On March 27, 2020, in response to the economic impact of the COVID-19 pandemic on the residents, families and businesses in United States, President Trump signed into law the CARES ACT which had been passed through bipartisan efforts in the house and senate, passing 96 to 0 in the latter chamber.  The purpose of this writing is to outline how the Act can benefit and impact small businesses in Washington state.  It should be noted, however, that because the Act was passed recently, the various state and federal agencies discussed below are still developing the rules to implement the law.  Therefore, MDK Law will be providing periodic updates as more information becomes available.  Please note that the contents herein do not constitute legal advice and by no means should be read to mean or assume that your business will qualify for any of the programs or benefits described below.  If you would like advice on how your business can benefit from the Act, please contact your attorney at MDK Law.

Loans to Small Businesses

One of the central elements of the Act is a drastic expansion of funds available to the U.S. Small Business Administration (“SBA”).  For most businesses, the test about whether the company qualifies as a small business under the act is whether the company employs fewer than 500 employees. It should be noted, however, that the 500 employee limit for companies with more than one physical location  is modified: The 500 limit for such companies  applies to each discrete location or operation—offering a “safe harbor” for larger companies with discrete multiple locations.  For not for profit companies, the SBA will establish a “standard size for such entities for the particular industry.

Perhaps the most appealing aspect of the SBA’s expanded lending capacity under the Act is the fact that the portion of the loan used to cover employee wages and salaries (up to $100,000.00 per year, per employee prorated to the covered period), mortgage payments, utilities, interest on previously incurred loans, and amounts paid for rent may be forgiven by the SBA.  In other words, if the business utilizes the loan to pay certain expenses, the SBA will forgive that portion of the loan.  Note however, that the total amount forgiven is calculated by examining historical data from the company’s business activities in 2019.  Therefore, being prepared with an accurate tax return, whether tax reporting occurred as a disregarded entity, a partnership, an S-corporation or a C-corporation is critical.  Critically, the maximum forgivable loan amount is limited to two and one-half times the amount of the average total wage costs incurred during the   year immediately preceding the year during which the loan is made.

Unlike typical SBA loans, the Act allows for more relaxed lending standards.  For example, the loans cannot be secured by a personal guarantee or collateral and the SBA will have no recourse against any shareholder, member or partner for a company’s failure to repay any covered loan.  The only caveat is that misuse of the funds will waive this provision of the Act and could result in criminal prosecution.

Layoffs and Furloughed Workers

Under the Act, unemployment is extended to furloughed workers so long as their employer continues to pay the employers’ portion of the employees’ health benefits.  Accordingly, if a small business elects to furlough workers, the employer should aid its employees in their efforts to obtain unemployment compensation; the employer must also continue to pay its portion of covered employee health premiums.  Additionally, a noteworthy provision in the Act is the increase in unemployment benefits to those seeking unemployment compensation.  Under the Act, for a period of four months unemployment benefits will be increased by $600.00 per week.  Therefore, in Washington the minimum weekly benefit  will be $788.00 and the maximum benefit will be $1,390.00.  The means by which an unemployed or furloughed individual’s weekly entitlement is calculated will not change, except as noted above.

Large Businesses

The primary focus of the bill is aimed towards helping Americans and Small Businesses recover from the impacts of the pandemic. However, it also includes up to $500 billion worth of loans and loan guarantees to eligible businesses, states, and municipalities that have been hurt by greatly diminished consumer demand amid the crisis. Much of the money would be used to backstop loans and other assistance that the Federal Reserve said it plans to extend to companies. That total includes no more than $25 billion to passenger air carriers, no more than $4 billion to air cargo carriers, and no more than $17 billion to businesses important to maintaining national security. The remainder is to be used to support lending to eligible businesses, states, and municipalities.  The term “eligible business” includes passenger air carriers or any other business that has not already received adequate economic relief in the form of loans or loan guarantees under other provisions of the Act.

Companies that receive the assistance are barred from making furloughs, pay cuts, or stock buybacks, and from issuing dividends to investors, through September. It also institutes limits on executive compensation.  These companies will be prohibited from paying dividends or repurchasing stock while the loan or loan guarantees are outstanding, and for a period of 12 months following repayment.

Independent Contractors (“Gig” Workers)

Another unprecedented part of the Act addresses Independent Contractors and so-called “Gig” Workers. Unemployment benefits will be extended for millions of people, some being part-time workers who drive for Uber or deliver for Amazon. The Act expands the scope of individuals who are eligible for unemployment benefits, including those who are furloughed or out of work as a direct result of COVID-19, self-employed or gig workers, and those who have exhausted existing state and federal unemployment benefit provisions.

The only individuals expressly excluded from coverage are those who have the ability to telework with pay and those who are receiving paid sick leave or other paid benefits (even if they otherwise satisfy the criteria for unemployment under the new law).

Workers will get normal unemployment benefits from their state, plus an additional $600 per week from the federal package. This applies to employees, those who are self-employed, and gig economy workers now as well. This increase applies for unemployment payments made from the date of the law’s enactment through July 31, 2020 (approximately four months).

Homeowners

The Act prohibits foreclosures on all federally-backed mortgage loans for a 60-day period beginning on March 18, 2020 and provides up to 180 days of forbearance for borrowers who have experienced a financial hardship related to the COVID-19 emergency. Applicable mortgages include those purchased by Fannie Mae and Freddie Mac, insured by HUD, VA, or USDA, or directly made by USDA.

For 120 days beginning on the date of enactment, landlords are prohibited from initiating legal action to recover possession of a rental unit or to charge fees, penalties, or other charges to the tenant related to nonpayment of rent where the landlord’s mortgage on that property is insured, guaranteed, supplemented, protected, or assisted in any way by HUD, Fannie Mae, Freddie Mac, the rural housing voucher program, or the Violence Against Women Act of 1994.  This includes landlords receiving Section VIII benefits.

Additionally, the Act does not allow fees, penalties or additional interest to be charged as a result of delayed payments. It includes similar protections for those with multifamily federal mortgage loans, allowing them to receive a 30-day forbearance and up to two 30-day extensions.  Landlords dealing with rent nonpayment or other lease-breach issues should seek counsel with extensive real estate law experience.

Student Loans

The Department of Education will suspend payments on student loan borrowers without penalty through September 30, according to the bill. Payments on student loans held by the Department of Education are suspended for 6 months, and the Secretary of Education shall suspend all involuntary collection activities during the period of payment suspension.

However, similarly to the recommendations given with the original Federal measure, it’s highly recommended that those with student loan debt check online for their amounts due.

Federal Income Tax Implications

While the Cares Act contains significant business-friendly provisions, there are also potential minefields requiring navigation for tax planning purposes.   As an example, individuals will be able to make early withdrawals totaling up to $100,000.00 from SEP-IRA accounts without penalty, provided that the same are repaid within three years of the date of withdrawal.  In the event such withdrawals are repaid, Section 72(c) of the Internal Revenue Code will not apply.  As yet another business-friendly and pro-growth provision stands as an example, most charitable contribution limits are suspended.

The Future

There are many federal and state regulatory agencies –including Treasury at the federal level and state revenue agencies that will be promulgating regulations informing questions raised in the preceding discussion.  The Act is new, and regulatory doctrines will be evolving administratively and judicially in the coming months.  Accordingly, cost-benefit analyses for individual businesses are difficult to make at this juncture.  However, decision making  can be aided by tax and legal professionals with experience and the knowledge to  help inform business decision  making based on existing heuristics and matrixes.

Summary

The CARES ACT was enacted with widespread bipartisan support, and includes provisions and aid for most American businesses, large and small, and their employees.  In a time when cross-partisan cooperation is rare, the Act stands as an opportunity for business owners –and their employees—to find a way through the Covid-19 crisis and emerge financially intact for a post-Covid US and global economy with support through the crisis and an optimistic trajectory.

Mark D. Kimball, President, James P. Ware, Vice President and Brandon P. Wayman, Shareholder are the management team at MDK Law.    MDK Law has been providing expert legal services in Western Washington for over 37 years.    Our client base consists of multinational corporations, medium and small sized businesses from a variety of industries including manufacturing, software and IT consulting, food and beverage, transportation, real estate, medical practice, finance and other areas.  We also welcome servicing the needs of individual clients.    Our firm specializes in Business Law, including company formations and transactions, Litigation, Tax, Real Estate and Estate Planning.

 

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