CARES Act Resources
The recently passed CARES Act is allocating trillions of dollars through various programs to support people and businesses adversely affected by the COVID pandemic. Many of the programs available to businesses fall withing three main buckets: Employee Retention/Relief, Federal Lending and Tax Provisions. Below are some quick links and explanations of the different provisions. For detailed explanation of how these programs may be used by your company, please consult an appropriate legal or tax professional.
- Penalty-Free Coronavirus-Related Distributions in 2020: Participants in eligible retirement plans (including 401(k)’s) may take distributions in 2020 of up to $100,000 from their plan benefits for corona-related impacts without incurring the 10% early distribution tax that would otherwise generally apply to payments made prior to age 59-1/2. A qualified individual who takes a coronavirus-related distribution can repay it to an eligible retirement plan within three years of taking the distribution without it counting towards the annual contribution limit.
- Plan Loan Dollar Limits Increased Temporarily: The maximum amount that a qualified individual may borrow from a plan account balance would temporarily increase to the lesser of $100,000 or the fund balance for half a year from 3/27/20. The Act would provide a one-year extension of time to repay a plan loan if the due date occurs between 3/27/20 and 12/31/20.
- Plan Amendments: Plans would need to be amended to reflect these new rules under the Act by the last day of the plan year beginning on or after January 1, 2022 (i.e., for calendar year plan years, by December 31, 2022). Guidance from the Department of Labor on impacts to plans as a result of the pandemic can be found through this link.
Federal Lending Facilities
- Paycheck Protection Program: The CARES Act makes available $349 billion for loans under the Paycheck Protection Program that is aimed at supporting some payroll and business expenses for small businesses (500 or fewer employees) for as much as $10 million. Loans used on (i) payroll costs; (ii) interest payments on any mortgage incurred prior to 2/15/20; (iii) rent on any lease in force prior to 2/15/20; and (iv) utilities during the eight-week period after the origination date of the loan may be forgiven under certain conditions. Amounts forgiven will not be treated as income for federal tax purposes. For additional information, please see this fact sheet and Treasury FAQs.
- Exchange Stabilization Fund Lending: The CARES Act also injected $454B into the Treasury’s Exchange Stabilization Fund to support business lending programs through the Federal Reserve. As a result, the Federal Reserve has established lending facilities aimed at providing access to cash for qualifying businesses. Those facilities include:
- The Main Street Lending programs which set aside $600B for 3 separate facilities covering new loans or the expansion of existing loans for businesses with less than 15,000 employees or less than $5 billion in revenues. Companies that might seek loans under the Main Street program could also still benefit from the Paycheck Protection Program. Terms sheets and FAQs on these programs can be found through this link.
- These efforts complement the other Federal Reserve programs such as the Primary Market Corporate Credit Facility (detailed fact sheet here), which is focused on the purchase corporate bonds or syndicated loans
- The Secondary Market Corporate Credit Facility (detailed fact sheet here), focused on facilitating the liquidity in existing corporate bonds and syndicated loans
- The Commercial Paper Funding Facility, that is focused on supporting the commercial paper market.
It should be noted that the CARES Act puts some conditions on companies availing themselves of lending facilities supported by the Exchange Stabilization Fund including
- Compensation above $3 million is capped using a formula, and salaries above $425,000 are frozen, for duration of loan plus 12 months thereafter.
- Retirement and severance are capped at twice the maximum total annual compensation received by that employee
- For duration of loan and 12 months thereafter, cannot pay common stock dividends or buy back stock
New Tax Provisions
- Payment Relief for Employment Taxes: The payment of the employer portion of Social Security tax on employee wages may be delayed (rather than permanently reduced or eliminated) for 2020. This also would apply to deposit requirements as well. Half of deferred payments must be paid by employers in 2021 and the remaining half of deferred payments must be paid by employers in 2022. Employers receiving loan forgiveness under Paycheck Protection Program are not eligible for this relief. For additional information, please see this link.
- Payroll Tax Credit: Employers are eligible for a 50 percent refundable payroll tax credit on wages paid up to $10,000 per eligible employee during the crisis. The credit would be available to employers whose businesses were fully or partially suspended under government order due to virus shutdowns or had a decrease in gross receipts of 50 percent or more when compared to the same quarter last year. For employers with fewer than 100 employees the credit is based on wages paid to all employees, regardless if they worked or not. For employers with greater than 100 employees the credit is allowed only for wages paid to employees who did not work during the calendar quarter. For additional information, please see this link.
- Carryback of Net Operating Losses (NOLs): The restriction that NOLs arising in a tax year beginning after 12/31/17 may only be carried forward, and are subject to an annual deduction limitation of 80% of taxable income is suspended for tax years beginning before 1/1/21. For additional information, please see this link.
- Interest Deductions: For tax years beginning in 2019 (except for partnership taxpayers) and 2020, business interest is limited to 50% of adjusted EBITDA rather than 30% in order to reduce the cost of raising cash through debt and help companies finance continued operations. Taxpayers may opt-out of this increase in the limitation. Additionally, taxpayers may use their 2019 taxable income figures to calculate their 2020 limitation.
- Corporate AMT Credits: AMT remaining after its repeal were made available as refundable credits over several years, ending with tax years beginning in 2021. Corporations may recover those AMT credits immediately, either in the form of a refund or credit to offset current year tax. For additional information, see this link.
- Excess Business Losses: The “excess business loss” limitation applicable to pass-through businesses and sole proprietors is suspended for tax years beginning prior to January 1, 2021.
- Charitable Deductions: The limitation on charitable contributions (including contributions of food inventory) by corporations is increased to 25% of the corporation’s adjusted gross income for cash contributions made during the 2020 calendar year.
API-PWC Webcast: Government relief programs: Opportunities and implications for businesses in the energy industry
API understands that the business relief and employee retention provisions in the CARES Act are complicated. Accordingly we arranged a webinar with professionals with PWC to go through them in more detail. A copy of the materials, survey questions and a replay of the webinar can be found through the following links.