CARES Act

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was passed into law on March 27, 2020. To date, the CARES Act is the single largest economic bill in U.S. History, and among other things, it provides financial assistance to businesses and individuals in the form of favorable loan programs, tax relief for businesses and individuals, retirement account changes for individual distributions and loans, and employer-targeted relief.

BUSINESSES

Financial assistance to businesses consists of loan and tax components. 

I. BUSINESS LOANS UNDER THE PAYCHECK PROTECTION PROGRAM

The CARES Act established the Paycheck Protection program. Loans authorized under this program are handled through financial institutions, but administered by the Small Business Administration (SBA) under its 7(a) lending program.  Loans under this program are to be used for payroll costs; continuation of group health care benefits during periods of paid sick, medical, or family leave, or insurance premiums; salaries or commissions or similar compensation; interest on mortgage obligations; rent; utilities; and interest on other outstanding debt. These loans could provide substantial benefits to borrowers.

These loans are potentially forgivable up to 100 percent of the principal amount borrowed. Qualified recipients may include those businesses with less than 500 employees such as the following:

• small businesses, other business concerns, nonprofits, veterans organizations, and Tribal concerns—please note that SBA size standards may allow a greater number than 500 or more employees;
• individuals who operate as sole proprietorships, independent contractors, and certain self-employed individuals; and
• accommodation and food service providers with fewer than 500 employees per location.

Each potential borrower is eligible for one loan, and the principal amount loaned cannot exceed the lesser of: (i) $10 million; or (ii) the sum of 2.5 times the average monthly payroll cost during the year prior to the loan. Payroll costs are defined broadly to include wages, salaries, retirement contributions, healthcare benefits, covered leave, and other expenses.

Borrowers receiving loans under this program are not required to establish losses suffered during the national disaster to be eligible for loan forgiveness, as it is presumed that the virus outbreak has caused financial distress. This is unlike the SBA disaster loans that do require the borrower to establish the losses to be eligible.

Borrowers under this program may be eligible for forgiveness determined by a formula and other factors. The amount eligible for forgiveness is an amount equal to the sum of costs incurred and payments made during the 8-week period beginning on the loan origination date for any (i) payroll costs, (ii) interest on any covered mortgage obligations, (iii) covered rent obligations, and (iv) covered utility payments provided that such amount does not exceed the original loan amount. The amount forgiven will be reduced by reductions in full-time employment (if these reductions were made between February 15, 2020, and June 30, 2020) and by the decrease in the pay of any employee beyond 25 percent of their historical compensation during such same time period. However, any reductions in the size of the workforce or the compensation made during the period between February 15, 2020, and April 26, 2020, will not be used in determining eligible forgiveness if the business rehires the employees or reinstates the historical compensation by June 30, 2020. Any amount that is forgiven under the program shall be excluded from gross income – typically loan forgiveness is treated as includible by the recipient. Loans not forgiven will be for a term not to exceed 10 years and at an interest rate of no more than 4 percent.

Regardless of the amount, loans under this program are fully guaranteed by the federal government, which is better than traditional SBA loans. Before the CARES Act, the SBA guaranteed 85 percent of the loan amount for loans up to $150,000, and for loans greater than $150,000 the SBA guaranteed 75 percent of the loan amount. The SBA is expected to provide guidance on the loan application process this week, but a lender must make a decision on the application within 60 days of receipt. There is no requirement of a personal guarantee or collateral for these loans even though for loans in excess of $350,000, the SBA traditionally requires that the lender collateralize the loan to the maximum extent possible up to the loan amount—and that may include requiring a personal guarantee. Further, the CARES Act waives the requirement that businesses show they cannot obtain credit elsewhere.

A borrower must certify that (i) the uncertainty of current economic conditions makes the loan necessary to support the ongoing operations of the recipient; and (ii) borrowed funds will be used for the purposes identified above. The SBA also announced last week potential benefits under what is labeled as Small Business Economic Injury Disaster Loans but that program would be instead of and not in addition to the above. Generally, the CARES Act terms will be more beneficial. Other requirements concerning CARES Act loans apply too, which can be addressed with you upon request.

If you have any questions please regarding CARES Act loans, please contact Christopher Hunt (CHunt@www.kwgd.com), David Lewis (DLewis@www.kwgd.com), or any KWGD corporate attorney at 330-497-0700 or 330-535-4830.

II. BUSINESS TAX RELIEF

Net Operating Loss Carrybacks C Corporations. 
The 2017 Tax Act repealed net operating loss carrybacks for all taxpayers. For net operating losses incurred in 2018, 2019, and 2020, the CARES Act allows net operating losses generated in those years to be carried back five years. This is significant especially because the corporate income tax rate was reduced to 21 percent by the 2017 Act for 2018 and later years. Now, the CARES Act allows a net operating loss carryback to years prior to 2018 when the corporate income tax rate was much higher. It may be possible now by virtue of this change to obtain a significantly higher tax refund by using current net operating losses to carry back to periods before 2018 when corporate income tax rates were as high as 35 percent.

Net Operating Loss Carrybacks for Non-Corporate Taxpayers.
Like the provisions above for C corporations, non-corporate taxpayers can also carry back net operating losses as described for C corporations above.

Payroll Tax Deposit Deferral.
For employer’s matching social security tax obligations incurred in 2020, employers and self-employed can elect to postpone their ordinary deposits—otherwise required to be paid during the course of 2020—instead to be paid in equal installments by December 31, 2021, and December 31, 2022. Please note that this does not extend to the Medicare portion of the employer’s matching contribution and importantly, all employee withholdings from wages must still be deposited on time and are not eligible for postponement. And please note, that if a taxpayer obtains a CARE Acts loan, then it will not be eligible for payroll tax deposit deferral outlined above.

Employee Retention Credit.
For non-government employees including non-profits, who fully or partially suspended operations caused by government orders or else have gross receipts of 50 percent or less compared to the same quarter in the year before, a refundable payroll tax credit measured by 50 percent of wages including health care expenses can be taken with respect to amounts paid between March 13, 2020, and December 31, 2020. It appears this credit will be claimed on Form 941, although IRS has not yet published guidance. The payroll tax credit will be limited to $10,000 of wages per employee. For employers who employed more than 100 employees in 2019, the credit will be limited to only qualifying wages paid when an employee provided no services, but further limited to 30 such days. For employers with 100 or fewer employees in 2019, the credit will be based on all employee wages.

Charitable Contributions.
The corporation’s charitable deductions limit has been increased from 10 percent to 25 percent for 2020.

Donations of Food Inventory.
The food inventory donations limit applied to C corporations and other taxpayers prior to the CARES Act was limited to 15 percent of net income without respect to the donated food inventory. That limit has been increased to 25 percent under the CARES Act. The donation amount is equal to the taxpayer’s adjusted basis in the food inventory plus 50 percent of the profit that would have otherwise been realized on its sale.

Corporate Alternative Minimum Tax Credits Carryforwards.
For those C corporations that had unused AMT credit carryovers generated by years prior to 2018, the AMT carryforward can be applied in 2018 (amended return) or 2019 and the excess of the AMT carryforward over the regular tax liability will be refundable.

Qualified Improvement Property.
The 2017 Tax Act extended the useful life for certain qualified improvement property for leaseholds, restaurants, and retail from 15 years to 39 years. The CARES Act allows certain qualified improvement property to use the 15-year life. This is a technical correction of the 2017 Tax Act.

Families First Coronavirus Response Act.

Please see KWGD March 19, 2020, Legal Alert concerning paid leave and potential payroll tax credits provided by other recent federal legislation caused by the Coronavirus.

III. INDIVIDUALS.

Rebate.
Individual taxpayers may receive rebate checks depending on income amount and whether 2018 income tax returns were filed. The rebate could be as much as $1,200 (or $2,400 for joint married filers) and up to $500 for each child eligible under age 16 for the child tax credit. But there will be a reduction in the rebate for those taxpayers with greater than $75,000 (or $150,000 for married joint filers) of adjusted gross income determined by 5 percent of the excess of adjusted gross income over $75,000 (or $150,000 for married joint filers). For example, a single taxpayer with adjusted gross income of $90,000 would have a reduction of $750 (($90,000 – $75,000) x 5 percent), and so would receive a rebate of $450 ($1,200 – $750). As a result of the reduction, single taxpayers with an adjusted gross income of $99,000 (or $198,000 for married joint filers) or greater will receive no rebate.

The U.S. Treasury will determine the rebate amount based on a taxpayer’s 2019 income tax return or the 2018 return if the taxpayer has not yet filed 2019. Rebate checks are expected to be sent as soon as possible, and taxpayers should expect to receive them in about three weeks.

Charitable Contributions.
There are also tax incentives to individual taxpayers for cash charitable contributions. Taxpayers that do not itemize deductions will receive an above-the-line deduction up to $300 for charitable contributions of cash. For taxpayers that itemize deductions, there is no 60 percent adjusted gross income limitation for charitable contributions of cash in 2020.

Employer Educational Assistance.
Employer-sponsored educational assistance has been expanded to include student loan payments made by employers in 2020 on behalf of their employees. The CARES Act qualifies 2020 payments on employee education loans as a permissible payment subject to the total $5,250 educational allowance that presently covers tuition, fees, and supplies. Employer-paid student loan payments that do not exceed these limits are excluded from income under this new provision.

Ohio.
Ohio has moved the tax filing deadline from April 15, 2020, to July 15, 2020, but it has not offered any kind of tax benefits to Ohio taxpayers.

If you have any questions regarding business and individual tax relief, please contact Christopher Hunt (CHunt@www.kwgd.com), David Lewis (DLewis@www.kwgd.com), Nate Tucker (NTucker@www.kwgd.com), or any KWGD tax attorney at 330-497-0700 or  330-535-4830.

IV. RETIREMENT PLAN ACCESS AND REQUIRED MINIMUM DISTRIBUTIONS

The CARES Act provides employees impacted by the Coronavirus with opportunities to access money in a retirement plan accounts by:

• “Coronavirus related distributions” to participants;
• Increasing the maximum Participant loan amount to the lesser of $100,000 or 100% percent of the participant’s vested account balance; and
• Temporarily suspending certainly required minimum distributions.

Generally, a retirement plan providing “coronavirus-related distributions” or increased loan amounts will be treated as being operated in compliance with the terms of the plan so long as the plan is retroactively amended to include such distributions or loans on or before December 31, 2022.

Coronavirus Related Distributions.
The CARES Act provides that an eligible retirement plan may make “coronavirus-related distributions” to qualifying participants in the plan and that such distributions shall not be subject to the 10 percent early distribution penalty that might otherwise apply. A “coronavirus-related distribution” may be made to a participant:

• Who was diagnosed with COVID-19;
• Whose spouse or dependent was diagnosed with COVID-19; or
• Who experiences adverse financial consequences: (i) due to being quarantined, laid off or having their hours reduced; (ii) as a result of being unable to work due to a lack of child care; or (iii) closing or reducing hours of a business owned or operated by the individual.

Any individual who received a “coronavirus-related distribution” may repay it over the three years following the distribution, and the repayment will be treated as a “roll-over” contribution to the plan.

A plan sponsor may rely on a statement from the individual that certifies that the distribution is a “coronavirus-related distribution”.

Retirement Plan Loans.

The CARES Act also increases the amount a plan sponsor may allow a participant impacted by COVID-19 to borrow from their retirement plan account using the same “coronavirus-related distribution”. If a loan is taken over roughly the next six months, the Plan Sponsor may allow the qualified participant to borrow the lesser of $100,000 or 100 percent of the participant’s vested account balance. This is a temporary increase from $50,000 or 50 percent of the participant’s vested account balance. 

Temporary Waiver of Required Minimum Distributions.

The CARES Act provides that for calendar year 2020 required minimum distributions will be waived concerning the majority of defined contribution plans including IRAs. In addition, any required distribution date beginning in calendar year 2020 will be waived in the same manner as required minimum distributions.

If you have any questions regarding retirement plan-related questions, please contact Paul Malesick (Pmalesick@www.kwgd.com), Andrew Byler (AByler@www.kwgd.com), or any KWGD Employee Benefits attorney at 330-497-0700.

V. EMPLOYER CLARIFICATIONS FAMILY AND MEDICAL LEAVE, SICK LEAVE, AND UNEMPLOYMENT

The CARES Act provides the following concerning employers:

– Clarification As To Who Is An Eligible Employee For The Purposes of FMLA.  An eligible employee under the Emergency Family and Medical Leave Expansion Act (EFMLA) means an employee who has been employed for at least 30 calendar days by the employer. The CARES Act clarifies that the term “employed for at least 30 calendar days” includes an employee who was: (i) laid off by the employer on or after March 1, 2020; (ii) had worked for the employer for not less than 30 of the last 60 calendar days prior to the layoff; and (iii) was rehired by the employer. Stated simply, rehired employees that meet the above criteria will be eligible for EFMLA without having to restart the 30-day requirement.

– Limitations on Paid Leave and Emergency Paid Sick Leave Act Reiterated.  Under the CARES Act, it confirms that an employer is not required to pay more than $200 per day and $10,000 in the aggregate for each employee’s paid leave under the EFMLA. Further, the CARES Act states that an employer is not required to pay more than (1) $511 per day and $5,110 in the aggregate for each employee taking leave, or (2) $200 per day and $2,000 in the aggregate for each employee taking leave, dependent upon the type of sick leave the employee is taking Emergency Paid Sick Leave (EPSL). An employer’s requirement to continue EPSL expires at the earlier of (i) 80 hours of paid leave; or (ii) upon the employee’s return to work.

– Federal Unemployment Enhancement and Ohio.  The CARES Act includes an expansion of unemployment benefits to workers impacted by COVID-19. The federal unemployment expansion will provide eligible employees and covered individuals up to $600 in additional unemployment funds each week for the first four months of the CARES Act—that is until July 31, 2020. While the federal government is providing the additional monetary benefits, state unemployment agencies will be responsible for administering the additional benefits. As written and understood, unemployed Ohio employees will be eligible for the weekly unemployment benefits for which they otherwise qualify through ODJFS in addition to the weekly $600 federal enhancement. This will provide near full income replacement for many unemployed Ohioans.

Families First Coronavirus Response Act.

Please see KWGD March 19, 2020, Legal Alert concerning paid leave and potential payroll tax credits provided by other recent federal legislation caused by the Coronavirus.   

Additionally, the federal unemployment expansion asks states to waive the one-week waiting period.  Ohio granted that waiver in an Order from the Governor in mid-March. 

If you have any questions concerning family medical leave, sick leave, and unemployment, please contact Attorney Michael J. Bogdan (mbogdan@www.kwgd.com) at 330-497-0700 or any other KWGD Labor and Employment attorney.

Note: This is a general, rather than comprehensive, a summary of the law does not serve as legal advice and should not be used to solve individual problems as slight factual changes may require a material variance in applicable legal advice.