The CARES Act: What We’re Watching

Like many Americans, we’ve been on the edge of our seats watching, reading, and trying to understand exactly how the Coronavirus Aid, Relief, and Economic Security (CARES) Act, a $2 trillion coronavirus stimulus bill, will affect our businesses and the economy. Here is what we think you need to know.

Mitigating the effects of the COVID-19 Outbreak

In general, the CARES Act is designed to help three specific groups.

Businesses

This stimulus package helps businesses weather the economic impact of the coronavirus by providing:

– $349 billion Paycheck Protection Program to help businesses with fewer than 500 employees make payroll and cover other expenses from February 15 to June 30.

– Employee retention tax credit

– Payroll tax credit refunds

– Deferred payroll tax payments

– Opportunities for businesses to carry back losses from 2018, 2019, and 2020 for up to five years. Temporarily, net operating losses will not be subject to a taxable income limit

– Prior Year AMT Credits 

– Expansion of the net interest deduction limitation from 30 percent to 50 percent of adjusted taxable income for 2019 and 2020

– A ban on stock buybacks for companies receiving a government loan from the stimulus package

– Assistance for hard-hit industries, including: $25 billion in direct financial aid to struggling airlines; $4 billion for air cargo carriers; $17 billion for businesses deemed critical to U.S. national security

Individuals

Households benefit by receiving:

– Recovery rebates

– Expanded unemployment benefits, which will extend to freelancers, gig workers, and others who typically would not qualify

– Waiver of the 10 percent early withdrawal penalty for retirement fund distributions up to $100,000 taken in 2020.

Public health organizations and state and local governments

The stimulus bill directs resources to improve public health:

– Investment in the health care system to address supply shortages, diagnostic testing, support for health care providers, greater access to telehealth services, and the creation of drugs to treat the virus

– Nearly $340 billion will go to state and local government programs

Paycheck Protection Program is critical to business owners

Arguably, one of the most powerful aspects of the CARES Act is the Paycheck Protection Program, designed to help maintain employment and keep small- to mid-sized businesses afloat.

Under this program, businesses may borrow up to $10 million to cover payroll costs for compensation less than $100,000. Loans may be forgiven if the funds are used for payroll, interest payments on mortgages, rent, and utility expenses. Note this important caveat: The IRS will reduce the forgiveness in proportion with any reduction in employees, among other restrictions.

Put another way, theoretically, business owners could borrow up to 250 percent of their monthly payroll and have the majority of the loan forgiven. So they can effectively manage cash flow, business owners need to clearly understand how much they can borrow as well as how much the IRS may forgive.

Mergers and acquisitions may be affected

There are also provisions of the CARES act that some believe may impact potential mergers and acquisition (M&A) transactions and the operations of portfolio companies held by investors, specifically:

– Increased tax deduction for interest paid will make both potential and completed transactions more attractive from a tax perspective.

– The provision addressing accelerated depreciation for qualified improvement property (QIP) corrects a technical error that occurred in the Tax Cut and Jobs Act of 2017 (TCJA), which could provide tax benefits in some M&A transactions.

– The modification of rules regarding corporate net operating losses (NOLs), change NOLs from a nonfactor in negotiations to something that may be considered.

It is also important to remember that there are multiple parties involved in M&A transactions and often with fewer than 500 employees. The CARES Act will affect/support all involved on a business level as well.

More is coming

The New York Times reported that Congress is working on a fourth wave of legislation, which may include additional funding for payments to individuals, expanded FMLA eligibility, and additional grant money for states.

Small- to mid-sized companies need to be ready to act quickly to protect their businesses. Owners have an opportunity to invest their stimulus funds wisely and set their firms up for success in the future.

Our next blog post will build on this theme, with a look into the potential impacts of the pandemic on the M&A market as we continue to gather additional information.