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On March 27, 2020, in a historic effort to provide emergency aid to individuals, families and businesses impacted by the ongoing Coronavirus pandemic, the U.S. Congress passed, and the.
United States Coronavirus (COVID-19)
Section 3102 of the CARES Act authorizes the Secretary of the Treasury (the “ Secretary ”) to make or guarantee loans totaling up to $500 billion to eligible businesses, including air carriers and businesses that have not otherwise received adequate economic relief under the CARES Act. Up to $29 billion in loan funds will be reserved for passenger and cargo air carriers ($25 billion and $4 billion, respectively), up to $17 billion in loan funds will be reserved for businesses critical to maintaining national security, and up to $454 billion will be provided to the Federal Reserve to support its lending programs for eligible businesses, states or municipalities.
The Secretary may enter into agreements to make loans or loan guarantees to eligible businesses if the Secretary determines that:
A key restriction on receiving loan funds is that from the period beginning on the day the loan agreement is executed until 1 year after the loan or loan guarantee is no longer outstanding (the “Covered Period”), no officer or employee of the eligible business whose total compensation was more than $425,000 in 2019 (other than those whose compensation is determined through a collective bargaining agreement entered into before March 1, 2020) will receive:
Additionally, no officer or employee whose total compensation exceeded $3,000,000 in 2019 may receive (during any 12 consecutive months of the Covered Period) total compensation in excess of the sum of: (a) $3,000,000 and (b) 50% of the excess over $3,000,000 of the total compensation received by the officer or employee in 2019.
The Secretary will post further details about application procedures and minimum eligibility requirements for the loans within the next 10 days.
The CARES Act also provides assistance to certain mid-sized businesses (and non-profit organizations) with between 500 and 10,000 employees in the form of direct loans subject to an annualized interest rate not higher than 2% per annum and featuring a 6 month grace period in which no principal or interest is due or payable. Eligible mid-sized businesses applying for such direct loans are required to make a good-faith certification that, among other criteria:
The CARES Act provides eligible employers with a refundable payroll tax credit equal to 50% of certain qualified wages paid to its employees in a calendar quarter if either (i) the operation of the employer’s trade or business is fully or partially suspended due to a governmental order related to COVID-19 or (ii) the gross receipts for that trade or business are less than 50% of its gross receipts for the same calendar quarter of the prior year. The credit is capped at $5,000 per employee for all calendar quarters. Section 501(c) organizations are eligible for the credit, but governmental entities and companies receiving small business interruption loans under the CARES Act are not.
The CARES Act permits a corporation to carry back its losses from 2018, 2019 and 2020 for five years and allows a corporation to fully reduce its taxable income by its available NOLs. This changes the rules effected by the Tax Cuts and Jobs Act (TCJA) whereby a corporation could only carry forward its losses and offset only 80% of its taxable income. Note that a REIT is not permitted to carry back losses, and the Act contains provisions that prevents taxpayers from using NOLs to offset income includible under Code Section 965 (the deemed repatriation provision enacted in the TCJA).
The CARES Act retroactively increases the Section 163(j) limitation on business interest expense deductions from 30% to 50% of adjusted taxable income for 2019 and 2020. In addition, for taxable years beginning in 2020, the Act permits taxpayers to elect to determine the limitation using their adjusted taxable income from 2019 rather than 2020. For partnerships, the increased limitation applies to partners in partnerships only in 2020, but 50% of the business interest of a partner that is accrued in 2019 is deemed to accrue in 2020 and is not subject to any limitation in 2020.
The CARES Act permits employers to delay payment of the 6.2% employer share of the Social Security tax (but not the 1.45% employer share of the Medicare tax) from the date of enactment through the end of 2020. The tax would be payable over the following two years with half due by December 31, 2021 and the other half due by December 31, 2022.
The CARES Act adds a technical correction to the definition of qualified improvement property, which allows for the immediate expensing for improving facilities related to the hospitality industry. An error in the TCJA prevented businesses from expensing certain costs for improvements to a nonresidential building and required the costs to be depreciated over the 39-year life of the building. This change is retroactive to the date of enactment of the TCJA (December 22, 2017).
The CARES Act increases the 10% taxable income limitation on charitable contribution deductions for corporations to 25%. In addition, the Act temporarily increases the cap on deductions for charitable contributions of food inventory in 2020 from 15% to 25% of taxable income in the case of a C corporation.
The TCJA repealed the corporate AMT and allowed corporations to claim corporate AMT credits over several years until 2021. The CARES Act permits corporations with outstanding AMT credits to claim those credits immediately.
Under the CARES Act, an employer may repay up to $5,250 of an employee’s student loan debt, and the repayment will be excluded from the employee’s income if such repayment is made after the enactment of the CARES Act and before January 1, 2021.
The CARES Act outlines various actions that the federal government will take and require of others to better support the healthcare system in response to the pandemic, including (but not limited to):
In particular, for businesses that manufacture drugs or medical devices critical to fighting the current pandemic, Sections 3112 and 3121 of the CARES Act mandate that additional reporting requirements be met during a public health emergency, in order to combat potential product shortages. Critical drug and medical device manufacturers must report manufacturing interruptions in or permanent discontinuances of the active pharmaceutical ingredients of critical drugs or medical devices, provided the interruptions are likely to lead to a meaningful disruption in the supply chain. (Discontinuances of critical medical devices resulting from approved modifications of the devices are not subject to such reporting.)
Notifications concerning critical drugs must detail, for example: reasons for the interruption; whether active pharmaceutical ingredients or medical devices used to prepare or administer the drug had any relation to the interruption; alternative sources that the manufacturer is aware of to procure a critical drug’s active pharmaceutical ingredient; the expected duration of the interruption; and any other information that the Secretary may require. Notifications concerning critical medical devices must be submitted to the Secretary either 6 months prior to the interruption or discontinuance or as soon as practicable if the earlier deadline cannot be met.
For all critical drug, active drug ingredient, and medical device manufacturers, the CARES Act requires them to develop, maintain and implement redundancy risk management plans for every location where critical drugs and/or active drug ingredients are manufactured.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
