The CARES Act
Insight Melinda Fellner Bramwit · John R. Mussman · Jill Haley Penwarden · Juan Zuniga · Phillip Wang · March 30, 2020
On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. The CARES stimulus package provides $2.2 trillion in emergency assistance to those impacted by the novel coronavirus. What follows is a brief description of the major provisions so that you may be aware of what is available to you in this difficult time. Of course, we are available to assist you in any capacity should you have more questions.
BUSINESS TAX RELIEF:
Employee retention credit
CARES grants a credit to eligible employers against employment tax in the amount of 50 percent of qualified wages paid to employees who are not working because of the employer’s full or partial cessation of business or a significant decline in gross receipts. The amount of wages for which the credit can be claimed is limited to $10,000 in the aggregate per employee for all quarters claimed. The provision also contains several important defined terms which must be met.
Payroll tax deferral
The act defers the payment of payroll tax for any amounts due from the period beginning March 27, 2020, and ending December 31, 2020. Half of these deferred payments will be due December 31, 2021, and the other half will be due December 31, 2022. The 6.2% old-age survivors and disability tax (“OASDI”) incurred by employers and 50% of the payroll tax incurred by self-employed persons qualify for this deferral.
Qualified improvement property
The law prior to CARES contained a “retail glitch” where, in general, taxpayers had to depreciate qualified improvement property over a period of 39 years and did not qualify for bonus depreciation. CARES now clarifies that qualified improvement property is 15-year property, allowing 100 percent of improvements to be deducted in the year incurred. This change is effective for property acquired and placed in service after September 27, 2017.
Net operating losses
The new law allows for a five-year carryback of net operating losses (“NOLs”) arising in 2018, 2019 and 2020 for corporations. Loss limit rules applicable to pass-through entities and sole proprietors have also been eliminated so these taxpayers can take advantage of this carryback.
Business interest expense
Under pre-CARES law, the interest expense deduction was limited to the amount of interest income plus 30% of adjusted taxable income for the year. This has now been increased to 50% for 2019 and 2020.
INDIVIDUAL TAX RELIEF:
Subject to phaseout amounts and other certain requirements, individual adult taxpayers will receive $1200 ($2400 for joint filers) with a $500 credit for each child in the form of a rebate as advance refunds of credits against 2020 taxes. This phaseout is gradually based on a threshold amount and completely phased out for single filers generally with adjusted gross income over $99,000 and joint filers with adjusted gross income over $198,000.
Retirement plan relief
The CARES Act waives the 10 percent penalty typically imposed on early withdrawals up to $100,000 from qualified retirement plans when the distribution is taken related to coronavirus. Moreover, all required minimum distributions for 2020 are waived regardless of whether related to coronavirus.
There are tax incentives for making charitable contributions in 2020 in the form of an above-the-line deduction up to $300 for individuals and an increase in the percent of adjusted gross income (“AGI”) limitations for all taxpayers for charitable contributions (e.g. for corporations the deduction was limited to 10% of AGI now it will be limited to 25%.)
Student loans paid by employers
Subject to certain requirements, students may exclude up to $5250 from income for amounts paid by their employer on their behalf for their education loans.
Small Business Administration (SBA)
The CARES Act provides relief targeted to “small business concerns” under the Small Business Act (the “Act”) as administered by the Small Business Administration (“SBA”). Among other matters, the CARES Act allocates $349 billion for special SBA Loans which may be converted to grants, $10 billion in additional funds to the SBA’s existing Economic Injury Disaster Loan Program, $17 billion in additional subsidies for payments under existing SBA loans and $675 million to the SBA to set up and support such programs. These various programs are specifically geared to assist “small businesses concerns”, including non-profit corporations which qualify for tax-exempt status under 501(c)(3) of the Internal Revenue Code, and, in some cases, sole proprietors and independent contractors.
The most salient features of how the CARES Act is intended to provide relief to small businesses include:
PAYCHECK PROTECTION PROGRAM:
The CARES Act establishes a new program called the Paycheck Protection Program (“PPP”) under Section 7(a) of the Act designed to allow small businesses to qualify for loans to cover the costs of payroll, rent, utilities and general working capital which the small business concern can’t otherwise cover because of the uncertain economic conditions resulting from the coronavirus pandemic. Key elements of the PPP include:
- PPP loans are limited to the covered period from February 15, 2020 and ending on June 30, 2020;
- Persons and entities eligible for PPP loans are the same as those that qualify for regular Section 7(a) loans under the Act (including 501(c)(3) non-profits). However, eligibility has been expanded to also include businesses with up to 500 employees, sole proprietors, independent contractors and self-employed individuals;
- The maximum loan amount available is $10,000,000;
- Interest on PPP loans cannot exceed 4% annually;
- PPP loans are non-recourse and no collateral is required;
- PPP loans can be used to pay for payroll costs, employee salaries and commissions (but not to exceed $100,000 on an annualized basis), benefits, mortgage interest, rent, utilities and other pre-existing debt obligations. For sole proprietors and independent contractors, payroll costs include personal earnings from self-employment capped at $100,000 on an annualized basis.
- Borrowers must have been in business prior to February 20, 2020, and had employees or paid independent contractors during this period;
- PPP loans can be used to refinance disaster loans under Section 7(b)(2) of the Act obtained between January 31, 2020, and February 15, 2020;
- PPP loans have a maximum term of 10 years;
- Repayment of PPP loans is deferred for an initial period of between 6 and 12 months from loan origination.
Perhaps the most important element of the new PPP loan program is that all or most loans can be forgiven and converted to grants. If a borrower uses proceeds from a PPP loan to cover payroll costs, mortgage interest, rent or utilities during the first eight-week period following the origination of the loan, such amounts are eligible for forgiveness and need not be repaid. Forgiveness of payroll costs may be reduced if the borrower has laid off employees or reduced salaries during the covered period as compared to its historical payroll expenses.
Because the CARES Act establishes the PPP loan program under Section 7(a) of the Act, applications would likely be governed by the general rules and procedures applicable to other 7(a) SBA Loans, however, the application process for PPP loans is not yet available on the SBA website.
EMERGENCY EIDL GRANTS:
The Economic Injury Disaster Loan (“EIDL”) Program is presently codified under Section 7(b) of the Act and is available to small business concerns (including certain non-profit organizations) if the applicant has suffered substantial economic injury as a result of a disaster, including most commonly defined natural disasters, riots, civil disorders and other catastrophes. Notably, “disaster” does not include economic dislocations. Prior to passage of the CARES Act, the SBA has been accepting loan applications due to coronavirus.
The CARES Act expands the EIDL Program by creating emergency EIDL grants in connection with the effects of COVID-19 on small business concerns. Salient provisions of the CARES Act related to EIDL loans include:
- Eligible businesses, including non-profits, must have not more than 500 employees and may include sole proprietorships (wit or without employees) and independent contractors;
- Personal guaranty requirements for EIDL loans of more than $200,000 are waived;
- Approvals of loans may be expedited by relying on the borrower’s credit score instead of tax returns;
- Advances of EIDL loan proceeds of up to $10,000 within 3 days of submission of the EIDL loan application;
- Such advances of EIDL loan proceeds may be used to pay sick leave to employees affected by COVID-19, maintain regular payroll during business disruptions, meet increasing supply chain costs, pay rent or mortgage and repay pre-existing obligations that can’t be met due to revenue losses;
- Such advances need not be repaid, even if the EIDL loan application is subsequently denied;
- This grant program expires on December 31, 2020.
Application for EIDL loan can be found at the SBA’s website: https://www.sba.gov/disaster/apply-for-disaster-loan/index.html
SUBSIDIES FOR CERTAIN LOAN PAYMENTS:
The CARES Act also provides that certain payments of interest and principal under existing 7(a) loans will be paid by the SBA. Such payments apply to 7(a) loans with the following conditions:
- Made by an intermediary pursuant to microloan program which averages less than $10,000;
- Loans must be in regular servicing status;
- Payments will be for 6 months.
For more information about SBA Section 7(a) loans, see: https://www.sba.gov/partners/lenders/7a-loan-program/types-7a-loans
In addition to providing emergency assistance and health care response for individuals, families, and businesses affected by the 2020 coronavirus pandemic, the CARES Act makes some important changes to various provisions of the United States Bankruptcy Code, including importantly, the Small Business Reorganization Act (SBRA) which became effective in February. The SBRA created a new subchapter under Chapter 11 (business reorganization) of the United States Bankruptcy Code that is commonly referred to as Subchapter 5, which aims to give small businesses a faster and less expensive option for reorganizing under Chapter 11. Under the SBRA, a business qualifies to file a case under Subchapter 5 if its debts are in the amount of $2,725,625 or less.
Section 1113 of the CARES Act increases the debt limit from $2,725,625 to $7.5 million. As a result, the CARES Act will allow many more businesses that may benefit from a Chapter 11 reorganization to take advantage of the new Subchapter provisions, including the more relaxed requirements for confirming a plan of reorganization. The impact of this change significantly increases the number of small businesses that should consider Chapter 11 reorganization as part of their plans to recover from the COVID-19 pandemic.
The CARES Act makes some more minor adjustments to Chapter 7 (liquidation) and Chapter 13 (wage earner bankruptcy) of the United States Bankruptcy Code. Under the CARES Act, payments made to the debtor pursuant to the CARES Act are excluded from being treated as income under the means test calculation that determines a debtor’s eligibility to file a Chapter 7 bankruptcy case, and from the calculation of disposable income that is conducted for the purposes of determining whether a Chapter 13 plan of reorganization may be confirmed. Also, Chapter 13 debtors with plans that have already been confirmed are permitted to modify them based on a material financial hardship related to the coronavirus pandemic, including extending payments under the plan for up to seven years after the initial plan payment was due.
All of these changes are applicable for one year after the CARES Act becomes effective.
Virtually every business is suffering losses due to the coronavirus pandemic, and many are looking to their insurance policies in hopes of relief. Whether coverage will be available will depend on the types of policies in place, as well as the specific coverage wording and exclusions to each policy. Every insurance policy is different, and policyholders will need to review their policies carefully to determine if any coverage is available. The following is a summary of some of the types of coverage that may be available and a discussion of some of the common policy provisions.
Event Cancellation Coverage
If your company had to cancel or postpone an event due to the pandemic, Event Cancellation or Non-Appearance policies may cover your losses. These policies’ wording varies widely, and coverage may depend on whether the insured voluntarily canceled or postponed the event (due to fear of coronavirus transmission or lack of attendance) or whether, for example, government orders required the event to be canceled or postponed.
In addition, many event policies contain standard exclusions for loss or damage caused by or resulting from a virus or bacteria. Some policies may contain an exclusion for communicable diseases and associated quarantines and travel restrictions. In addition, many event policies which were issued after the virus emerged and began to spread in mid-December 2019 contain specific language excluding coverage for any losses associated with the coronavirus pandemic. The existence of any or all of these exclusions may be a barrier to coverage.
Communicable Disease Coverage
Communicable Disease coverage is often purchased with a Commercial Property policy. These policies provide coverage for loss of business income sustained as a result of business operations shutting down or being suspended by a government order, as a result of an outbreak of disease at the insured premises. Many policies contain an expansive definition of “communicable disease” that may be interpreted to include COVID-19, the disease caused by coronavirus. Clean up and public relations costs may be covered as well. These policies commonly impose lower sub-limits on coverage.
Business Interruption Coverage
Business Interruption coverage is commonly purchased with a Commercial Property policy. Several provisions may impact whether business losses are covered.
Many policies provide that the insurer will pay for losses due to a suspension of operations caused by “direct physical loss or damage” to insured property. Business Interruption policies may also provide coverage for the costs of decontaminating property, if necessary. The question arises whether viral contamination (or fear of contamination) constitutes “physical loss or damage,” especially if the insured does not have proof of the presence of viral contamination. Under other circumstances, some state courts have held that the inability to use an insured property due to a contaminant could be sufficient to constitute “physical loss or damage” as defined in an insurance policy.
Whether the inability to use property due to the current pandemic, including loss of use due to feared, potential, or actual contamination, constitutes “physical loss or damage” and therefore triggers coverage will undoubtedly be the subject of a great deal of dispute between insurers and policyholders. In fact, policyholders in Louisiana and California have already filed lawsuits in March 2020 asking the courts to provide guidance as to the scope of coverage for coronavirus-related losses to hospitality businesses.
Contingent Business Interruption Coverage
Contingent Business Interruption coverage may cover the policyholder’s lost profits resulting from supply chain disruptions. Again, these policies often require “direct physical loss or damage” to the insured’s suppliers’ or customers’ property, and may be subject to exclusions for virus or communicable disease.
Civil Authority Coverage
Commercial Property and other types of policies may include a Civil Authority coverage extension. Civil Authority coverage may be available to reimburse business interruption losses and expenses where a government entity has issued an order resulting in denial of access to an insured premise. Depending on the policy wording, “direct physical loss or damage” to the insured property may or may not be required. Civil Authority coverage is often limited in time (for example, coverage may only be available for losses or expenses incurred within 72 hours after the order is issued) and is often subject to separate deductibles and sub-limits of coverage.
In some policies, Business Interruption insurance is extended to losses where “ingress or egress” (i.e. access) to insured property is prevented. Depending on the policy language, a government quarantine or stay-at-home order may trigger this coverage. Again, depending on the policy wording, “direct physical loss or damage” either to insured or uninsured (usually neighboring) property may be required.
As discussed above, many policies contain an exclusion from coverage for losses due to viruses or bacteria; some policies issued in recent months contain exclusions specific to coronavirus-related losses, and some policies contain an exclusion for Communicable Disease and associated losses.
Possible Legislative and Legal Developments
In a March 18, 2020 letter to insurance industry groups, a bipartisan group of Members of the United States House of Representatives requested that insurers agree to retroactively provide coverage for a wide variety of business interruption losses due to the coronavirus pandemic, regardless of policy exclusions or arguments that the virus and associated quarantines do not cause direct physical loss or damage to property. The insurers declined to do so, responding that business interruption policies are not designed to provide coverage for losses related to communicable diseases. Similar legislation has recently been proposed on the state level in New Jersey. It has recently been reported that insurers may propose the creation of a coronavirus fund to cover pandemic-related business losses, similar to the victims’ compensation fund set up after the 9/11 terrorist attacks. In the meantime, policyholders have filed suit in Louisiana and California requesting clarity on the interpretation of common policy provisions in light of the pandemic.
The interpretation of insurance policy coverage provisions and exclusions, as applied to coronavirus-related losses, will undoubtedly be the subject of a great deal of dispute, litigation, and possibly legislation in the coming weeks and months. Policy language varies widely, and its application and interpretation in the context of the current pandemic is evolving. Policyholders should carefully review their policy provisions, consult an attorney if appropriate, and consider their options in order to determine the best course of action regarding any potential insurance claims.
Consumer and Residential Credit
Consumer and Residential Credit. The CARES Act includes several provisions aimed at temporarily relieving certain borrowers, tenants and mortgagors.
- Credit Reporting. Section 4021 amends Section 623 of the Fair Credit Reporting Act (FCRA) to provide an accommodation covered period: provide that any furnisher who makes an accommodation of 1 or more payments, is required to report the credit obligation as current if it was not delinquent before the accommodation. The accommodation covered period began on January 31, 2020 and ends 120 days after the date the national emergency period terminates. For payments that were delinquent before the accommodation, the furnisher of the information needs to update the account information if the credit obligation is brought current.
- Forbearance and Foreclosure Moratorium on Federally Backed Mortgage Loans.
- Forbearance on Single-Family Federally Backed Mortgage Loans. Section 4022 provides that a borrower “experiencing a financial hardship due, directly or indirectly, to the COVID-19 emergency” may request orally or in writing forbearance for a federally backed mortgage loan for up to 180 days, which forbearance period may be extended for an additional period of up to 180 days the request of the borrower. “Federally backed mortgage loan” includes one insured by the FHA, under the National Housing Act or Housing and Community Development Act, the VA, the USDA or Freddie Mae or Freddie Mac. During the period of forbearance, no fees, penalties, or interest may be charged beyond those fees that are charged when current payments are made.
- Foreclosure Moratorium on Federally Backed Mortgage Loan. Section 4022(c)(2) suspends servicer foreclosures under federally backed mortgage loans for a 60-day period commencing March 18, 2020.
- Forbearance and Foreclosure of Federally Backed Mortgage on Multifamily Properties with Federally Backed Loans and Temporary Eviction Moratorium on Eviction Filings.
- Forbearance. Sections 4023(a) - (b) provide that a mortgagor on a multifamily property with a federally backed mortgage may submit an oral or written request for forbearance, stating that mortgagor is experiencing a financial hardship, and receive a forbearance for up to 30 days, with up to 2 additional 30-day extensions.
- Tenant Protections: Suspension of Eviction or Charging of Any Late Fees, Penalties or Other Charges Relating to Late Payment. Sections 4023(d) and (e) provide that any mortgagor on a federally backed multifamily property mortgage loan that receives a forbearance may not initiate any eviction or issue a notice to vacate or to charge any fees or charges or late penalties for the late payment of rent during a forbearance described in the above paragraph.
- Temporary Moratorium on Eviction Filings. Section 4024 provides a broad temporary moratorium on eviction filings for 120 days beginning on the date of enactment of the CARES Act (March 27, 2020) that applies to any lease of property covered by any federally backed mortgage loan or federally backed multifamily mortgage loan.
- Student Loans. Section 3513 provide that all payments on loans made under Part D (the Ford Federal Direct Loan Program) and Part B (Federal Family Education Loan Program) of title IV of the Higher Education Act of 1965 that are held by the Department of Education are suspended through September 30, 2020. During such suspension, no interest may accrue on the loans.
Banking provisions. The CARES Act includes several provisions giving relief for banks and other financial institutions.
- Community Banks: Relief from Capital Requirements. Section 4012 requires the prudential federal banking agencies to issue interim rules establishing the Community Bank Leverage Ratio at 8% but providing that a qualifying community bank falling under that ratio be provided a reasonable grace period to satisfy the ratio and creating a presumption that such bank is presumed to satisfy the capital and leverage capital ratios during the grace period.
- Temporary Relief from Current Expected Credit Losses. Section 4014 provides both banks and credit unions temporary relief from the Financial Accounting Standards Board’s Accounting Standards Update No. 2016-13 (“Measurement of Credit Losses on Financial Instruments”), specifically including credit loss methodology for estimating allowing for credit losses during the COVID-19 outbreak.
- Treasury Program Management Authority. Section 1109 expands the authority of the Treasury Department to allow additional depository institutions, insured credit unions and institutions of the Farm Credit System and other lenders that do not participate in Administration programs to participate in paycheck protection programs and lending under the national emergency declaration. Section 1109 also authorizes the Treasury Secretary to provide regulations and guidance to allow such additional institutions to originate loans.
- Money Market Guaranty Program. Section 4015 provides for appropriations to guaranty the “total value of shareholder’s accounts” for participating money market accounts from the date of enactment until “not later than December 31, 2020.”
If you have any follow up questions about these issues, please contact Rimon as we continue to be fully operational during these extraordinary times.
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