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Business and Employee Elements of CARES Act [Additional Details]

Tue, March 31, 2020 10:40 AM | Anonymous

Congress approved the “Coronavirus Aid, Relief, and Economic Security Act” (CARES Act) to provide financial assistance to individuals and businesses on March 27, 2020.  At over $2 trillion, the Act is the largest package ever passed with a mirage of provisions and complex elements that will impact individual employees and firms, some within the design and construction community.  Eligibility requirements are key to many of the provisions and may take some time to be better understood, but as of now, here are some key features:

(1) Elements: CARES Act’s economic stimulus package includes more than $500 billion of federal funding across three basic categories: (i) grants and direct lending dedicated to specific nonfinancial industries, such as the airline and national security sectors; (ii) a significant expansion of eligibility and other aspects of lending programs administered by the Small Business Administration, and (iii) funding for several lending programs administered by the Federal Reserve. [NOTE: Financings under these programs place a number of requirements on the businesses that receive federal aid].

(2) Direct Lending & Grants: The Treasury Secretary has broad discretion to make loans and loan guarantees to air carriers and to businesses critical to maintaining national security. The loans are only available to eligible businesses that have incurred or expect to incur covered losses that jeopardize the business, and all recipients must be organized and conduct a majority of their operations in the U.S.  [Presumably virtually no A/E/C firms will likely fall within this category].

(3) Federal Reserve Lending Programs:  The Act provides additional support to the Fed’s lending programs if such programs: restrict stock buybacks, dividends and capital contributions, limit executive compensation, and prohibit loan forgiveness. (However, these requirements may be waived by the Treasury Secretary of the Treasury).  Moreover, the program targets U.S.-eligible businesses with between 500 and 10,000 employees, subject to: prohibitions on outsourcing and offshoring jobs for the term of the loan plus two years. The Federal Reserve may also establish a Main Street Business Lending Program or facility that supports lending to small and mid-sized businesses on such terms and conditions that are consistent with its authority under the Federal Reserve Act.  [Depending on circumstances, this program could include A/E/C firms if they meet the criteria and are willing to accept the prohibitions and other dictates mandated].

(4) Small Business Paycheck Protection Programs: CARES Act expands the ability to obtain loans under Section 7(a) of the Small Business Act through a new $349 billion Paycheck Protection Program. Under the program, small businesses, other business concerns, etc. that have fewer than 500 employees; self-employed; sole proprietors; independent contractors; and businesses in the accommodation and food services sector with fewer than 500 employees per location, are eligible for small business loans to cover payroll; health care costs; mortgage interest payments, rent and utility payments; and interest on pre-existing debt obligations.  [Many A/E/C firms can meet this size standard, albeit, not many of CIRT’s members would fit this requirement].

(5) Capital Markets:  Although the Act provides significant financial assistance through loans, ultimately many businesses are expected to require accesses to the capital markets. At least $450 billion is being made available by the Federal Reserve to provide liquidity to the financial system — including: facility to purchase certain new issuances by eligible issuers, potentially enabling these issuers to successfully market securities offerings that may otherwise be too costly or lack adequate investor interest in current market conditions. NOTE: the act does not limit purchases to debt obligations.  [Presumably, the A/E/C community may be able to access this liquidity for their or client needs].

(6) Real Estate Elements: The vast majority of the provisions are designed to economically support individuals, businesses and hard-hit industries in an effort to enhance their ability to remain solvent and cover operational expenses, including rent and debt service.  This is delivered through various means such as: in the form of emergency cash infusions, financing availability, loan forgiveness/forbearance, tax benefits, and supplemental awards designed to help owners, landlords, operators, borrowers and tenants survive. (See, the Act for a more detailed set of sub-provisions that relate to this element).  NOTE: Notwithstanding the Act’s assistance, contracts likely will need to be restructured and renegotiated; thus requiring property owners and lenders collaborate.  [Presumably the A/E/C community could be on either side of this equation].

(7) Tax Elements:  Certain deduction limitations imposed by the Tax Cuts and Jobs Act (TCJA); regarding: (i) Corporate taxpayers may carryback Net Operating Losses (NOLs) arising in 2018-2020 for up to five years (under the TCJA, no carrybacks were allowed); (ii) for 2020 and years prior, corporations and pass-throughs may fully offset their income using NOLs (the TCJA imposed an 80% cap); (iii) For 2019-2020, taxpayers may generally deduct interest up to the sum of 50% of adjusted taxable income plus business interest income (instead of the 30% limit under the TCJA); and (iv) Taxpayers may also elect to use their 2019 adjusted taxable income for determining their 2020 interest deduction.  [These tax changes will affect any eligible A/E/C firms].

(8) Payroll Tax Credit/Deferral of Payroll Taxes: The Act provides a refundable payroll tax credit to eligible employers for 50% of “qualified wages” paid to employees; and also permits all employers and self-employed individuals to defer payment of the employer portion of payroll taxes owed on wages paid. An employer is eligible for the payroll tax credit if, during any calendar quarter of 2020, it has operations fully or partially suspended due to a governmental order related to COVID-19, or it has a decline in gross receipts of more than 50% compared to the same quarter of the prior year.  For employers with more than 100 full-time employees, “qualified wages” only covers wages paid to those employees not providing services due to a COVID-19 impact as described above; and will be limited to the first $10,000 of compensation paid to an employee. This credit is not available to employers who receive a Paycheck Protection Program loan. [Appears applicable to any A/E/C firm meeting the eligibility requirements].

(9) Unemployment Insurance Benefits and Loans to Employers: The Act expands eligibility for unemployment insurance for workers who are displaced due to COVID-19 in a number of ways: (i) It creates the Pandemic Unemployment Assistance program, which provides up to 39 weeks of combined federal and state unemployment assistance between January 27, 2020, and December 31, 2020, to individuals, including independent contractors, who are otherwise not eligible for, or have exhausted, other state or federal benefits; (ii) One of the most controversial elements of the new Federal Pandemic Unemployment Compensation provides an additional weekly $600 federally funded payment
for up to four months to individuals already collecting state unemployment insurance payments; (iii) Further it provides federal funding to states to cover the cost of the first week of unemployment benefits for states that choose to waive the typical one-week waiting period; and (iv) In addition, certain federal funds are made available to states to fully fund work share programs, under which employees receive partial unemployment benefits if work hours are reduced but not eliminated by their employer.  NOTE: See above for support to employers covering payroll.  [Unfortunately the disincentive of unemployment wages possibly higher than to work, will apply to the A/E/C firms and their employees].

The precise procedures for employees to seek unemployment insurance benefits will depend greatly on individual state processes and requirements.  Given the controversial $600 federal expansion SUPPLEMENTS or is added to the state unemployment insurance levels, it won’t necessarily exceed typical prevailing wages in all areas and in all instances.

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