On March 27, 2020, in a historic effort to provide emergency aid to individuals, families and businesses impacted by the ongoing Coronavirus pandemic, the U.S. Congress passed, and the President signed into law, the CARES Act. The bill details a federal stimulus package totaling $2 trillion, which provides for assistance to the U.S. healthcare and education sectors, direct financial relief to individuals and economic stabilization measures for eligible businesses. In a companion update, we cover the sections of the legislation that provide loan and relief programs to small businesses. In this update – geared toward mid-sized and large businesses – we highlight the direct financial assistance that will be available to severely distressed businesses, certain loan relief available to mid-sized businesses, the applicable tax relief provisions of the bill, and certain provisions that will impact the healthcare sector.

Direct Financial Assistance to Severely Distressed Sectors

Section 3102 of the CARES Act authorizes the Secretary of the Treasury (the “Secretary”) to make or guarantee loans totaling up to $500 billion to eligible businesses, including air carriers and businesses that have not otherwise received adequate economic relief under the CARES Act. Up to $29 billion in loan funds will be reserved for passenger and cargo air carriers ($25 billion and $4 billion, respectively), up to $17 billion in loan funds will be reserved for businesses critical to maintaining national security, and up to $454 billion will be provided to the Federal Reserve to support its lending programs for eligible businesses, states or municipalities. 

The Secretary may enter into agreements to make loans or loan guarantees to eligible businesses if the Secretary determines that: 

  • the applicant is an eligible business for which credit is not reasonably available at the time of the transaction;
  • the intended obligation is “prudently incurred;”
  • the loan is sufficiently secured or is made at a rate that reflects the risk of the loan and is no lower than comparable pre- COVID-19 outbreak rates;
  • the maturity the loan must not exceed 5 years;
  • until one year following the date the loan or loan guarantee is no longer outstanding, neither the eligible business nor any affiliate may purchase an equity security listed on a national securities exchange of the eligible business or any parent company thereof, with exceptions for existing contractual obligations;
  • until one year following the date the loan or loan guarantee is no longer outstanding, the eligible business may not pay dividends or make other capital distributions with respect to its equity;
  • until September 30, 2020, the eligible business must maintain its employment levels as of March 24, 2020, to the extent practicable, and in any case may not reduce its employment levels by more than 10% from such date;
  • the eligible business must be organized in the U.S. and have significant operations in and a majority of its employees based in the U.S.; and
  • the eligible business must have incurred or be expected to incur covered losses such that the continued operations of the business are jeopardized.

A key restriction on receiving loan funds is that from the period beginning on the day the loan agreement is executed until 1 year after the loan or loan guarantee is no longer outstanding (the “Covered Period”), no officer or employee of the eligible business whose total compensation was more than $425,000 in 2019 (other than those whose compensation is determined through a collective bargaining agreement entered into before March 1, 2020) will receive:

  • Total compensation exceeding (during any 12 consecutive months of the Covered Period) the total compensation the officer or employee received in 2019; or
  • Severance pay or termination benefits exceeding twice the maximum total compensation the officer or employee received in 2019

Additionally, no officer or employee whose total compensation exceeded $3,000,000 in 2019 may receive (during any 12 consecutive months of the Covered Period) total compensation in excess of the sum of: (a) $3,000,000 and (b) 50% of the excess over $3,000,000 of the total compensation received by the officer or employee in 2019.

The Secretary will post further details about application procedures and minimum eligibility requirements for the loans within the next 10 days.

Direct Loans to Mid-Sized Businesses

The CARES Act also provides assistance to certain mid-sized businesses (and non-profit organizations) with between 500 and 10,000 employees in the form of direct loans subject to an annualized interest rate not higher than 2% per annum and featuring a 6 month grace period in which no principal or interest is due or payable. Eligible mid-sized businesses applying for such direct loans are required to make a good-faith certification that, among other criteria:

  • the loan is necessary to support ongoing operations;
  • the funds received will be used to retain at least 90% of the employer’s workforce, at full compensation and benefits, until September 30, 2020;
  • the recipient intends to restore no less than 90% of the workforce that existed as of February 1, 2020, including the restoration of compensation and benefits no later than 4 months following the termination date of the public health emergency declared by the Secretary of Health and Human Services on January 31, 2020 in response to COVID-19;
  • the eligible business must be organized in the U.S. and have significant operations in and a majority of its employees based in the U.S.;
  • the recipient is not a debtor in any bankruptcy proceeding;
  • the recipient will not pay dividends with respect to the common stock of the eligible business;
  • the recipient will not outsource or offshore jobs for the term of the loan and 2 years after completing repayment;
  • the recipient will not repeal existing collective bargaining agreements for the term of the loan and 2 years after completing repayment of the loan; and
  • the recipient will remain neutral in any union organizing effort for the term of the loan.

Tax Relief

50% Payroll Tax Credit for Employers

The CARES Act provides eligible employers with a refundable payroll tax credit equal to 50% of certain qualified wages paid to its employees in a calendar quarter if either (i) the operation of the employer’s trade or business is fully or partially suspended due to a governmental order related to COVID-19 or (ii) the gross receipts for that trade or business are less than 50% of its gross receipts for the same calendar quarter of the prior year. The credit is capped at $5,000 per employee for all calendar quarters. Section 501(c) organizations are eligible for the credit, but governmental entities and companies receiving small business interruption loans under the CARES Act are not.

Net Operating Losses (NOLs)

The CARES Act permits a corporation to carry back its losses from 2018, 2019 and 2020 for five years and allows a corporation to fully reduce its taxable income by its available NOLs. This changes the rules effected by the Tax Cuts and Jobs Act (TCJA) whereby a corporation could only carry forward its losses and offset only 80% of its taxable income. Note that a REIT is not permitted to carry back losses, and the Act contains provisions that prevents taxpayers from using NOLs to offset income includible under Code Section 965 (the deemed repatriation provision enacted in the TCJA).

Increased Business Interest Deduction

The CARES Act retroactively increases the Section 163(j) limitation on business interest expense deductions from 30% to 50% of adjusted taxable income for 2019 and 2020. In addition, for taxable years beginning in 2020, the Act permits taxpayers to elect to determine the limitation using their adjusted taxable income from 2019 rather than 2020. For partnerships, the increased limitation applies to partners in partnerships only in 2020, but 50% of the business interest of a partner that is accrued in 2019 is deemed to accrue in 2020 and is not subject to any limitation in 2020.

Payroll Extension

The CARES Act permits employers to delay payment of the 6.2% employer share of the Social Security tax (but not the 1.45% employer share of the Medicare tax) from the date of enactment through the end of 2020. The tax would be payable over the following two years with half due by December 31, 2021 and the other half due by December 31, 2022.

Immediate Expensing of Improvements related to the Hospitality Industry

The CARES Act adds a technical correction to the definition of qualified improvement property, which allows for the immediate expensing for improving facilities related to the hospitality industry. An error in the TCJA prevented businesses from expensing certain costs for improvements to a nonresidential building and required the costs to be depreciated over the 39-year life of the building. This change is retroactive to the date of enactment of the TCJA (December 22, 2017).

Increased Charitable Contribution Limitation

The CARES Act increases the 10% taxable income limitation on charitable contribution deductions for corporations to 25%. In addition, the Act temporarily increases the cap on deductions for charitable contributions of food inventory in 2020 from 15% to 25% of taxable income in the case of a C corporation.

Acceleration of Alternative Minimum Tax (AMT) Credits

The TCJA repealed the corporate AMT and allowed corporations to claim corporate AMT credits over several years until 2021. The CARES Act permits corporations with outstanding AMT credits to claim those credits immediately.

Tax-Free Employer Repayment of Employee Student Loans

Under the CARES Act, an employer may repay up to $5,250 of an employee’s student loan debt, and the repayment will be excluded from the employee’s income if such repayment is made after the enactment of the CARES Act and before January 1, 2021.

Support for the Healthcare System

The CARES Act outlines various actions that the federal government will take and require of others to better support the healthcare system in response to the pandemic, including (but not limited to):

  • Providing additional funding to assist in preventing, diagnosing and treating COVID-19;
  • Prioritizing the Food and Drug Administration’s review of drug applications, to mitigate or prevent drug shortages;
  • Examining and reporting on the security of the U.S. medical product supply chain and providing recommendations on how to improve it; and
  • Requiring that certain medical supplies (such as personal protective equipment, ancillary medical supplies, and other applicable supplies required to administer drugs, vaccines and other biological products, medical devices, and diagnostic tests) be added to the strategic national stockpile.

In particular, for businesses that manufacture drugs or medical devices critical to fighting the current pandemic, Sections 3112 and 3121 of the CARES Act mandate that additional reporting requirements be met during a public health emergency, in order to combat potential product shortages. Critical drug and medical device manufacturers must report manufacturing interruptions in or permanent discontinuances of the active pharmaceutical ingredients of critical drugs or medical devices, provided the interruptions are likely to lead to a meaningful disruption in the supply chain. (Discontinuances of critical medical devices resulting from approved modifications of the devices are not subject to such reporting.)

Notifications concerning critical drugs must detail, for example: reasons for the interruption; whether active pharmaceutical ingredients or medical devices used to prepare or administer the drug had any relation to the interruption; alternative sources that the manufacturer is aware of to procure a critical drug’s active pharmaceutical ingredient; the expected duration of the interruption; and any other information that the Secretary may require. Notifications concerning critical medical devices must be submitted to the Secretary either 6 months prior to the interruption or discontinuance or as soon as practicable if the earlier deadline cannot be met.

For all critical drug, active drug ingredient, and medical device manufacturers, the CARES Act requires them to develop, maintain and implement redundancy risk management plans for every location where critical drugs and/or active drug ingredients are manufactured.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.