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Apr 27, 2020

Congress Passes Largest Ever Economic Stimulus Package: Key Provisions Of Cares Act

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Originally published March 27,2020 – Last updated April 27,2020

CONGRESS PASSES LARGEST EVER ECONOMIC STIMULUS PACKAGE: KEY PROVISIONS OF CARES ACT

The Novel Coronavirus (COVID-19) pandemic has swiftly and significantly unsettled key sectors of the U.S. economy, impacted the viability of many businesses and affected the financial health of millions of Americans. In response, the Senate passed the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) in the late hours of March 25, 2020. The CARES Act consists of a nearly $2 trillion stimulus package aimed at delivering critical assistance to the U.S. economy. The House of Representatives passed the Act, and it was enacted into law on Friday, March 27, 2020.

This note provides a summary of select provisions of the CARES Act. The keystone of the CARES Act is $500 billion in loans and loan guarantees to support certain hard hit industries specifically but a broader range of borrowers more generally. The Act also includes unemployment and other labor-related assistance to businesses and workers, more than $377 billion in federally guaranteed loans to small businesses, and tax provisions aimed at shoring up businesses.

The CARES Act follows two earlier coronavirus-related Acts passed by the U.S. Congress: (i) the Families First Coronavirus Response Act (which provided for, among other matters, paid sick leave and free coronavirus testing, expanding food assistance and unemployment benefits, and requiring employers to provide additional protections for health care workers) and (ii) Coronavirus Preparedness and Response Supplemental Appropriations Act, 2020 (which provided $8.3 billion in emergency funding for federal agencies to respond to the coronavirus outbreak). On April 24, 2020, a subsequent $480+ billion stimulus package, the Paycheck Protection Program and Health Care Enhancement Act, was enacted, which amends one of the core programs created under the CARES Act, the Paycheck Protection Program, by allocating additional funds to the program. For more on the Paycheck Protection Program and related guidance, please refer to our client note, Coronavirus Aid, Relief, and Economic Security Act (CARES Act): Paycheck Protection Program Summary.

Economic Stabilization and Assistance to Severely Distressed Sectors of the US Economy

The economic stabilization provisions of the CARES Act are a mosaic of programs, some providing targeted funding to particular sectors (airlines and national security), some providing general funding to a potentially wide array of businesses (through program pursuant to Section 13(3) of the Federal Reserve Act (“Section 13(3)”)), and many targeted to specific relief for individuals as they grapple with the fallout from the pandemic (e.g., mortgage foreclosure moratorium). A key takeaway from this title of the Act is that regulators, including the Federal Reserve and the FDIC, have more flexibility and funding to provide assistance going into this crisis than they had coming out of the last crisis. For information relating to compensation and governance restrictions applicable to different programs authorized by the CARES Act, please refer to our client note, Compensation and Governance Restrictions on CARES Act Stimulus Recipients.

General Terms of Loans to Eligible Businesses

Title IV of the CARES Act authorizes the Treasury Secretary to make loans, loan guarantees and other investments in support of eligible businesses, States and municipalities up to $500 billion.

  • An “eligible business” includes (i) an air carrier and (ii) a U.S. business that has not otherwise received adequate economic relief in the form of loans or loan guarantees provided under Title IV of the CARES Act.
  • U.S. Organized and Operated. An eligible business that participates in one of the programs or facilities must also certify that it is created or organized in the United States or under the laws of the United States, and has significant operations in and a majority of its employees based in the United States.
  • No Loan Forgiveness. The principal amount of any obligation issued by an eligible business cannot be reduced through loan forgiveness.
  • Administrative Costs. The Treasury Secretary may use up to $100 million to pay costs and administrative expenses, including hiring employees, entering into services contracts, establishing vehicles for the facilities, and issuing regulations and guidance, and may hire financial institutions as financial agents to engage in reasonable duties.

Air Carriers and National Security Businesses. Of the $500 billion, up to $25 billion may be allocated to loans and loan guarantees for passenger air carriers and certain businesses providing related services; up to $4 billion may be allocated to loans and loan guarantees for cargo air carriers; and up to $17 billion may be allocated to loans and loan guarantees for businesses critical to maintaining national security. Title IV sets certain limits and criteria on the provision of such loans and loan guarantees, some of which are as follows:

  • Continuation of Air Service. Until March 1, 2022, the Treasury Secretary can require an air carrier receiving loans and loan guarantees to maintain scheduled air transportation service as the Secretary deems necessary, taking into consideration certain community and supply chain needs.
  • Terms of Loan. Such loans and loan guarantees, among other things, must be as short as practicable and in no event longer than five years; and either secured or at rates that reflect the credit risk, and at no lower than the market rate prior to the COVID-19 outbreak. As a practical matter, those requirements may push such borrowers to either provide security interest or look elsewhere for funding as current market rates are likely to be lower.
  • Capital Restrictions. For such loans and loan guarantees, the CARES Act also requires that until one year after the date that the loan or loan guarantee is no longer outstanding, the eligible business may not repurchase outstanding equity interests, pay dividends or make other capital distributions; and, until September 30, 2020, the eligible business must maintain its existing employment levels to the extent practicable and in any case, retain at least 90 percent of its employees employed as of March 24, 2020.
  • Compensation Restrictions. Such businesses must agree that, from the date on which the loan or loan guarantee agreement is executed until one year after the loan or loan guarantee is no longer outstanding, the total compensation (including salary, stock and bonuses) and severance of certain employees will be limited. Applicable businesses may not provide employees receiving calendar year 2019 compensation in excess of $425,000 per year (i) more compensation than they received in 2019 or (ii) severance pay or other benefits upon termination exceeding twice their 2019 compensation amount. Officers or employees receiving compensation in excess of $3 million per year may not receive total compensation in excess of (i) $3 million plus (ii) 50% of the excess of 2019 compensation over $3 million.
  • Warrants and Equity Interests in Eligible Businesses. The Treasury Secretary may not issue a loan or loan guarantee to such businesses unless the business has issued securities traded on a national securities exchange; and the Secretary receives a warrant or equity interest in the business. For an eligible business that is not traded on a national securities exchange, the Secretary must receive a warrant or equity interest or a senior debt instrument. The Treasury Secretary may sell, exercise or surrender a warrant or senior debt instrument and may not exercise any voting rights.

Federal Reserve Programs and Facilities. The remaining $454 billion (and amounts available but not used for air carriers, cargo air carriers and national security businesses) is available for loans, loan guarantees and other investments in support of programs or facilities established by the Board of Governors of the Federal Reserve System (“Federal Reserve”) for the purpose of providing liquidity to the financial system that supports lending to eligible businesses, States or municipalities. This amount can be used to (i) purchase obligations or other interests directly from issuers of such obligations or other interests; (ii) purchase obligations or other interests in secondary markets or otherwise; or (iii) make loans, including loans or other advances secured by collateral. Section 13(3) requirements remain in effect with respect to any program or facility.

  • Mid-Size Business Facilities. The CARES Act specifically directs the Treasury Secretary to implement a program or facility that makes direct loans to eligible businesses with between 500 and 10,000 employees, on favorable rates and with interest and principal deferral for 6 months. Recipients have to certify to retaining and restoring at least 90 percent of its workforce.
  • Main Street Lending Program. The Federal Reserve is empowered to establish a facility to support lending to small and mid-sized businesses consistent with Section 13(3). On April 9, 2020, the Federal Reserve announced the creation of two Main Street Lending Facilities. The Federal Reserve is still working to establish the program infrastructure after receiving numerous comments from the public on April 16, 2020. For more information about these (and other) Federal Reserve facilities, please refer to our client note, The Fed Moves Beyond the Financial Crisis Playbook for Pandemic Response
  • Lending to States and Municipalities. The Treasury Secretary is directed to seek the implementation of a program that provides liquidity to the financial system that supports lending to States and municipalities. On April 9, 2020 the Federal Reserve announced the creation of the Municipal Liquidity Facility to help state and local governments better manage cash flow pressures caused by the outbreak of COVID-19. For more information about this facility, please refer to our client note, The Fed Moves Beyond the Financial Crisis Playbook for Pandemic Response.

In the case of “direct loans,” i.e., a bilateral loan agreement, not part of a syndicated loan, a loan originated by a financial institution in the ordinary course of business or a securities or capital markets transaction, the following apply:

  • Capital Restrictions. The eligible issuer must agree that until one year after the direct loan is no longer outstanding, the eligible business may not engage in stock buybacks of a listed security, unless under prior contractual obligation; pay dividends; or make other capital distributions.
  • Compensation Restrictions. Such businesses must further agree that, from the date on which the loan or loan guarantee agreement is executed until one year after the loan or loan guarantee is no longer outstanding, the total compensation (including salary, stock and bonuses) and severance of certain employees will be limited. Applicable businesses may not provide employees receiving compensation in excess of $425,000 per year (i) more compensation than they received in 2019 or (ii) severance pay or other benefits upon termination exceeding twice their 2019 compensation amount. Officers or employees receiving compensation in excess of $3 million per year may not receive total compensation in excess of (i) $3 million plus (ii) 50% of the excess of 2019 compensation over $3 million.
  • Waiver. Notably, the Treasury Secretary can waive these Capital and Compensation Restrictions if necessary to protect the interests of the Federal Government. However, the Secretary must make himself available to testify regarding such a determination.

Other Provisions Applicable to Banks

Temporary Relief for Community Banks. The CARES Act provides temporary relief for community banks by requiring the appropriate federal banking agencies to issue an interim final rule that the Community Bank Leverage Ratio (CBLR) shall be 8 percent. The CBLR is currently set at 9 percent.

  • A qualifying community bank that falls below the CBLR will have a grace period in which it may continue to be treated as a qualifying community bank and will be presumed to satisfy applicable capital and leverage requirements.
  • This relief will extend until the earlier of the termination date of the national emergency declaration concerning the COVID-19 outbreak, or December 31, 2020.

Temporary Relief for Troubled Debt Restructurings. The CARES Act also provides temporary relief from troubled debt restructurings.

  • A financial institution may elect to suspend the requirements under U.S. generally accepted accounting principles (GAAP) for loan modifications related to the COVID-19 pandemic that would otherwise be categorized as troubled debt restructurings, until the earlier of December 31, 2020 or 60 days after the termination date of the national emergency declaration concerning the COVID-19 outbreak.
  • Financial institutions may also suspend any determination of a loan modified as a result of the COVID-19 pandemic as being a troubled debt restructuring, including impairment for accounting purposes.
  • Federal banking agencies must defer to the determination of the financial institution to make such a suspension.

This relief mirrors relief provided by the federal banking regulators in a recently issued interagency statement encouraging banks to work with borrowers impacted by the COVID-19 pandemic.

Similarly, the Act provides temporary relief from the requirement to comply with FASB Accounting Standards Update No. 2016-13, including the current expected credit losses methodology for estimating allowances for credit losses.

Enhanced Authority to the FDIC. The CARES Act would enhance the authority of the FDIC, which was curtailed in the Dodd-Frank Act, in the following ways:

  • It would allow the FDIC to guarantee non-interest bearing transaction accounts, which was one of the tools used in the last financial crisis to keep funds flowing at the banks.
  • The CARES Act would function as prior Congressional approval to allow the FDIC to set up a program to guarantee obligations of solvent insured depository institutions, solvent insured depository institution holding companies, and affiliates, provided that the program and the guarantee terminate by December 31, 2020.

Temporary Lending Limit Waiver. The CARES Act would give the Comptroller of the Currency the temporary authority to waive lending limits to nonbank financial companies, and to exempt any transaction or transactions from the requirements of the lending limits generally if in the public interest. Such authority will last until the earlier of the termination date of the national emergency declaration concerning the COVID-19 outbreak or December 31, 2020.

Use of the Exchange Stabilization Fund for Money Market Mutual Funds. The CARES Act suspends application of Section 131 of the Emergency Economic Stabilization Act of 2008 (EESA) between the date that the CARES Act is enacted until December 31, 2020. Under EESA, the Treasury Secretary is prohibited from using the Exchange Stabilization Fund (“ESF”) to establish any future guaranty programs for the U.S. money market mutual fund industry. The Federal Reserve, meanwhile, has established a facility to purchase assets from U.S. money market mutual funds.

Temporary suspension of Section 131 of the EESA would allow the Secretary of the Treasury to use the ESF to establish a guaranty program for the United States money market mutual fund industry until the expiration date of December 31, 2020. Notably, any guarantee is limited to the total value of shareholder’s holding in a participating fund as of the close of business the day prior to the announcement of the guarantee. At that time, the Treasury would be required to appropriate the amount necessary to reimburse the ESF for any funds that were used for the guaranty program to the extent a claim payment exceeds the balance of fees collected by the fund.

Oversight Provisions

Federal Reserve Open Meetings Relief. The CARES Act allows the Chairman of the Federal Reserve to determine that, if unusual and exigent circumstances exist, the Federal Reserve Board may meet without satisfying Sunshine Act requirements, until the earlier of the termination date of the national emergency declaration concerning the COVID-19 outbreak or December 31, 2020.

Office of Inspector General for Pandemic Recovery. The CARES Act establishes the Office of the Special Inspector General for Pandemic Recovery and specifies that the duties of the Inspector General include the following:

  • Conducting, supervising and coordinating audits and investigations of the making, purchase, management and sale of loans, loan guarantees, and other investments entered into by the Treasury Secretary under Title IV of the CARES Act.
  • Submitting to Congress regular quarterly reports detailing loans, loan guarantees and other investments. Such reports or other information that is gathered cannot be disclosed publicly if it is specifically prohibited by law, Executive Order or part of an ongoing criminal investigation.

Conflicts of Interest. Any company in which the President, Vice President, executive department head, or member of Congress, together with certain related persons of such individual, owns, controls, or holds 20 percent or more, by vote or value, of the outstanding amount of any class of equity interest shall not be eligible for loans, loan guarantees or investments, or participation in Federal Reserve facilities. Companies must certify that they do not qualify as such prior to entering into transactions under the CARES Act.

Congressional Oversight Committee. The CARES Act also establishes a Congressional Oversight Commission (“Oversight Commission”) comprised of 5 members appointed by the leadership of the House of Representative and the Senate. The Oversight Committee is responsible for:

  • Conducting oversight of the implementation of Title IV by the Treasury Department and the Federal Reserve, including efforts by both agencies to establish economic stability in the wake of the COVID-19 outbreak.
  • Submitting reports to Congress detailing, inter alia, the use, impact and effectiveness of loans, loan guarantees and investments pursuant to the CARES Act.

Reports. The CARES Act contemplates a series of reports which will be interesting for how they may impact the dialogue on the on-going programs. Specifically:

  • The Treasury Secretary must disclose information related to transactions for air carriers and national security businesses within 72 hours on the Department of the Treasury’s website.
  • Within 7 days of any loan or loan guarantees to air carriers and national security businesses, the Treasury Secretary must make a report to Congress, and within 7 days of such a report to Congress the report must be published on the Treasury’s website. Every 30 days the Treasury Secretary shall publish a report on the website summarizing the information provided to Congress. For the facilities and programs established by the Federal Reserve, the Federal Reserve shall report to Congress within 7 days and once every 30 days. Likewise, the Federal Reserve must publish its report on its website within 7 days of the report to Congress.
  • Within 24 hours of the Treasury Secretary entering into any contract to administer a loan or loan guarantee to air carriers and national security businesses, a copy of such an agreement must also be published on the Department of Treasury website.
  • The Comptroller General must also conduct a study on the loans, loan guarantees and other investments made pursuant to the Act and provide a report to Congress within 9 months and annually thereafter.

Provisions Related to Federally-Backed Mortgage Loans

Foreclosure Moratorium. The CARES Act prohibits a servicer of a federally-backed mortgage loan from initiating the filing or advancement of foreclosure proceedings or the execution of foreclosure-related evictions or sales for a period of 60 days beginning on March 18, 2020.

For the purpose of the foreclosure moratorium and forbearance requests, federally-backed mortgage loans include those purchased by Fannie Mae, Freddie Mac, insured by HUD, VA or USDA or directly made by USDA.

Forbearance.

  • The CARES Act provides forbearance for up to 180 days for borrowers of federally-backed mortgage loans experiencing financial hardship related to the COVID-19 emergency. Requests for forbearance can be made regardless of delinquency status by submitting a request to the servicer and affirming such financial hardship. Servicers must grant the forbearance request without additional documentation for the period specified under the Act.
  • The CARES Act also allows requests for forbearance for up to 90 days to multifamily borrowers (as defined) with federally-backed multi-family mortgage loans experiencing financial hardship related to the COVID-19 emergency. Borrowers receiving forbearance may not evict or charge late fees to tenants for the duration of the forbearance period.
  • Applicable mortgages include loans to real property designed for 5 or more families that are purchased, insured or assisted by Fannie Mae, Freddie Mac or HUD.

Unemployment Assistance Programs

The CARES Act establishes a temporary supplemental unemployment insurance relief program, referred to as the Pandemic Unemployment Assistance Program, for “covered individuals” for weeks of unemployment, partial unemployment or inability to work caused by the COVID-19 public health emergency. The relief is available for the length of the covered individual’s unemployment, partial unemployment or inability to work during the period from January 27, 2020 through December 31, 2020, up to a maximum of 39 weeks (subject to future extensions). This period includes any time during which the individual receives compensation or extended benefits under federal or state law.

A “covered individual” is any individual (i) who is not eligible for regular compensation or extended benefits under federal or state law (including individuals who have exhausted all rights to such benefits) or other pandemic emergency unemployment compensation and (ii) who self-certifies that he or she is unable to work as a direct result of COVID-19. This temporary program will provide payment to those not traditionally eligible for unemployment benefits, including self-employed individuals, independent contractors, gig-economy workers and those with limited work history. Covered individuals do not include those who are able to telework with pay or who are receiving paid leave benefits.

States are not permitted to impose waiting periods for receipt of benefits under this relief. All states have entered into an agreement with the Secretary of Labor for additional unemployment insurance funding (up to $600 per week per qualifying person for a four-month period ending on July 31, 2020) under the new Federal Pandemic Unemployment Compensation program and have either started implementing this program or are expected to implement this program by the end of April 2020. The CARES Act provides that the Secretary of Labor will establish a process for making unemployment assistance available for weeks beginning on or after January 27, 2020 through the enactment of the CARES Act.

The federal government will provide funds to States to cover unemployment insurance and related administrative costs under this program. The CARES Act also enables states to receive federal funding for short-term compensation programs and programs for employees with reduced hours and individuals who have exhausted available unemployment relief, have no right to compensation and are able to work, available to work, and are “actively seeking work.” States may provide additional flexibility for individuals who are unable to search for work because of COVID-19, including because of illness, quarantine or movement restriction. Funding will also be available for certain State reimbursements to nonprofits, government agencies and Indian tribes.

Further, under the CARES Act, applications for unemployment compensation (and assistance with the application process) must be accessible by person, by phone or online, except in the case of certain excluded government employees.

Special Rules Related to Retirement Funds

Subject to certain exemptions, current law provides that individuals who make early withdrawals (i.e., withdrawals before the age of 59½) from qualified defined contribution plans must pay an early withdrawal penalty. The CARES Act waives this tax penalty for any “coronavirus-related distributions” up to $100,000 per person. For this purpose, “coronavirus-related distributions” cover distributions from an eligible retirement plan made during calendar year 2020 to an individual: (1) diagnosed with COVID-19; (2) whose spouse or dependent was diagnosed with COVID-19; or (3) who experiences adverse financial consequences as a result of being quarantined, furloughed or laid off (including reduced work hours) or is unable to work due to lack of child care because of COVID-19.

Income attributable to such distributions will be subject to tax ratably over a three-year period, unless the individual recontributes their coronavirus-related distributions to an eligible retirement account within three years, which the individual may do without regard to that year’s caps on contributions.

Loans from certain qualified employer plans (including government, nonprofit and 403 plans) made during the 180-day period following the date of enactment of the CARES Act will not be treated as distributions if they do not exceed the lesser of $100,000 (increased from $50,000) and the present value of the accrued benefits under the plan (or if greater, $10,000). In addition, the due date for certain outstanding loans that are otherwise due on or prior to December 31, 2020 will be delayed for one year.

The CARES Act temporarily allows applicable retirement plans to adopt these rules immediately and to be amended to allow hardship distributions or loans that are not otherwise permitted by the plan, but does not require it. Furthermore, the CARES Act temporarily waives required minimum distributions for certain qualified retirement plans for calendar year 2020.

Under the final turn of the CARES Act, provisions were added regarding filing deadlines and funding requirements pursuant to the Employee Retirement Income Security Act of 1974, as amended (ERISA). Specifically, the CARES Act amends the filing deadlines under ERISA to provide the Department of Labor the ability to postpose certain ERISA filing deadlines for up to one year in the case of a public health emergency declared by the Secretary of Health and Human Services. The minimum required contribution deadlines in 2020 for companies that sponsor single-employer pension plans will be extended to January 1, 2021 (but will accrue interest). Additional relief may be available for cooperative and small employer charity pension plans.

For a more in-depth analysis regarding considerations related to qualified retirement plans, please refer to our client note, Qualified Retirement Plans During COVID-19: The CARES Act and Other Considerations.

Exclusion for Certain Employer Payments of Student Loans

The CARES Act provides that employers may contribute up to a maximum of $5,250 toward an employee’s student loans in a manner that will not be taxable income to the employee. Such contributions must be made in compliance with certain rules. This provision applies to any student loan payment made by an employer on behalf of an employee after the date the CARES Act is enacted and before January 1, 2021.

Paycheck Protection Program Loans

The CARES Act expands eligibility for loans under Section 7(a) of the Small Business Act, and authorizes the Small Business Administration (SBA) to make $349 billion in Section 7(a) loans during the period between February 15, 2020 and June 30, 2020. The Paycheck Protection Program and Health Care Enhancement Act enacted on April 24, 2020 subsequently allocates an additional $310 billion to the program, bringing the total amount assigned to the Paycheck Protection Program to $659 billion. The loans are guaranteed by the government and eligible for forgiveness for amounts spent on payroll costs, utilities, rent and mortgage interest during the 8-week period after the loan origination date, with such forgiveness amount reduced proportionately by any reduction in employee headcount or certain reductions in salary or wages. Senator Marco Rubio, chairman of the Senate Committee on Small Business and Entrepreneurship, said that the goal of the proposal is to transfer enough money to allow small businesses to make payroll and other operating obligations over roughly the next six weeks.

Key aspects include:

  • Eligible Borrowers. In addition to entities currently eligible for the loans, the CARES Act expands eligibility for the loans to include: (1) any business, nonprofit organization, veterans organization, or Tribal business concern that has 500 or fewer employees or that otherwise meets the size standards established by the SBA for the relevant industry, (2) sole proprietors, independent contractors and other self-employed individuals, and (3) businesses with an NAICS classification that begins with 72 (Accommodation and Food Services) with more than one physical location and which employ no more than 500 employees per physical location. Borrowers are not required to demonstrate that they cannot obtain credit elsewhere (as would typically be required for Section 7(a) loans).
  • Certification. Additionally, borrowers must make a good faith certification: (1) that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient, (2) to acknowledge that funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments and utility payments, and (3) that the recipient has not received, and does not have another application pending, for loans under Section 7(a) for the same purpose.
  • Maximum Loan Amount. The lesser of $10,000,000 or 2.5 times the average total monthly payments for covered payroll costs incurred during the 1-year period preceding the date of the loan (with exceptions for (1) businesses that are seasonal, and (2) businesses that were not open during the period beginning on February 15, 2019 and ending on June 30, 2019).
  • Payroll Costs. Covered payroll costs include salary, wages, cash tips, payments for vacation, parent, family, medical or sick leave, allowance for dismissal or separation, payments for group health care benefits, payments of retirement benefits, payments of state or local taxes on employee compensation, and payments of any compensation to or income of a sole proprietor or independent contractor that is wages, compensation or similar payments up to an annual rate of $100,000 (as prorated for a covered period). The following are expressly excluded from payroll costs: (1) any compensation of an individual employee in excess of an annual salary of $100,000 (as prorated for the covered period), (2) compensation to employees whose principal place of residence is outside the U.S., and (3) qualified sick leave or family leave wages for which a credit is allowed under Section 7001 or Section 7003 of the Families First Coronavirus Response Act.
  • Limited waiver of affiliation rules. Notably, the affiliation rules (which would otherwise require the aggregation of employees by businesses under common control) under the SBA Act are waived with respect to businesses with an NAICS classification that begins with 72 (Accommodation and Food Services), any business operating as a franchise that is assigned a franchise identifier code by the SBA; and any business that receives financial assistance from a Small Business Investment Company. It is possible that additional waivers of the affiliation rules may be adopted in the SBA’s regulations implementing the CARES Act provisions.
  • Maturity and interest rate. Sets a maximum maturity of 10 years from the date of the loan and a maximum interest rate of 4%.
  • Allowable Uses. In addition to the generally allowable uses of Section 7(a) loans, the borrower may use proceeds from the loans for payroll costs; costs related to the continuation of group health care benefits during periods of paid sick, medical or family leave and insurance premiums; employee salaries, commissions or similar compensation; mortgage interest payments; rent; and utilities.
  • No Collateral Requirements or Personal Guarantees. Borrowers are not required to post collateral or have personal guarantees under the loans (as they would under typical Section 7(a) loans).
  • Fee waiver. Fees normally charged by the SBA for Section 7(a) loans are waived.
  • Deferral. All payments of principal and interest under the loans are deferred for a period between six months and one year.
  • Loan Forgiveness. Borrowers are eligible for forgiveness of the loans in the amount equal to the sum of payroll costs, mortgage interest payments, rent and utilities incurred during the 8-week period following the origination of the loan. The loan must be allocated such that 75 percent of the loan proceeds must be used for payroll costs. Not more than 25 percent of the forgiven amount may be used for allowed non-payroll costs. Furthermore, the amount of forgiveness will be reduced (i) proportionately by any reduction in employee headcount in the covered period with respect to either (1) the period between February 15, 2019 and June 30, 2019, or (2) the period between January 1, 2020 and February 29, 2020 (or other period for seasonal businesses), (ii) by the amount of reduction in salary or wages beyond 25% of any employee (measured based on the most recent full quarter before the covered period) who did not receive, during any 2019 pay period, wages or salary at an annualized rate of pay of more than $100,000. However, there is an exemption in the reduction in loan forgiveness to the extent employees that were terminated or had pay reductions from February 15, 2020 through 30 days after the enactment of the CARES Act are rehired or given wages or salary increases by June 30, 2020. The SBA is required to issue guidance and regulations implementing these loan forgiveness provisions no later than 30 days after the enactment of the CARES Act (other rules implementing the SBA provisions are to be adopted within 15 days after implementation). Borrowers will not recognize any income for federal tax purposes on the portion of the loans that are forgiven.
  • Interaction with Payroll Tax Credit and Delayed Payroll Tax Payment Provisions. If a company receives a loan under the Paycheck Protection Program, it is not eligible for the payroll tax credit under the CARES Act.  In addition, if a company takes a loan under the Paycheck Protection Program and the loan is forgiven, the company is not eligible for the delayed payment of payroll taxes under the CARES Act. 

The loans will be available from existing SBA-certified lenders, and others that may be added. With respect to risk weightings of federal banking agencies and the National Credit Union Administration Board, a covered loan will receive a risk weight of zero percent.

Business Tax Provisions

The CARES Act contains tax provisions intended to provide business with liquidity as the world addresses the COVID-19 pandemic. The business tax provisions of the CARES Act allows taxpayers: (i) to fully offset taxable income for certain years with post-2017 net operating losses (NOLs); (ii) to carryback certain NOLs up to five years; (iii) to immediately claim tax credits for taxes paid under the alternative minimum tax (AMT) in prior years; (iv) to deduct additional interest expense; (v) to claim bonus depreciation for improvements to nonresidential buildings; (vi) to claim a refundable payroll tax credit for qualified wages paid by COVID-19 impacted taxpayers; and (vii) to delay tax payments for the employer portion of certain payroll taxes. Each of these changes is discussed in more detail below.

  • Net Operating Loss Carrybacks and Carryforwards. The CARES Act significantly increases the ability of corporations to utilize NOL carryforwards and carrybacks for 2018, 2019, and 2020. The Tax Cuts and Jobs Act (TCJA) enacted at the end of 2017 eliminated net operating loss carrybacks and limited a corporation’s ability to use NOL carryforwards in any given year to 80 percent of taxable income. Section 2303 of the CARES Act temporarily reverses both of those changes by permitting a corporation to carryback NOLs from 2018, 2019 and 2020 for five years. The change also allows corporations to carryback NOLs from 2018 and 2019 that were previously subject to the TCJA disallowance of NOL carrybacks. In the event that a taxpayer has an NOL carryback to 2017 and such taxpayer had an income inclusion under Section 965 of the Code, the taxpayer is treated as having made an election under Section 965(n) of the Code such that the NOL is not used in determining the taxpayer’s income inclusion under Section 965 of the Code. Alternatively, the CARES Act provides that a taxpayer may make an election to exclude taxable years in which it had an inclusion under Section 965 of the Code from the carryback period. The CARES Act also suspends the 80 percent taxable income limitation to permit a corporation to offset without limitation its taxable income in 2019 or 2020 with NOL carryforwards from 2018 or 2019. In addition, Section 2304 generally allows partnerships and businesses operated as sole proprietorships to utilize business losses without regard to the excess business loss rules enacted by the TCJA by delaying the application of such excess business loss limitations of Section 461(l) of the Code to tax years beginning after December 31, 2020. Other rules that limit losses, such as the passive activity rules under Section 469 of the Code, continue to apply. Taxpayers with losses that were not allowed in 2018 and 2019 as a result of the limitation under Section 461(l) of the Code may file claims for refund.
  • Alternative Minimum Tax Credit Carryforwards. Section 2305 of the CARES Act accelerates the ability of a corporate taxpayer to utilize corporate AMT credits to offset its tax liability. The TCJA eliminated the corporate AMT. However, under the AMT, a taxpayer received tax credits for amounts paid under the AMT, which taxpayers were allowed to carryforward after the elimination of the AMT. The TCJA permitted a corporate taxpayer to utilize AMT credit carryforwards to offset taxable income and receive a refund for up to 50 percent of unused AMT credit carryforwards at the end of each of 2018, 2019 and 2020. Any remaining AMT credit carryforwards would have been refundable at the end of 2021. The CARES Act permits a corporation to immediately request a refund for any remaining corporate AMT carryforwards.
  • Increased Interest Expense Limitation. The TCJA amended the interest expense limitations under Section 163(j) of the Code such that taxpayers may only deduct net business interest expense up to 30 percent of the taxpayer’s adjusted taxable income. For interest expense incurred by a partnership, the partnership rather than the partnership’s partners apply the interest expense limitation under Section 163(j) of the Code. Section 2306 of the CARES Act increases the interest expense limitation in two ways. For 2019 and 2020, the CARES Act increases this limitation to 50 percent (rather than 30 percent) of the taxpayer’s adjusted taxable income. In addition, the CARES Act permits a taxpayer to elect to use its 2019 adjusted taxable income to determine its limitation for 2020, thereby potentially allowing a taxpayer to deduct additional interest expense in the event that the taxpayer’s adjusted taxable income from 2019 exceeds its adjusted taxable income for 2020. The CARES Act provides that an election to use the partnership’s 2019 adjusted taxable income will be made by the partnership rather than the partner. For a discussion of additional tax considerations with respect to structuring borrowings, see our recent perspective, Tax Planning for Multinational Borrowers During the COVID-19 Crisis.
  • Bonus Depreciation for Qualified Improvement Property. The TCJA provided for 100 percent bonus depreciation for certain investments in depreciable property. However, as a result of a provision commonly referred to as “the retail glitch,” any investment in any improvement to any interior of a nonresidential building meeting the definition of “qualified investment property,” was not eligible for bonus depreciation. Section 2307 of the CARES Act permits taxpayers to claim bonus depreciation with respect to such improvements effective retroactively as if originally included in the TCJA, thereby enabling businesses (especially in the hospitality and retail industries) to immediately expense costs associated with improving facilities.
  • Employee Retention Payroll Tax Credit. Section 2301 of the CARES Act provides a refundable payroll tax credit up to 50 percent of eligible wages paid by employers to employees from March 13, 2020 through December 31, 2020 whose (i) operations were fully or partially suspended due to a COVID-19 related shut-down order or (ii) gross receipts declined by more than 50 percent compared to the same quarter in the prior year. The credit is capped at $10,000 of compensation per employee (which includes health benefits). For eligible employers with 100 or fewer employees, all employee wages paid qualify as eligible wages for the purpose of the payroll tax credit. For eligible employers with more than 100 employees, only wages paid to employees when they are not providing services due to a COVID-19 related shut-down order or a 50 percent reduction in gross receipts are eligible for the payroll tax credit.
  • Delayed Tax Payments. Under Section 2302, the CARES Act delays the payment of employer payroll taxes for the period between the date of enactment and December 31, 2020. Rather than making the required payments in 2020, an applicable employer would owe 50 percent of such taxes on December 31, 2021 and the remaining 50 percent of such taxes on December 31, 2022.

Labor Provisions Relating to Paid Sick Leave

Amendments to the Emergency Family and Medical Leave Act

The CARES Act makes clarifying amendments to the Emergency Family and Medical Leave Expansion Act (the “FMLA Expansion Act”), signed on March 18, 2020, which amended the Family Medical Leave Act of 1993 (FMLA). The FMLA Expansion Act expanded family and medical leave for certain U.S. employees. The FMLA Expansion Act requires employers with fewer than 500 employees to provide up to 12 weeks of paid sick leave to full-time and part-time employees for “a qualifying need related to a public health emergency.” The qualifying need applies to employees unable to work (or telework) due to a need to care for a minor child home due to a school or other care facility closure due to COVID-19. The first two weeks are unpaid (but an employee can substitute accrued paid leave), and the remaining 10 weeks are paid at two-thirds of the employee’s regular rate for the number of hours the employee would otherwise have been scheduled to work, up to a maximum payment of $200 per day and $10,000 in the aggregate. The CARES Act provides that employers may, but are not required to, pay more than these thresholds.

Emergency Paid Sick Leave Act

The FMLA Expansion Act also requires qualifying employers to provide paid sick leave to an employee who is unable to work (or telework) because of sick leave due to COVID-19 or because the employee is caring for a quarantined individual or minor child. The CARES Act provides that an employer is not required to pay more than either $511 per day ($5,110 in the aggregate) to an employees on sick leave due to COVID-19, or more than $200 per day ($2,000 in the aggregate) to an employee who is caring for a quarantined individual or minor child.

Until December 31, 2020, paid sick leave will also be available in certain instances for employees who were laid off by their employer after March 1, 2020 due to COVID-19, had worked for their employer for at least 30 of the last 60 days prior to the layoff, and were rehired by their employer. Businesses with fewer than 50 employees are exempt from these requirements if the paid leave is for caring for others, but not if the employee is sick with or has COVID-19 symptoms. These provisions may also not apply to certain government employees.

For more information on these topics, please refer to our client note, Expanded Employee Leave: Application and Enforcement.

Stay Tuned

Following days of protracted debate in the Senate, Congress finally passed the CARES Act on March 27, 2020. The Shearman team is committed to remaining abreast of further developments with regards to the CARES Act and other legislative and regulatory measures undertaken in response to the COVID-19 pandemic.

Special thanks to Andrew Lewis, Caitlin Hutchinson Maddox & Teri Tillman for their contribution to this publication.

Authors and Contributors

Reena Agrawal Sahni

Partner

Financial Institutions Advisory & Financial Regulatory

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New York

Gillian Emmett Moldowan

Partner

Compensation, Governance & ERISA

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New York

Jay M. Singer

Partner

Tax

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Washington DC

J. Russel Denton

Partner

Emerging Growth

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Austin

Brian Dillavou

Partner

Emerging Growth

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Austin

Christopher Forrester

Partner

Capital Markets

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Menlo Park

Jonathan Browalski

Associate

Emerging Growth

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Austin

Steven Blau

Associate

Financial Institutions Advisory & Financial Regulatory

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New York

Rachel Kim

Associate

Capital Markets

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Menlo Park

Joshua Savey

Associate

Tax

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Washington DC

Melisa Brower

Associate

Compensation, Governance & ERISA

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New York

Taylor Pugliese

Associate

Financial Institutions Advisory & Financial Regulatory

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New York