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The Third Wave of Coronavirus Relief – Will it Help You, and How? 

CARES Act

The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law on March 27, 2020, and represents the third major piece of relief legislation enacted in response to the coronavirus crisis.  After an $8.3 billion dollar emergency spending bill, and the Families First Coronavirus Response Act, (see our summary here), the CARES Act aims to soften the economic blow of COVID-19 through expanded SBA loan programs and direct payments to taxpayers and affected industries. Individuals and businesses struggling with the financial impact of this crisis need to know what help the CARES Act provides for them, and what they have to do to get it. We have reviewed the text of the bill, and here’s what we know about its key provisions: 

 

Recovery Rebates

Perhaps the most publicized provision of the CARES Act is its provision for direct payments to many taxpayers. These payments are technically advanced refundable tax credits for the 2020 tax year. However, because we are only one quarter into the year 2020, eligibility for payments and the amount of the benefit will be determined based on taxpayers’ 2019 or 2018 tax returns (if 2019 is not filed when the IRS begins calculating checks). 

How Much Will You Get? 

The Act provides for $1,200 payments to individual taxpayers and $2,400 to married taxpayers who filed jointly, with an additional $500.00 per child. Payments are reduced or phased out entirely for taxpayers whose income in the relevant tax year was above set thresholds. 

Individuals who had an adjusted gross income (AGI) up to $75,000 a year will be eligible for the full $1,200 check. For those with an AGI between $75,000 and $99,000, a reduced payment will be made. The reduction will be calculated as 5% of any amount over $75,000.00.  

So, for example, someone with an AGI of $85,000 and no children would receive a $700.00 rebate. ($85,000 – $75,000 = $10,000.00, the amount in excess of the threshold; $10,000.00 x .05 = $500.00, the amount the credit is reduced; $1,200 – $500.00 = $700.00, the amount of the rebate).  

At $99,000.00 the credit will be reduced to $0 and no rebate will be issued.  ($99,000.00 – $75,000.00 = $24,000.00; $24,000.00 x .05 = $1,200.00; $1,200 -$1,200 = $0.00). 

For married couples filing jointly, the rebate will be for $2,400.00 as long as their AGI is under $150,000.00 per year. The amount of the check will be reduced in the same way for income over $150,000.00. So at $198,000.00 a married couple without children would receive no refund.  ($198,000.00 – $150,000.00 = $48,000.00; $48,000.00 x .05 = $2,400.00; $2,400 – $2,400 = $0.00).  

Single parents filing as a head of household will also receive a $500 credit per child, and will have the threshold at which their rebate is reduced increased from $99,000.00 to $112,500.00. After this threshold, the rebate is reduced in the same manner described above for other individuals and married couples. 

So a head of household with one child would be eligible for a $1,700.00 credit ($1,200.00 + $500 child credit).  With one child, a single head of household with an AGI over $112,500 would receive a partial refund as long as their AGI is below $146,500.00. ($146,500.00 – $112,500.00 = $34,000.00; $34,000.00 x .05 = $1,700.00; $1,700 – $1,700 = $0.00).  

What Do You Need to Do?

The Act intends for the rebates to be issued automatically by direct deposit or mailed check depending on the information provided in the tax return used by the IRS to determine the rebate amount. Therefore the majority of people will not need to do anything to claim their rebate. But if you haven’t filed a 2019 return and your direct deposit account or physical address has changed since you filed a 2018 return, it would be advisable to file your 2019 return and update this information as soon as possible in order to avoid a delay in processing. If you made less money in 2019 than 2018 and you haven’t filed your return yet, you should definitely do so immediately in order to maximize your credit. 

What if Your Income Has Changed?

The rebates are technically an advanced credit on your 2020 taxes, so what happens if your income from 2020 winds up being significantly different than it was in the year used to calculate the rebate amount? 

Under the provisions of the Act, you will not have to repay the rebate amount, even if your 2020 AGI winds up being more than it was in the year that was used to calculate your rebate. 

An unfortunate consequence of using 2018 and 2019 returns to calculate rebate amounts is that individuals who have become unemployed or otherwise had their income reduced in 2020 may not receive the full rebate amount they would otherwise be entitled to. Unless the IRS adopts future implementing regulations to account for these individuals’ loss of income, they will not be eligible for a rebate check under this program. 

What if you Owe Back Taxes? 

The Act includes an exemption from the Treasury Department’s offset program, meaning the Rebate Refunds will not be reduced even if a taxpayer owes back taxes or is in default under student loans. 

When Will Checks Arrive? 

The Act directs the Treasury Department to advance rebates as quickly as possible, and early indications are that these checks may begin to issue as early as next week. Past stimulus programs have completed the process of issuing rebate checks in a period of approximately eight weeks, and it is reasonable to anticipate that this program will operate with a similar timeframe. 

 

SBA Loan Programs

The CARES Act creates two avenues for infusing capital into small businesses: the new Paycheck Protection Program and an expansion of the existing Economic Injury Disaster Loan Program. 

Paycheck Protection Program

The Paycheck Protection Program (“PPP”) authorized by the CARES Act makes loans of up to $10 million available to qualified small businesses. These loans are intended to be forgivable if the borrower maintains employees and otherwise complies with the CARES Act and they do not require collateral or personal guaranties. Loans will be made by SBA-approved lenders and 100% guarantied by the SBA. 

In order to be eligible for a PPP Loan, a business:

  • must have been in operation on February 15, 2020,
  • must have, as of that date, had employees for whom the entity paid salaries and payroll taxes, or paid independent contractors. 
  • must be a small business as defined by the SBA regulations, or a business with 500 or fewer employees. 
  • must certify that the uncertainty of current economic conditions makes the loan request necessary to support their ongoing operations and acknowledge that the funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments.

The maximum loan amount available will be the lesser of (1) the business’ average monthly payroll costs for the one-year period before the date of the loan multiplied by 2.5 and (2) $10 million. If an applicant was not in business from February 15, 2019 to June 30, 2019, the maximum loan amount is the lesser of (1) the business’ average monthly payroll costs from January 1, 2020 to February 29, 2020 multiplied by 2.5 and (2) $10 million.

This loan program provides significantly relaxed lending criteria and a number of other advantages over a conventional SBA loan. Beyond the loan forgiveness provisions and the waiver of collateral and guaranty requirements, the PPP program also waives all SBA administration fees, provides for deferred payments for 6-12 months, eliminates pre-payment penalties, and for any debt not forgiven under the program, allows a maximum 4% interest with up to a ten-year term. 

Debt forgiveness under the program will be available for amounts spent in the 8 weeks after origination of the loan on (i) rent, (ii) qualifying payroll costs, (iii) mortgage interest, and (iv) utilities, not to exceed the principal of the loan. The qualifying “payroll costs” under the act only include salaries for employees which are less than $33,333.00 during the four month period from March 1, 2020 through June 30, 2020 (the annualized equivalent of $100,000.00 salary) . Qualifying payroll costs also exclude any emergency paid leave or FMLA leave for which a business is otherwise able to obtain a credit under the Families First Coronavirus Response Act. 

The amount of loan forgiveness under the PPP program will also be reduced if an employer reduces the number of employees or cuts wages to employees in the eight week period after obtaining the loan. However, employers forced to make payroll cuts during this period may recover their loan forgiveness if they rehire terminated employees and restore their payroll prior to June 30, 2020. 

After the expiration of the eight week period, employers who comply with the provisions of the Act will be able to submit an application for loan forgiveness to the originating lender. The application must include documentation of all qualifying expenses and payroll which the borrower wants forgiven, including IRS payroll tax filings, state unemployment insurance filings, financial statements verifying the payment of debt obligations, and any other documentation which the SBA may require through subsequently issued regulations. 

Assuming all costs are appropriately documented and qualify, the SBA will provide a notification of forgiveness of the covered debt within 15 days, and will reimburse the lender as if the loan had defaulted. For the borrower, the forgiveness will be treated by the SBA as a cancellation of indebtedness, not a default; however the borrower will not be required to treat the cancellation of indebtedness as income for tax purposes.

Economic Injury Disaster Loan Program

Loans made by SBA under the expanded EIDL Program will not be eligible for forgiveness like PPP loans, but they allow for extended payment terms and lower interest rates. Businesses may apply for loans under both the EIDL and PPP programs, but may not “double dip,” meaning that they can not seek reimbursement for costs covered by their PPP loan with a loan under the EIDL program. 

Loans under the EIDL program are available to small businesses in order to cover economic injury and losses resulting from the coronavirus emergency, including loss of revenue costs related to interruption of operations. The CARES Act relaxes the typical requirements for EIDL Loans such that a borrower is no longer required to demonstrate that they have been unable to obtain credit elsewhere, and it is not required that the borrower have been in business for at least one year, only that the business must have been in operation on January 31, 2020. 

Unlike PPP loans, EIDL loans in excess of $200,000.00 must be guaranteed by each owner with more than a 20 percent interest in the borrower. The CARES Act eliminates the guaranty requirement for EIDL loans less than $200,000.00. Loans under this program have a maximum amount of $2 million, an interest rate of 3.75% and a 30 year term and 30 year amortization. 

Finally, the CARES Act provides that borrowers applying for an EIDL loan may also request an emergency cash advance of up to $10,000.00, to be paid by the SBA within three days of the request.  These advances are essentially cash grants, and do not need to be repaid by the applicant, even if their EIDL application is ultimately denied. Applicants must spend the $10,000 on allowed costs, such as maintaining payroll, making rent and mortgage payments or providing paid sick leave to employees. If an applicant obtains a PPP loan, amounts advanced under this program will count toward the limit of their loan forgiveness under the PPP program. 

 

Changes to Unemployment Programs

In addition to loans and direct payments, the CARES Act provides for the expansion of existing state-run unemployment programs and provides a Pandemic Unemployment Assistance Program for individuals who are otherwise ineligible for unemployment and who have been impacted by conditions related to the coronavirus. 

For employees already eligible to receive state unemployment benefits, the CARES Act will pay an additional $600/week on top of benefits paid by the state, through July of 2020. The Act also provides that it will pay 100% of the cost for states that waive any waiting period imposed before benefits are available. Finally, the Act provides that the federal government will pay $600/week in unemployment for 13 weeks after the expiration of state unemployment benefits. 

The Pandemic Unemployment Assistance Program creates a temporary federal unemployment system for individuals who are otherwise ineligible for state unemployment benefits, or who have exhausted their unemployment benefits. The program applies to individuals who are unemployed or unable to work (or telework) because of any of the following conditions:

  • The individual has been diagnosed with COVID-19 or is experiencing symptoms of COVID-19 and is seeking a medical diagnosis;
  • A member of the individual’s household has been diagnosed with COVID-19;
  • The individual is providing care for a family member or household member who has been diagnosed with COVID-19;
  • The individual is the primary caregiver for a child or other person in the household who is unable to attend school or another facility that has been closed as a direct result of COVID-19 and such school or facility care is required for the individual to work;
  • The individual is unable to reach the place of employment because of a quarantine imposed as a direct result of COVID-19;
  • The individual was scheduled to begin employment and does not have a job or is unable to reach the job as a direct result of COVID-19;
  • The individual has become the source of support for a household because the head of household has died as a direct result of COVID-19;
  • The individual has been forced to quit a job as a direct result of COVID-19;
  • The individual’s place of employment is closed as a direct result of COVID-19.

Benefits under the Pandemic Unemployment Assistance Program are available retroactively for any period in which employees were affected, from January 27, 2020 through December 31, 2020, for a maximum of 39 weeks.  The amount of the benefit paid will be the lesser of the (i) employee’s regular weekly compensation and (ii) $600 per week. Benefits will be available immediately, without a one week waiting period, and without any requirement that a recipient is pursuing new employment. 

 

Other Provisions

The CARES Act also provides new rules for distributions and loans from retirement accounts, forbearance of certain federally-owned student loans, and expands limits on charitable deductions. If you have questions regarding how the CARES Act or other issues related to this ongoing pandemic may affect you or your business, contact the attorneys at Massey Law Group for a consultation. 

 

The above is intended to inform firm clients and friends about recent developments in the law, including analysis of statutes and new case decisions. This update should not be construed as legal advice or a legal opinion, and readers should not act upon the information contained herein without seeking the advice of legal counsel.

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