UPDATE: COVID-19 PHASE III LEGISLATION—THE CARES ACT

On March 27, 2020, the President signed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act” or “Act”), which was the Phase III legislative response to the COVID-19 pandemic and its economic consequences.  This Act is to provide emergency assistance and health care response for individuals, families, and businesses affected by the coronavirus pandemic.

Neel, Hooper & Banes provides a summary of portions of the Act particular to small business below.

KEEPING WORKERS PAID AND EMPLOYED

Overview of appropriations

  • $349 billion for the Small Business Administration (“SBA”) to provide loans of up to $10 million per business. Any portion of that used to maintain payroll, keep workers on the books, or pay for rent, mortgage payments, and existing debts may be eligible for forgiveness, if workers stay employed through the end of June.
  • $675 million for salaries and expenses of the SBA.
  • $25 million for necessary expenses of the Office of Inspector General in overseeing the SBA.
  • $265 million for entrepreneurial research grants.
  • $10 billion for emergency grants.
  • $17 billion for loan subsidies.
  • $25 million for Department of Treasury salaries and expenses.
  • $100 billion for secondary market guarantee sales.

Paycheck Protection Program

The Paycheck Protection Program (“PPP”) expands the SBA’s 7(a) Loan Program.

What is the covered period?

  • February 15, 2020 through June 30, 2020.

To whom does the PPP apply?

  • Businesses with fewer than 500 employees shall be eligible to receive a loan made under section 7(a) of the Small Business Act, 15 U.S.C. 636(a), in addition to small business concerns.
  • The PPP also includes nonprofits, veteran organizations, Tribal businesses, sole-proprietors, independent contractors, and certain self-employed individuals.
  • Businesses in the hospitality industry are eligible for a loan as long as they do not employ more than 500 employees per physical location.

How much can a qualifying business be loaned?

  • The maximum amount of the loan shall be the lesser of –
    • Average monthly payroll costs times 2.5 plus any Economic Injury Disaster Loans (“EIDL”) received after January 31, 2020 that are refinanced under section 36, not to exceed $10,000,000.
    • To note:
      • Average monthly payroll costs are calculated based upon the one-year period prior to the loan disbursal date, with an exception for seasonal employers.
    • Seasonal employers calculate average monthly payroll costs based on the 12-week period starting February 15, 2019 or the period starting March 1, 2019 through June 30, 2019.
    • New employers not in business between February 15, 2019 and July 30, 2019, average monthly payroll cost is calculated based on the January 1, 2020 through February 29, 2020 period.

What is included in payroll costs?

  • Payroll support, including paid sick leave, medical or family leave, and costs related to the continuation of group health care benefits during those periods of leave;
  • Employee salaries;
  • Wages and commissions;
  • Payment of cash tips; and
  • Payment of retirement benefits.

What is not included in payroll costs?

  • Compensation of an individual person in excess of $100,000 (as prorated for the period starting February 15, 2020 to June 30, 2020);
  • Federal employment taxes imposed or withheld taxes;
  • Compensation to an employee whose principal residence is outside the United States;
  • Qualified sick leave for which a credit is allowed under § 7001 of the Families First Coronavirus Response Act (“FFCRA”);
  • Qualified family leave wages for which a credit is allowed under § 7001 of the FFCRA.

What are the loan terms?

  • Loans are available for up to a 10-year term, amortized, at 4% interest, with 6 months (and up to 1 year) deferral of principal and interest payments. Deferral is discussed in detail below.
  • Loans are available with –
    • No personal guaranties of shareholders, members, or partners
    • No collateral
    • No proof that the funds cannot be obtained elsewhere
    • No SBA fees (some lender processing fees may apply)
    • No prepayment fee

What makes a small business eligible for approval?

  • The lender will consider whether the borrower –
    • Was in operation on February 15, 2020; and
    • Will have paid employees and payroll taxes or independent contractors
  • Applicants will need to certify that:
    • The loan is necessary;
    • Will be used to retain workers and pay eligible expenses;
    • No other application for a loan for the same purpose is pending and that the entity has not received any other loan for the same purposes from February 15, 2020 to December 31, 2020.

What about payment deferral?

  • Lenders must provide payment deferment relief for no less than 6 months and no more than 1 year.
  • If a 7(a) loan is sold on the secondary market, and if an investor declines to approve a deferral requested by a lender as stated above, the Administrator has the authority to purchase the loan so that the impacted borrower may receive a deferral for a period of not more than one (1) year.
  • The SBA will provide additional guidance to lenders on the deferment process within 30 days of enactment.

Is there loan forgiveness?

  • A borrower is eligible for forgiveness in an amount equal to the amount actually paid for payroll costs, salaries, benefits, rent, utilities, and mortgage interest during the 8 weeks following the disbursement of the loan. Additional wages paid to tipped employees may also be forgiven.
  • The Administrator will issue guidance and regulations implementing this section within 30 days of the date of enactment of the CARES Act.
  • How is loan forgiveness treated?
    • Amounts that are forgiven under the CARES Act will be considered canceled indebtedness by lenders.
    • For purposes of purchase of guarantee for a covered loan by the Administrator, amounts that are forgiven are treated in accordance with other SBA procedures that are applicable to a 7(a) guaranteed loan.
  • What are the limits on loan forgiveness?
    • The amount of loan forgiveness cannot exceed the principal amount
    • Reduction relating to salary and wages –
      • The amount of loan forgiveness will be reduced by the amount of any reduction in salary or wages of an employee that is in excess of 25% of the total salary or wages of the employee during the most recent full quarter during which the employee was employed before the covered period.
    • Reduction based on reduction in number of employees –
      • The amount of loan forgiveness shall be reduced, but not increased, by multiplying the amount of forgiveness available by the quotient obtained by dividing:
        • The average number of full-time employees per month employed by the recipient during the covered period; by:
          • At the borrower’s election:
            • The average number of full-time equivalent employees per month employed by the eligible recipient during the period beginning on February 15, 2019 and ending on June 30, 2019; or
            • The average number of full-time equivalent employees per month employed by the eligible recipient during the period beginning on January 1, 2020 and ending on February 29, 2020
          • In the case of a seasonal employer, the average number of full-time equivalent employees per month employed by the eligible recipient during the period beginning on February 15, 2019 and ending on June 30, 2019.
        • Number of employees is determined by calculating the average number of full-time employees for each pay period falling within a month.
      • How can I obtain loan forgiveness?
        • A recipient seeking loan forgiveness shall submit to the lender an application, which includes documentation verifying the number of full-time equivalent employees on payroll and pay rates for the periods described, including:
          • Payroll tax filings reported to the IRS;
          • State income, payroll, and unemployment insurance filings;
          • Documentation, including cancelled checks, payment receipts, transcripts of accounts, or other documents verifying payments on covered mortgage obligations, payments on covered lease obligations, and covered utility payments;
          • Certification from a representative of the eligible recipient authorized to make such certifications that the documentation is true and correct and the amount for which forgiveness is requested was used to retain employees, make interest payments on a covered rent obligation, or make covered utility payments;
          • Any other documentation the SBA determines necessary.
        • Loan forgiveness will not be available to recipients who fail to submit the documentation above.
        • Lenders shall issue decisions on loan forgiveness applications with 60 days of receiving the application.
      • Will canceled debt under this section of the CARES Act be considered gross income?
        • Canceled indebtedness under this section of the CARES Act will be excluded from gross income.

Are there penalties for prepayment?

  • The CARES Act waives penalties for pre-payment for any payment made on a covered loan.

Express Loans

  • The maximum loan amount under the Express Loan Program (see 15 U.S.C. 636(a)(31)) is $1,000,000 until December 31, 2020.

Assistance for American Workers, Families, and Businesses

Relief for Workers Affected by Coronavirus Act

  • Pandemic unemployment assistance
    • The Secretary of Labor shall provide individual unemployment benefit assistance while an individual is unemployed, partially unemployed, or unable to work for the weeks of such unemployment.
    • This assistance is available for individuals who are not eligible for regular compensation or extended benefits under State or Federal law or pandemic emergency unemployment compensation, including an individual who has exhausted all rights to regular unemployment or extended benefits under State or Federal law pandemic emergency unemployment compensation; or is self-employed, is seeking part-time employment, does not have sufficient work history, or otherwise would not qualify for regular unemployment or extended benefits. Certification by the individual is required.
    • This assistance is not available to individuals who have the ability to telework with pay or an individual who is receiving paid sick leave or other paid leave benefits.

Recovery Rebates

How much will I receive in a direct payment?

  • For individuals with incomes up to $75,000.00 the Act provides a $1,200.00 payment. The threshold for head of household is $112,500.00
    • For individuals with an income above $75,000, the amount paid deducts $5.00 for every $100.00 above $75,000.00
    • The payment is phased out entirely for an individual making above $99,000.00
  • Married couples with combined incomes up to $150,000.00 will receive $2,400.00 subject to the same phasing out as stated above.
    • The payment is phased out entirely for married couples making $198,000.00 or more.
  • The CARES Act provides an additional $500.00 per child, which is also subject to phaseout.

How is eligibility determined for payments?

  • Eligibility is determined based on 2019 income tax filings, where possible. 2018 tax data and Social Security data can be used in lieu of 2019 data if 2019 data is unavailable.

What if I made too much in 2018 or 2019 to qualify for the rebate but my income is significantly less this year because of COVID-19?

  • Unfortunately for such individuals, the rebate will not be applied until your 2020 taxes are filed in 2021.
  • Example: Martin is a single taxpayer with no children who made $200,000 in 2019, and his 2019 tax return is on file with the IRS. In early March, Martin was laid off and his income is now well below the $75,000 threshold. In this instance, Martin should be eligible for the rebate. However, because his 2019 income was $200,000, he will not get any cash assistance now through the Recovery Rebate check, but it will be applied when he files his 2020 income tax return, if his income for the year is below the threshold.

What if I haven’t filed my 2019 taxes and would qualify for the rebate based on 2019 earnings, but not based on 2018 earnings?

  • The CARES Act does not provide a cutoff date for when they will stop considering newly-filed 2019 tax returns for purposes of the rebate, but you may wish to file your 2019 return as soon as possible for a chance to receive the rebate based on your 2019 income.

Will I have to repay an overpayment?

  • No, an individual will not be required to repay an overpayment when filing 2020 taxes.

When will I receive the payment?

  • The CARES Act says that payments will be made as rapidly as possible. Some sources indicate that the payments will be made within the next 3 weeks. The CARES Act states that no credit will be paid after December 31, 2020.

How will I receive the payment?

  • Payments will be made via direct deposit to an account that you authorized on or after January 1, 2018 for delivery of refund of taxes.
  • If an individual receives Social Security benefits, the payment will be made to the same account the Social Security benefit is received.
  • The CARES Act also authorizes the payment to be made to the last known address on file.
  • What if I moved or closed the authorized account?
    • For these circumstances, the IRS will provide a phone number for individuals to report these issues.

What if I have past tax debts or am behind on payments to federal or state governments? What if I have past due child support?

  • The CARES Act turns off almost all administrative offsets that would otherwise reduce refunds for individuals. If you are within the qualifying income threshold and you are behind on tax debts or payments to federal or state governments, you will still receive the rebate. However, past due child support payments that have been reported to the U.S. Treasury department and the IRS will be offset.

Business Provisions

Employee retention credit for employers subject to closure due to COVID-19

  • For eligible employers, there will be an allowed credit against applicable employment taxes for each calendar quarter, an amount equal to 50% of the qualified wages with respect to each employee of such employer for a calendar quarter.
    • An eligible employer is one that was carrying on a trade or business during the 2020 calendar year, and with respect to any calendar quarter for which the operation of the business fully or partially suspended during the calendar quarter due to orders from the government limiting travel, group meetings, or commerce related to COVID-19 or there was a significant decline (50% less than the prior year) in gross receipts and those gross receipts are greater than 80% of gross receipts for the same calendar quarter in the prior year.
  • Limitations and refundability:
    • The amount of qualified wages may not exceed $10,000.00.
    • The credit is limited to employment taxes and may not exceed the applicable employment taxes.
    • If the amount of credit exceeds the limitations above, the excess will be treated as an overpayment that will be refunded.
    • Payments due to the employer under this section of the CARES Act will be treated as a credit.

Delay of payment of employer payroll taxes

  • Payment for applicable employment taxes for the payroll tax deferral period will not be due before the applicable date.
  • This section does not apply to any taxpayer if they have had indebtedness forgiven under the Act with respect to a 7(a) loan.

Modifications for net operating losses

  • Temporary repeal of the taxable income limitation – the CARES Act allows for a 5-year carryback of net operating losses (“NOLs”) arising in 2018, 2019, and 2020 tax years. Businesses may amend or modify tax returns for years dating back to 2013 to take advantage of the expanded carryback.
  • The CARES Act modifies certain loss limitations to permit sole proprietors and pass-through entitles to use NOLs previously disallowed. NOLs incurred before January 1, 2021 can be used to fully offset income, without the 80% taxable income limitation under the Tax Cuts and Jobs Act. These changes allow for greater cash flow and liquidity.

Modification of credits for prior year minimum tax liability of corporations

  • The CARES Act accelerates the recovery of the alternative minimum tax credits, making them fully refundable in tax years 2018 and 2019.

Modification on limitation of business interest

  • The CARES Act temporarily returns the applicable limitation to 50% of adjusted taxable income for 2019 and 2020. Taxpayers may elect to use the 2019 adjusted income in calculating the limitation for 2020.

Federal Contractor Authority

  • Funds made available to an agency by the CARES Act or any other Act may be used by such agency to modify the terms and conditions of a contract, or other agreement, without consideration, to reimburse at the minimum contract billing rates, not to exceed an average of 40 hours per week, any paid leave, including sick leave, a contractor provides to keep its employees or subcontractors in a ready state, including to protect the life and safety of Government and contractor personnel, but not beyond September 30, 2020.
  • This authority will only apply to a contractor whose employees or subcontractors who cannot perform work on a site that has been approved by the Federal Government, including a federally-owned or leased facility or site, due to facility closures or other restrictions, and who cannot telework because their job duties cannot be performed remotely during the COVID-19 public health emergency.
  • The maximum reimbursement allowed by this section of the CARES Act shall be reduced by the amount of credit a contractor is allowed for tax credits for paid sick leave and any applicable credits a contractor is allowed under the CARES Act.

Labor provisions

  • Amends Section 110(b)(2)(B)(ii) of the FMLA –
    • An employer shall not be required to pay more than $200.00 per day, and $10,000.00 in the aggregate, for each employee paid leave under the section.
  • Amends division E of the FFCRA –
    • An employer shall not be required to pay more than $511.00 per day, and $5,110.00 in the aggregate, when the employee is taking leave for Federal, State, or local quarantine, advised to self-quarantine by a health care provider, or experiencing symptoms of COVID-19; or $200.00 per day, and $2,000.00 in the aggregate, when the employee is taking leave for the care of a child whose school or place of care is closed or unavailable due to COVID-19.
  • Amends section 903(h)(2)(B) of the Social Security Act –
    • The State ensures that applications for unemployment compensation, and assistance with the application process, are accessible, to the extent practicable in at least two of the following ways: in person, by phone, or online.
  • Amends division C subsection (a)(4) of the FFCRA by adding that –
    • (a)(4) the Director of the Office of Management and Budget (“OMB”) shall have the authority to exclude for good cause from the requirements of (b) certain employers of the United States Government with respect to certain categories of Executive Branch employees.
  • Amends division E of the Paid Sick Leave Act (FFCRA) by adding –
    • The Director of the OMB has the authority to exclude for good cause, certain employees, by exempting certain United States Government employers from requirements of the title with respect to certain categories of Executive Branch employees.
  • Amends the FMLA Expansion –
    • The term “eligible employee” means an employee who has been employed for at least 30 calendar days by the employer with respect to whom leave is requested.
    • The term “employed for at least 30 calendar days” includes an employee who was laid off by that employer March 1, 2020 or later, had worked for the employer no less than 30 of the last 60 days, and was rehired by the employer.
  • Amends division G of the FFCRA –
    • Regarding payroll credits for required paid sick leave, the amendment removes “In General.—If the amount of the credit under subsection (a) exceeds the limitation of paragraph (3) for any calendar quarter, such excess shall be treated as an overpayment that shall be refunded under sections 6402(a) and 6413(b) of such Code” in (b)(4)(A) and replaces it with “(b)(4)(A)(i) Credit is refundable.—If the amount of the credit under subsection (a) exceeds the limitation of paragraph (3) for any calendar quarter, such excess shall be treated as an overpayment that shall be refunded under sections 6402(a) and 6413(b) of such Code; and (ii) Advancing Credit.— In anticipation of the credit, including the refundable portion under clause (i), the credit may be advanced, according to forms and instructions provided by the Secretary, up to an amount calculated under subsection (a), subject to the limits under subsection (b), both calculated through the end of the most recent payroll period in the quarter.”

Other CARES Act provisions

  • Single-employer plan funding due date for employee retirement accounts is January 1, 2021 and the amount of each minimum required contribution is increased by interest accruing for the period between the original due date for the contribution and the payment date, at the effective rate of interest for the plan for the year that includes the payment date. A plan sponsor may elect to treat the plan’s adjusted funding target attainment percentage for the last plan year, ending before January 1, 2020, as the adjusted funding target attainment percentage for plan years which include calendar year 2020.
  • Addresses medical product supply shortages and drug shortages.
  • Provides for access to health care for COVID-19 patients and support for health care providers.
  • Suspends accrual of interest for federal student loan borrowers through September 30, 2020.
  • Expands public health programs.
  • Coronavirus Economic Stabilization Act of 2020
    • Provides $500 billion to U.S. Treasury Exchange Stabilization fund to provide loans, loan guarantees, and other investments in support of eligible businesses.
    • $46 billion for direct lending to certain industries –
      • $25 billion for loan and loan guarantees for passenger air carriers, eligible businesses that provide inspection, repair, replace, or overhaul services, and ticket agents;
      • $4 billion for loans and loan guarantees to cargo air carriers;
      • $17 billion for loans and loan guarantees to businesses critical to maintaining national security (not defined in the Act).
    • As determined by the Secretary and at the Secretary’s discretion, a business in the three specified industries would be eligible for direct lending if –
      • Credit is not otherwise reasonably available to the borrower;
      • The obligation under the loan is “prudently incurred” by the borrower;
      • The loan is sufficiently secured or is made at a rate that reflects the risk or the loan or loan guarantee and is, to the extent practicable, not less than an interest rate based on market conditions or comparable obligations prevalent prior to the outbreak of COVID-19;
      • The loan is as short as practicable and in no event longer than 5 years;
      • Stock or equity buybacks by the borrower or its affiliates of an equity security, listed on a national securities exchange, of the borrower—or parent company of the borrower—is prohibited during the term of the loan and 12 months following the loan .
    • $454 billion plus any unused amounts will be available to make loans and loan guarantees to programs or facilities established by the Board of Governors for the Federal Reserve System for purpose of providing liquidity to the financial system that supports lending to eligible businesses.
    • Provides assistance to mid-size businesses (between 500 and 10,000 employees)
  • Provides air carrier worker support.
  • Appropriates $150 billion for making payments to States, Tribal governments, and local governments to cover necessary expenditures incurred due to COVID-19, were not accounted for in the budget, and were incurred between March 1, 2020 and December 30, 2020.
  • Provides borrowing authority for various Federal agencies, like the Postal Service, and for agriculture producers impacted by COVID-19.

As always, if you have any questions about the CARES Act or any other COVID-19 legislation, please do not hesitate to contact our office. Neel, Hooper & Banes is here to support your business and help you thrive during this time.


Neel, Hooper & Banes, P.C. Labor and Employment Lawyers, Government Contract Attorneys





Neel, Hooper & Banes, P.C.

Labor & Employment Attorneys, Government Contract Attorneys in Houston Texas
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