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Legislative Update: Coronavirus Aid, Relief, and Economic Security Act $2 Trillion Stimulus

On Friday, March 27, 2020, the federal government passed a $2 trillion stimulus package designed to assist American families and businesses during this difficult time. In its 880 pages, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act provides several options to help small businesses, individuals and families get through the public health emergency brought on by the novel coronavirus and COVID-19. While the CARES Act is expansive, attorneys at Homesley & Wingo Law Group have scoured this law to provide the following summary of the CARES Act’s key provisions affecting small businesses, individuals, and families. Please note that the information contained below is subject to change as more developments emerge.

Keeping American Workers Paid and Employed Act

Paycheck Protection Program ("PPP") – Government-backed small business loans through the US Small Business Administration (“SBA”) that may be fully or partially forgiven after 8 weeks.

  • Eligibility – A business that was operational on February 15, 2020, and that had employees for whom it paid salaries and payroll taxes. The following entities are eligible for the loan program so long as they have 500 or fewer employees (whether full-time, part-time, or otherwise)
    • Small Businesses
    • 501(c)(3) Nonprofits
    • 501(c)(19) Veterans Organizations
    • Tribal Businesses
    • Sole proprietors, independent contractors, and other self-employed individuals – additional documentation required to prove one of these categories (i.e. payroll tax filings, Form 1099-MISC, and income and expenses of the sole proprietorship
    • More than one physical location – A business with more than 500 total employees in the Accommodation ((i.e. hotels, etc.) and Food Service (i.e. restaurants, etc.) industries may be eligible for a PPP loan if the business operates more than one physical location that employs 500 or fewer employees per physical location
    • Note: there is no requirement that an eligible business be shut down due to a COVID-19 related government order.
  • Covered Loan Period – February 15, 2020, through June 30, 2020
  • Loan proceeds may be used for the following
    • Payroll costs
      • Includes
        • Salaries (not in excess of $100,000), wages, commissions, or other similar compensation
        • Payment of cash tip or equivalent
        • Paid vacation, family leave, medical leave, parental leave, or sick leave
        • Allowance for dismissal or separation
        • Payments required for group health care benefits, including insurance premiums
        • Retirement benefits
        • State or Local taxes assessed on compensation
      • Does not include
        • Taxes imposed or withheld under chapters 21 (FICA taxes), 22 (Railroad Retirement taxes), or 24 (Income taxes) of the Internal Revenue Code
        • Compensation of an employee who resides outside of the US
        • Qualified sick leave subject to the tax credit under the Emergency Paid Sick Leave Act under of the Families First Coronavirus Response Act
        • Qualified family leave subject to the tax credit under the Emergency FMLA Expansion Act under of the Families First Coronavirus Response Act
    • Mortgage interest (not principal, incurred prior to February 15, 2020)
    • Rent payments (in force prior to February 15, 2020)
    • Utility payments (for which service began prior February 15, 2020)
    • Interest payments on debt incurred prior to obtaining the PPP loan (use of PPP loan proceeds for this purpose, while allowed may not be forgiven)
  • Certification Required – a business must certify that
    • the loan is necessary due to uncertainty of current economic conditions
    • the business will use the loan proceeds only for the authorized purposes
    • the business is not applying for and has not received duplicative funds from another SBA program for the same purpose
  • Crossover with Economic Injury Disaster Loans - A business may not obtain both a PPP loan and an Economic Injury Disaster Loan (“EIDL”) for the same purpose
    • Expanded access to EIDL loans are still available through the SBA in addition to the PPP loan program
      • Waiver of personal guarantee on COVID-19 related loans under $200,000 made prior to December 31, 2020
      • SBA may approve loans based solely on applicant's credit score or some alternative method
    • A business with a previous EIDL loan made after January 31, 2020, however, may also receive a PPP loan.
    • Additionally, a business may refinance the existing EIDL loan (made after January 31,2020 under the PPP loan program
    • Emergency EIDL Grants – Allows applicants for an EIDL to request and advance of up to to $10,000 on the sought loan
      • SBA must disbures within 3 days of the request
      • An Applicant is not required to repay any such advanced payment
  • Waivers of customary loan requirements
    • Waiver of SBA affiliation rules for certain industries or businesses (primarily in the Accommodations and Food Services industries)
    • Waives borrower and lender fees
    • Waives collateral and personal guarantee requirements
    • Waives prepayment fees for borrowers
  • Maximum Amount of Loan – 2.5 times the average monthly payroll costs incurred in the preceding year, capped at $10 million
    • Note – The maximum loan amount may differ for a seasonal business, a business with a previous outstanding SBA loan, or a new business that did not exist prior to June 30, 2019.
  • Maximum Interest Rate – 4%
  • Loan Payment Deferral – all payments deferred for 6 to 12 months. SBA will provide guidance on the deferral process.
  • Loan Forgiveness
    • PPP loans may be forgiven in an amount equal to the amount spent by the business (up to the principal amount of the loan) during an 8-week period after the origination date of the loan for covered expenses listed above. Forgiveness on a covered loan is equal to the sum of the payroll costs incurred during the covered 8-week period compared to the previous year or time period, proportionate to maintaining employees and wages:
      • Payroll costs plus mortgage interest payments (not including any prepayment or principal) plus rent payments plus utility payments.
      • Reduction of the forgiven amount will be made proportionally for
        • any reduction in employees retained compared to the prior year
        • any reduction in pay of any employee beyond 25 percent of their prior-year compensation.
    • As an incentive to rehire employees laid off due to COVID-19, no penalty or reduction will be assessed if the business re-hires workers previously laid off at the beginning of the period.
      • Allows forgiveness for additional wages paid to tipped workers.
      • Borrowers will verify through documentation to lenders their payments during the period.
      • Canceled indebtedness resulting from this section will not be included in the borrower’s taxable income.
      • Any loan amounts not forgiven at the end of one year is carried forward as an ongoing loan with a maximum maturity term of 10 years, at a maximum interest rate of 4%. The 100% loan guarantee remains intact.
    • In the case of a COVID-19 related EIDL loan made after January 31, 2020, being refinanced as a PPP loan, any amount of advanced payment under the Emergency EIDL Grant program will reduce the amount forgiven by that amount

Bankruptcy Law Changes (Sunset after 1 year)

  • Chapters 7 – excludes COVID-19 related payments received from the federal government from being treated as income for the purpose of filing bankruptcy
  • Chapter 11 - Increases the eligibility threshold to allow businesses with less than $7.5 million of debt (after 1 year, the threshold reverts to $2,725,625)
  • Chapter 13
    • excludes COVID-19 related payments received from the federal government from being treated as income for the purpose of filing bankruptcy
    • permits individuals and families currently in chapter 13 to seek material financial hardship modifications to their payment plans

Assistance for American Workers, Families, and Businesses

Relief for Workers Affected by Coronavirus Act – creates temporary (through December 31, 2020 Pandemic Unemployment Assistance (“PUA”) program expanding unemployment benefits to those not traditionally eligible for such benefits.

  • Emergency increase in Unemployment Benefits – provides an additional $600 per week to recipients of unemployment insurance or PUA for up to 4 months
  • Provides an additional 13 weeks of unemployment benefit (through December 31, 2020) for those who remain unemployed after the public health emergency terminates
  • Short Time Compensation – provides funding to States to run or being “short-time compensation” programs where employees, facing a reduction of hours in lieu of being laid off, receive pro-rated unemployment benefits

Individual Programs

Rebates – provides a rebate of $1,200 ($2,400 total to married couples) to each U.S. Resident plus an additional $500 rebate per child

  • Eligibility
    • The individual is not a dependent of another taxpayer
    • The individual has a work-eligible social security number
  • Phase-out
    • Adjusted gross income of $75,000 or less – individual receives full rebate
    • Reduction – the rebate is reduced by $5 for every $100 in excess of and adjusted gross income of $75,000
    • Completely phases out as and adjusted gross income of
      • Single Filers – $99,000
      • Head of Household with one child – $146,500
      • Joint Filers – $198,000

Special Rules for Retirement Funds

  • Coronavirus-related definition
    • The individual has been diagnosed with COVID-19
    • The Individual’s spouse or dependent has been diagnosed with COVID-19
    • The individual experiences adverse financial consequences related t COVID-19
      • Quarantined
      • Furloughed
      • Laid off
      • Reduction in work hours
      • Unable to work due to lack of childcare
      • Closing/reduction in hours of business owned/operated by individual
      • Other factors as determined by the secretary of the treasury
  • Waives the 10% penalty for distributions up to $1000,000 from qualified retirement accounts for coronavirus-related purposes on or after January 1, 2020.
    • Income attributable to such distribution is subject to tax over 3 years
    • Funds may be recontributed to an eligible retirement plan within 3 years regardless of that year’s contribution cap.
    • Also provides flexibility for coronavirus-related loans from certain retirement plans
  • Temporary waiver of required minimum distribution rules for certain defined contribution plans and IRA for calendar year 2020

2020 Charitable Tax Deduction changes

  • Partial “Above the Line” Deduction for Charitable Contributions – provides a tax deduction of up to 300 for cash contributions to churches or other charitable organizations made in 2020 regardless of whether the taxpayer itemizes deductions.
  • Increases limitations on charitable deductions for individuals who itemize deductions and for corporations
    • Individuals – the 50% of adjusted gross income limitation is suspended
    • Corporations – limitation increased to 25% of taxable income
  • Increases limitations on the Food Inventory deductions to 25%

Employer Payments of Student Loans – an employer may contribute up to $5,250 annually toward an employee’s student loans.

  • Such payments are excluded from the employee’s income
  • The cap applies to new student loan repayment benefits as well as other educational benefits under current law
  • Only applies through December 31, 2020

Business Provisions

Employee Retention Credit – provides a refundable payroll tax credit for businesses subject to closure due to COVID-19.

  • Amount of Credit – up to 50% of the qualified wages paid to employees
  • Eligibility – the credit is available to employers whose
    • Operations were fully or partially suspended due to a COVID-19-related shutdown order
    • Gross receipts declined by more than 50% as compared to the same quarter in the prior year
    • The employer did not take out a PPP loan as described more fully above
  • Qualified Wages
    • Employers of more than 100 employees – wages paid to employees when they are not provided services to the COVID-19-related circumstances above
    • Employers of 100 or fewer employees – all employee wages regardless of whether the business is open for business or subject to a shut-down order
  • Cap – qualified wages for each employee may not exceed $10,000 in all calendar quarters
  • Applies to wages paid/incurred between March 13, 2020, and December 31, 2020.

Employer Payroll Tax Deferral – Allows employers to defer the employer portion of payroll taxes for up to two years with half being due by December 31, 2021, and the remaining portion due by December 31, 2022.

Net Operating Loss Limitations Modification – removes the taxable income limitation and allows net operating losses (“NOL”) arising in 2018, 2019, or 2020 to be carried back 5 years. Businesses can utilize losses and amend prior-year tax returns to assist with liquidity and cash flow issues.

Limitation on Losses for Taxpayers Other Than Corporations Modification – modifies the loss limitation applicable to pass-through businesses and sole proprietors, so they can utilize excess business losses and access critical cash flow to maintain operations and payroll for their employees.

Credit for Prior Year Minimum Tax Liability of Corporations Acceleration - accelerates the ability of companies to recover those AMT credits, permitting companies to claim a refund now and obtain additional cash flow during the COVID-19 emergency.

Limitation on Business Interest Increase – temporarily increases the amount of interest expense businesses are allowed to deduct on their tax returns to 50% of taxable income (with adjustments) for 2019 and 2020. As businesses look to weather the storm of the current crisis, this provision will allow them to increase liquidity with a reduced cost of capital, so that they are able to continue operations and keep employees on payroll.

Qualified Improvement Property Amendment – enables businesses, especially in the hospitality industry, to write off immediately costs associated with improving facilities instead of having to depreciate those improvements over the 39-year life of the building.

Temporary Exception from Excise Tax for Alcohol Used in Hand Sanitizer – waives the federal excise tax on any 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 and is effective for calendar year 2020.

Coronavirus Economic Stabilization Act of 2020 ("CESA")

  • Provides additional loans and emergency relief/protections for businesses not otherwise receiving adequate economic relief (i.e. loans, loan guarantees, etc.) provided for in the CARES Act
  • Eligible Business – a US business that has not otherwise received adequate economic relief in the form of loans or loan guarantees provided under the CARES Act.
  • Direct Lending Criteria
    • Alternative financing is not reasonably available to the business;
    • The loan is sufficiently secured or made at an interest rate that reflects the risk of the loan and, if possible, not less than an interest rate based on market conditions for comparable obligations before the coronavirus outbreak;
    • The duration of the loan shall be as short as possible and shall not exceed 5 years;
    • Borrowers and their affiliates cannot engage in stock buybacks, unless contractually obligated, or pay dividends until the loan is no longer outstanding or one year after the date of the loan;
    • Borrowers must, until September 30, 2020, maintain its employment levels as of March 24, 2020, to the extent practicable, and retain no less than 90 percent of its employees as of that date;
    • A borrower must certify that it is a U.S.-domiciled business and its employees are predominantly located in the U.S.;
    • The loan cannot be forgiven; and
    • In the case of borrowers critical to national security, their operations are jeopardized by losses related to the coronavirus pandemic.
  • Verification required – each participant is not insolvent and is unable to obtain adequate financing elsewhere. Loan forgiveness is not permissible in any such credit facility.
  • Loans to nonprofits and businesses with between 500 and 10,000 employees are subject to additional criteria and obligations
    • must retain at least 90 percent of the workforce, with full compensation and benefits, through September 30, 2020;
    • will not outsource or offshore jobs for the term of the loan plus an additional two years;
    • will not abrogate existing collective bargaining agreements for the term of the loan plus an additional two years; and
    • must remain neutral in any union organizing effort for the term of the loan.
  • Limitation on Certain Employee Compensation
    • prohibits recipients increasing the compensation of any officer or employee whose total compensation exceeds $425,000,
    • prohibits offering such employees severance pay or other benefits upon termination of employment which exceeds twice the maximum total annual compensation received by that employee, until one year after the loan is no longer outstanding.
    • Officers or employees making over $3 million in 2019 would also be prohibited from earning more than $3 million plus 50% of the amount their 2019 compensation exceeded $3 Million.
  • Termination of Authority – All authority to make new loans, loan guarantees, or other investments provided under the CESA shall terminate on December 31, 2020. The duration of all loans under the CESA shall not exceed five years.

Credit Protection During COVID-19 – provides credit reporting protection for certain consumers affected by COVID-19 for the period beginning January 31, 2020, and ending at the later of 120 days after enactment or 120 days after the date the national emergency declaration related to the coronavirus is terminated.

Foreclosure Moratorium and Consumer Right to Request Forbearance – prohibits foreclosures on all federally-backed mortgage loans for a 60-day period beginning on March 18, 2020, and provides up to 180 days of forbearance for borrowers of a federally-backed mortgage loan who have experienced a financial hardship related to the COVID-19 emergency. This provision terminates on the earlier of the termination date of the national emergency concerning the coronavirus or December 31, 2020.

Forbearance of Residential Mortgage Loan Payments for Multifamily Properties with Federally Backed Loans – Provides up to 90 days of forbearance for multifamily borrowers with a federally backed multifamily mortgage loan who have experienced a financial hardship. Borrowers receiving forbearance may not evict or charge late fees to tenants for the duration of the forbearance period. This provision terminates on the earlier of the termination date of the national emergency concerning the coronavirus or December 31, 2020.

Temporary Moratorium on Eviction Filings – For 120 days beginning on the date of enactment, landlords are prohibited from initiating legal action to recover possession of a rental unit or to charge fees, penalties, or other charges to the tenant related to such nonpayment of rent where the landlord’s mortgage on that property is federally insured, guaranteed, supplemented, protected, or assisted in any.

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DISCLOSURE: This legislative update, drafted by attorneys at Homesley & Wingo Law Group PLLC, is only intended to be a summary of recently passed legislation in a legal environment that is subject to change daily. Accordingly, this summary is not intended to be a full explanation of the law, nor should it be considered legal advice. For a more detailed explanation of how these or other legislative changes may affect your business, contact your attorney.