Late in the evening of March 25, 2020, the U.S. Senate by a vote of 96 to 0 passed HR 748, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), a $2 trillion emergency relief bill that attempts to arrest the financial disruption caused by COVID-19.
This bill is not yet law. The U.S. House of Representatives will convene on Friday, March 27, to consider the bill and vote on the package. If the House passes the CARES Act, as expected, the President will then need to ratify it. President Donald Trump has said he intends to sign it into law immediately.
This is the largest economic stimulus in U.S. history.
Below is a summary of key elements of the bill, which include (I) loans, guarantees and subsidies available to qualifying small businesses; (II) general assistance available to all qualifying American businesses; (III) modifications to property tax and protections for homeowners and renters; (IV) relief for colleges, universities and their students; (V) unemployment insurance, tax credits and rebates to individuals; (VI) direct lending to qualifying businesses; (VII) assistance to air carriers and other businesses related to air transportation; and (VIII) support for the national healthcare system.
It is important to note that the CARES Act will have inadvertent errors and omissions, including definitions of important terms. When Congress next convenes, we anticipate that it will pass a measure making technical corrections to the CARES Act. We also anticipate that Congress will consider passing additional COVID-19-related relief measures in a “Phase 4” stimulus bill.
I. Small Business Loans, Guarantees and Subsidies
Title I of the CARES Act — titled Keeping American Workers Paid and Employed Act — offers loans, guarantees, loan forgiveness and other relief to small businesses (as defined under the CARES Act), including nonprofit organizations. This includes the following:
- Paycheck Protection Program. The Small Business Administration (SBA) will guarantee $349 billion in loans to small businesses to be used for specific purposes, including employee salaries, mortgage interest, rent and utilities. Payment on these loans may be deferred for a period of between six months and one year (Sec. 1102).
- Loan Forgiveness. Businesses that receive loans under the Paycheck Protection Program may receive eight weeks’ worth of loan forgiveness on amounts paid for salaries, mortgage interest and other expenses. Forgiveness amounts are reduced if an employer reduces salaries or the average number of full-time employees (Sec. 1106). Any forgiven amount that would otherwise be treated as cancellation of indebtedness income for U.S. federal income tax purposes will be excluded from gross income.
- Loan Subsidies. The SBA will provide $17 billion in subsidies for certain loans previously disbursed under the Small Business Act. These subsidies would cover six months’ worth of principal and interest payments. The SBA is also directed to offer deferments and other arrangements as necessary (Sec. 1112).
- Bankruptcy and Debtor Reorganization. The Act provides special bankruptcy protection for companies with less than $7.5 million in liquidated secured and unsecured debts as of the date that a bankruptcy petition is filed (Sec. 1113).
II. Assistance for American Businesses
Subtitle C of Title II of the CARES Act provides additional payroll and tax assistance to American businesses, including the following:
- Employee Retention Credit. Employers may receive a refundable payroll tax credit, up to $5,000 per employee, based on the amount of wages and health benefits paid during the COVID-19 crisis. To be eligible, an employer’s operations must have been fully or partially suspended, or the employer must have experienced a more than 50 percent decline in gross receipts, compared to the same quarter in the prior year (Sec. 2301). This credit is not available to employers that receive a small business interruption loan under this Act.
- Delay of Payroll Taxes. Employers may defer payment of the employer’s 2020 share of Social Security taxes, to be paid over the following two years: half due by December 31, 2021, and the other half due by December 31, 2022 (Sec. 2302).
- Modifications for Net Operating Losses. Net operating losses arising in tax years 2018, 2019 or 2020 may be carried back five years, and the 80 percent taxable income limitation is temporarily removed, so that a net operating loss may fully offset income (Sec. 2303).
- Modification of Limitation on Business Interest. Businesses may increase the amount of deductible interest expense, from 30 percent to 50 percent for 2019 and 2020 (Sec. 2306).
Unlike the assistance provided under Title I of the CARES Act, the assistance provided under Title II Subtitle C is not limited to those that qualify as small businesses under the CARES Act.
The above are general summaries of these tax provisions. A more detailed summary and analysis is available here.
III. Property Tax Modifications and Housing Protections
The CARES Act contains significant provisions related to housing. These provisions include taxation, updated antidiscrimination provisions and eviction moratoriums for properties that are affected by federal programs.
As noted, net operating losses arising in tax years 2018, 2019 or 2020 may be carried back five years, and the 80 percent taxable income limitation is temporarily removed, so that a net operating loss may fully offset income. However, the loss carryback provisions would not apply to real estate investment trusts (Sec. 2303).
Under the CARES Act, landlords will be prohibited from discriminating against tenants with substance abuse disorders in leasing and renewal applications. This prohibition is a part of a larger amendment to the Health Insurance Portability and Accountability Act (HIPAA) related to the disclosure of records regarding substance abuse disorders (Sec. 3221). The CARES Act also provides protection against evictions for renters who are leasing multifamily units from owners with federally backed mortgages in forbearance (Sec. 4023) and includes a four-month moratorium on evictions, fees, penalties and other charges for the nonpayment of rent. The moratorium applies to most properties that are backed by federal mortgages, rental assistance and other federal programs (Sec. 4024).
IV. Assistance for Colleges, Universities and Their Students
The CARES Act contains several provisions that give colleges and universities flexibility in dealing with interruptions caused by COVID-19. The CARES Act also provides significant relief for borrowers with federal student loans. The provisions
- allow colleges to make payments to work-study eligible students who were unable to exhaust their work-student allotment due to COVID-19; students are eligible receive the rest of their work-study allotment (Sec. 3505)
- authorize students in calculating satisfactory academic progress to exclude attempted credits that were not completed due to qualifying emergencies such as COVID-19 (Sec. 3509)
- require the Secretary of Education to suspend federal student loan payments for six months, suspend interest accrual for six months and allow borrowers seeking loan forgiveness to receive six months’ credit toward loan forgiveness while loan payments are suspended (Sec. 3513)
- authorize the Secretary of Education to modify and waive service requirements for Teach Grants due to emergencies such as COVID-19. This section also requires the Secretary to allow teachers seeking loan forgiveness to claim five consecutive years of teaching service, even if their service is interrupted by emergencies such as COVID-19. However, the teacher must resume service following the emergency (Sec. 3519).
V. Unemployment Insurance and Individual Rebates and Credits
Title II, Subtitle A of the CARES Act provides for expansions of unemployment and similar benefits, including
- payments to those not traditionally eligible for unemployment but who are unable to work as a result of COVID-19 (Sec. 2102)
- an additional $600 per week payment to those on unemployment (Sec. 2104)
- an additional 13 weeks of unemployment benefits (Sec. 2107)
- funding to states without a waiting week for unemployment benefits (Sec. 2105)
- reimbursements to states for unemployment benefits provided to government agencies and nonprofit organizations (Sec. 2103)
This subtitle also provides for grants to states that establish “short-time compensation programs” (Sec. 2108-11), extended benefits under the Railroad Unemployment Insurance Act (Sec. 2112-14) and $25 million to the Office of the Inspector General of the Department of Labor to carry out audits, investigations and other oversight activities of the matters under this subtitle (Sec. 2115).
Title II, Subtitle B provides for U.S. residents with adjusted gross income up to $75,000 ($150,000 if married), subject to certain exceptions, to receive a tax credit in the amount of $1,200 ($2,400 if filing a joint return) and $500 per eligible child, subject to a phaseout (Sec. 2201). This subtitle also affords special treatment to distributions and loans to those adversely affected by COVID-19 from certain retirement and employer plans (Sec. 2202-03), provides for a new deduction and eased maximum levels of deductions for charitable contributions (Sec. 2204-05) and allows employers to make tax-free payments toward an employee’s student loans (Sec. 2206).
VI. Coronavirus Economic Stabilization Act of 2020
Title IV, Subtitle A of the CARES Act provides $500 billion of funding for loans, loan guarantees and other investments in support of eligible businesses, states and municipalities. This funding authorization includes
- up to $29 billion in support of air carriers (discussed in greater detail below in Section VII)
- up to $17 billion for businesses critical to national security
- up to $454 billion for the emergency lending facilities of the Federal Reserve Board to provide loans, loan guarantees and investments in eligible businesses, states and municipalities
A portion of the $454 billion used for emergency lending will be targeted for lending to midsize organizations with 500 to 10,000 employees (Sec. 4003).
The distribution of the authorized funds will be determined by the Secretary of the Treasury and the Federal Reserve Board as specific guidelines for eligible recipients beyond air carriers and businesses critical to national security are not laid out in the subtitle (Sec. 4003).
However, with respect to any loan or loan guaranty by the Secretary of the Treasury, certain restrictions will apply, including that any recipient must (i) be created or organized in the United States and have a majority of its employees based in the United States (Sec. 4003), (ii) agree to not pay any dividends or perform any stock buybacks until 12 months after the termination of the loan (Sec. 4003), (iii) agree not to reduce its employment level by more than 10 percent from the level as of March 24, 2020 (Sec. 4003), and (iv) limit total compensation of highly paid personnel (Sec. 4004). This subtitle also provides for oversight of the funding by establishing both a Congressional Oversight Committee (Sec. 4018) and a Special Inspector General (Sec. 4020).
The CARES Act provides that any loan made by or guaranteed under these provisions will be treated as indebtedness for U.S. federal income tax purposes and will be treated as issued without original issue discount. Treasury is directed to issue guidance providing that the acquisition by Treasury of warrants or equity interests in a corporation in connection with any such loan will not result in an ownership change under Section 382 of the Internal Revenue Code. Such an ownership change would limit the corporation’s use of its net operating losses. The IRS issued similar guidance in 2010 to address financial instruments acquired by Treasury in connection with the Troubled Asset Relief Program.1 It is reasonable to assume that the guidance under the Act will be similar to the 2010 guidance.
VII. Financial Assistance Specific to Air Carriers and Other Business Related to Air Transportation
As noted in the section above, Title IV of the CARES Act offers certain financial relief including loans, loan guarantees, investments, worker support financial assistance and suspension of excise taxes in specific support of air carriers and other businesses related to air transportation. This relief includes
- $25 billion in loans, loan guarantees and other investments to (i) passenger air carriers, (ii) businesses certified as repair stations under 14 C.F.R. § 145 and approved to perform inspection, repair, replacement or overhaul services and (iii) ticket agents (Sec. 4003)
- $4 billion in loans, loan guarantees and other investments to cargo air carriers (Sec. 4003)
- $25 billion in financial assistance to passenger air carriers for worker wage and benefit support (Sec. 4003)
- $4 billion in financial assistance to cargo air carriers for worker wage and benefit support (Sec. 4112)
- $3 billion in financial assistance to contractors that perform catering functions or functions on airport property related to air transportation for worker wage and benefit support (Sec. 4112)
- temporary suspension of excise taxes related to the use of kerosene in commercial aviation (Sec. 4007)
The loans, loan guarantees, investments and financial assistance are all subject to requirements and assurances, including limitations on stock buybacks and employee compensation; maintenance of employment levels; issuance of warrants, equities or senior debt obligations in or by the recipient to the Secretary of the Treasury, and assurances to protect to collective bargaining agreements (Sec. 4003, 4004, 4025, 4114, 4115, 4116, 4117). Similarly, air carriers specifically must ensure continuation of air service, with particular consideration given to small and remote communities and the function of healthcare and pharmaceutical supply chains (Sec. 4005).
For loans, loan guarantees and investments issued by Treasury, the CARES Act requires disclosure of information related to those transactions (Sec. 4026). In particular, information related to each transaction, including the parties involved, amount, and terms and conditions, must be published on Treasury’s website within 72 hours of the transaction, and a report must be given to Congress within seven days of the transaction (Sec. 4026).
To apply for a loan, loan guarantee or investment, the applicant must follow procedures that Treasury will establish no later than 10 days after enactment of the legislation (Sec. 4003). To apply for worker support financial assistance, the applicant must follow procedures Treasury will establish no later than five days after enactment of the legislation (Sec. 4113). As part of the worker support financial assistance application, the applicant must submit the salary and benefit reports it submits to the Department of Transportation, or in the alternative, certified financial statements and other appropriate data related to salaries and wages paid (Sec. 4113).
VIII. Healthcare and Pharmaceuticals
Title III of the CARES Act broadly expands appendages of the national healthcare system by bolstering the medical products supply chain, addressing potential drug shortages and increasing coverage to include services aimed at treating and preventing COVID-19. At large, there are provisions addressing
- medical product supplies, such as requiring a national stockpile of certain medical equipment and exempting entities from liability under federal and state law for the use of protective respiratory devices
- expansion of coverage and testing of preventative services, such as diagnosis, treatment and vaccination for COVID-19
- expansion of grant programs for rural and telehealth centers
- increased flexibility for volunteer and professional health service workers
Subtitle C of Title III addresses provides certain funding relief to single-employer defined benefit plans (Sec. 3608). Moreover, it provides paid sick and family leave. Notably, the Act allows for rehired employees to qualify for paid family leave if they were laid off by an employer March 1, 2020, or later, worked for the employer for at least 30 days prior to being laid off and were subsequently rehired by their former employer (Sec. 3605). The Act also clarifies that an employer will not be obligated to pay more than $511 per day and $5,110 in the aggregate for each employee taking leave due to COVID-19 treatment or quarantine, as outlined in the Families First Coronavirus Response Act. If an employee is taking leave to care for an individual with COVID-19, an employer will not be obligated to pay more than $200 per day and $2,000 in the aggregate for the employee (Sec. 3602). The Act also expands the types of expenses that can be reimbursed from consumer-driven health plans (e.g., health savings accounts, health reimbursement arrangements, healthcare flexible spending accounts etc.) to include over-the counter drugs without a prescription (Sec. 3702).
Beyond expanding healthcare and paid leave resources, the CARES Act implicates patient privacy by calling on the Secretary of the Department of Health and Human Services (HHS) to promulgate guidance relating to the disclosure of patient health records relating to COVID-19 treatment within 180 days of enactment of the CARES Act, potentially affecting covered entities’ reporting and authorization obligations under existing HIPAA regulations (Sec. 3224).
The CARES Act also expansively addresses coverage for telehealth services, including permitting high-deductible health plans to cover telehealth services with no or lower cost-sharing prior to satisfaction of the otherwise minimum deductible (Sec. 3701), allowing Medicare beneficiaries to receive telehealth services from physicians who have not yet treated them (Sec. 3703), waiving certain home dialysis requirements (Sec. 3705), expanding federally qualified health centers’ and rural health clinics’ ability to furnish telehealth services covered by Medicare (Sec. 3704) and calling on the Secretary of HHS to issue clarifying guidance to encourage expanded use of telehealth services (Sec. 3707). Future clarifying guidance issued by the Secretary may further expand coverage of telehealth services under federal healthcare programs. Increased Medicare coverage for COVID-19-related drugs and services include adding Medicare Part B coverage for vaccines designed to treat COVID-19 (Sec. 3713), expanding Part D and Medicare Advantage coverage to allow a beneficiary to get up to a three-month supply of drugs (Sec. 3714) and increasing the add-on payment diagnosis weighting factor associated with the discharge of patients with COVID-19 (Sec. 3710). Nonphysician medical professionals, such as physician assistants and nurse practitioners, are now authorized to order home health services for Medicare beneficiaries (Sec. 3708), which will reduce delays in patients’ receiving care. Finally, the CARES Act expands Medicaid programs’ ability to pay for in-home patient services rendered by direct support professionals (Sec. 3715).
1 See https://www.irs.gov/pub/irs-drop/n-10-02.pdf.
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