weeks of their payroll costs) are not eligible for this payroll tax deferral.
While companies in a loss position at the end of the tax year used to be allowed to carry back those losses to offset prior year income (resulting in a refund—and a cash infusion—to the company) for the prior two years, the Tax Cuts and Jobs Act (TCJA) from 2017 changed the law so that such losses could not be carried back at all. The last time that there was a recession (2008–09), lawmakers decided to give most companies the ability to carry back and deduct their losses over the prior five years.
The CARES Act similarly allows any NOL arising in tax years 2018 through 2020 to be carried back to each of the five taxable years preceding the loss year. Companies with unused losses arising in 2018, 2019, or 2020 that paid tax in one or more of the five preceding tax years will be able to immediately file amended returns seeking a refund of taxes paid, which can help such companies make payroll and rent.
The legislation includes special NOL carryback rules for real estate investment trusts (REITs) and life insurance companies and rules regarding the interaction of the NOL carryback provision with the Section 965 deemed repatriation tax.
Since 2018, companies have not been allowed to use NOLs to zero out their taxable income. Specifically, for any losses arising in 2018 or later, the NOL deduction could not exceed 80 percent of taxable income, increasing the chances that a corporation would have to pay taxes.
The CARES Act temporarily repeals this limitation for tax years 2018 through 2020, allowing taxpayers to claim the full NOL deduction (including the carryback described above), effectively undoing the TCJA change (and providing a potential cash infusion in cases where companies can amend prior year returns to claim the full deduction, giving rise to a refund). However, the 80 percent limit returns beginning in 2021.
Under current law, a corporation is only allowed to deduct the interest expense it pays on its loans to the extent the amount does not exceed 30 percent of the company’s “adjusted taxable income” (which is comparable to earnings before interest, taxes, depreciation and amortization (EBITDA)). This limit, which was imposed by TCJA, has been widely criticized by firms, especially those that are highly leveraged.
The CARES Act will increase the limit to 50 percent of the company’s adjusted taxable income just for 2019 and 2020. However, it will also allow corporations to elect to use their 2019 adjusted taxable income for 2020, ensuring that even though their earnings may be harmed by the COVID-19 outbreak, their otherwise increased business interest deduction will not be.
Corporations are no longer subject to the alternative minimum tax (AMT), as it was repealed for such taxpayers by TCJA. Any AMT credits that a company generated pre-TCJA and otherwise had available to carry forward were refundable in 2018 through 2022, with the amount limited in each year to (essentially) 50 percent of the remainder. For instance, a $20 million AMT credit generated pre-TCJA might generate a $10 million refund in 2018, a $5 million refund in 2019, a $2.5 million refund in 2020, a $1.25 million refund in 2021 and a $1.25 million refund in 2022.
The CARES Act modifies the refundable credit so that corporations will take the entire amount in 2018 and 2019 (so, in the example above, a $10 million refund in 2018 and a $10 million refund in 2019). Further, corporations that prefer to can elect to take the entire amount in 2018.
The legislation specifies that, exclusively for purposes of the refundable AMT credit, a taxpayer may file an application for a tentative refund with the Internal Revenue Service (IRS), which then must review the application and, if appropriate, issue the related refund within 90 days. A tentative refund would likely be paid out before any necessary review by the Joint Committee on Taxation, as such reviews are required for large ($5 million or more) corporate refunds and can take weeks.
When Congress enacted TCJA at the end of 2017, it wanted to expand the availability of expensing. Expensing (which, in this case, is really 100 percent bonus depreciation) generally allows a business to immediately write off (deduct) the cost of certain purchases. Congress wanted to make expensing available not only for investments in equipment and other capital assets, but also for improvements made to commercial property (so that retail establishments, including restaurants and others businesses in the hospitality industry, could benefit).
Unfortunately, due to a drafting error, improvements to the interior of a non-residential building (so-called qualified improvement property or QIP, which potentially includes certain structural components of the building) were not actually eligible for expensing because their recovery period was set at the 39-year ordinary life of a building instead of the intended 15 years (as only property with a recovery period of 20 years or less is eligible for bonus depreciation).
The CARES Act fixes this technical drafting glitch effective retroactively to property placed in service in 2018 and beyond. Lawmakers are not only hoping this change will increase companies’ cash flow by allowing them to amend a prior year return and receive a refund, but also hope it will incentivize firms to invest in improvements to help stimulate economic activity.
For businesses that have a wide-scale impact on the economy, the act also offers financial relief through loans with favorable interest rates for “eligible business[es]” with 500-10,000 employees. The act specifies certain industries such as the airline industry as well as certain financial institutions as “eligible business[es],” it is unclear what other businesses may qualify for financial assistance. Applications will be available within 10 days of the act. For employers, relevant conditions of the loans include:
The CARES Act also makes several changes to the recently enacted Families First Coronavirus Response Act (FFCRA). Most employers are already familiar with the provisions of that law, which establishes new paid leave requirements as part of new E-PSLA and E-FMLEA requirements. The U.S. Department of Labor (DOL) recently announced that those new leave requirements will go into effect on April 1, 2020. Most of the changes to the FFCRA are technical and clarifying in nature.
However, the CARES Act adds new language to the E-FMLEA to address leave entitlement under that provision for “rehired employees.” The new language states that for purposes of the E-FMLEA, the term “employed for at least 30 calendar days” includes an employee who was laid off on or after March 1, 2020, had worked for the employer for not less than 30 of the last 60 calendar days prior to their layoff, and was rehired. Essentially, this provides that rehired employees who meet those criteria will be eligible for E-FMLEA without having to “restart the clock” on the 30-day requirement.
The CARES Act also includes language facilitating the ability of employers to obtain an “advance” refunding of tax credits by withholding employment tax deposits (and not being penalized for doing so). The IRS recently announced that it would be issuing guidance on this point to help employers manage cash-flow challenges associated with the new leave requirements.
It appears that in many instances, the applicability of provisions in the CARES Act turn on the Tax Code and/or definitions promulgated by the Small Business Administration. Accordingly, we would recommend that employers consult with a CPA and/or tax consultant to confirm eligibility for these programs. Additionally, it is important to note that the law and legal guidance in connection with COVID-19 is evolving rapidly, which could affect this analysis.
For more information or further guidance, contact: