The COVID-19 pandemic: The US economic stimulus program for businesses

Introduction

In response to the economic fallout from the COVID-19 pandemic, the US government has taken a number of legislative and administrative steps to provide emergency funding for businesses and stimulate the economy. This document will summarize the key economic relief actions taken by the federal government to support private businesses, particularly those actions that provide opportunities for companies to seek favorable loans and other forms of relief. The Norton Rose Fulbright team is monitoring these developments carefully, and is able to assist clients in thinking strategically about how to leverage these opportunities to manage the current economic circumstances.

This document is current through the passage of The Coronavirus Aid, Relief and Economic Security (CARES) Act on March 27, 2020, and references additional guidance through March 31, 2020. 

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Legislative response

The Coronavirus Aid, Relief and Economic Security Act

The CARES Act is a historically-large stimulus bill that contains provisions relevant to both corporations and individuals. The following is an overview of the provisions that aim to provide financial relief and assistance for businesses.

Economic Relief and Stimulus Funds

The CARES Act authorizes a total of $500 billion to provide liquidity to businesses that are suffering the most from this crisis. Of these funds, $46 billion is allocated for direct lending through the Treasury Department for certain industries, and the remaining $454 billion is allocated to support programs established by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) for lending to and investment in eligible US businesses. 

The legislation prohibits the principal amount of a loan from being reduced through loan forgiveness. It also specifies that the loans and loan guarantees issued under this program are to be treated as debt for federal income tax purposes, and that ownership interests arising from these transactions will not result in a change in ownership for Section 382 purposes.

Additionally, the CARES Act authorizes up to $32 billion in financial assistance to air carriers and airline contractors exclusively for payroll support.

The legislation directs the Treasury Secretary to publish relevant procedures and requirements for many of these programs within 10 days of enactment (March 27, 2020). The Treasury Department has issued guidance for several of these programs. The below discussion will continue to be updated when additional materials are released. 

Loans and loan guarantees for air carriers, other related businesses, and businesses critical to maintaining national security

Of the $500 billion, the legislation reserves up to $46 billion for loans and loan guarantees for air carriers, other related businesses, and businesses critical to maintaining national security. The Treasury Department released preliminary guidance on this program on March 30, 2020. This guidance provides additional (though limited) information regarding borrower eligibility and loan application requirements. The guidance, however, states that it is subject to change at any time and “will be supplemented promptly” with the following:

• Additional program rules and policies
  
  
• Certifications and disclosures to be required of all borrowers
  
  
• Loan terms and conditions
  
  
• Information regarding how the principal amount of individual loans will be determined
  
  
• An application form and instructions
  
  
• Application evaluation criteria

Form of Assistance

Pursuant to the recent Treasury guidance, borrowers will be able to apply for a loan directly from the Treasury Department.  If the loan application is approved, the loan will be disbursed directly to the borrower.

Eligible Borrowers

The CARES Act allocated the $46 billion as follows:

• $25 billion for:

Passenger air carriers (defined in the recent Treasury guidance as an air carrier that, during the time period from April 1, 2019 to September 30, 2019, derived more than half of its air transportation revenue from the transportation of passengers).

Businesses certified by the Department of Transportation (under 14 C.F.R. part 145) and approved to perform inspection, repair, replace, or overhaul services that have not otherwise received adequate economic relief (through loans or loan guarantees) under other programs authorized by the CARES Act.

Ticket agents (defined in the recent Treasury guidance as businesses and individuals, excluding air carriers and employees of air carriers, that as a principal or agent sells, offers for sale, negotiates for, or holds itself out as selling, providing, or arranging for, air transportation) that have not otherwise received adequate economic relief (through loans or loan guarantees) under other programs authorized by the CARES Act.

• $4 billion for cargo air carriers, defined in the recent Treasury guidance as air carriers that, during the time period from April 1, 2019 to September 30, 2019, derived more than half of its air transportation revenue from the transportation of property or mail, or both.
  
  
• $17 billion to businesses “critical to maintaining national security.”  Neither the legislation nor the initial Treasury guidance defines this phrase. Further clarification is expected.

Note that legislation defines “air carriers” as US citizens, US-owned partnerships, and US-controlled corporations or associations undertaking by any means, directly or indirectly, to provide air transportation. 

The CARES Act excludes businesses in which the president, vice president, an executive department head, member of Congress, or any of such individual’s spouse, child, son-in-law, or daughter-in-law holds (directly or indirectly) at least 20 percent of any class of equity interest from obtaining any loans, loan guarantees, or other investments. Applicable equity interests include shares (regardless of whether they are transferable or classified as stock or anything similar), capital or profit interests in a limited liability or company or partnership, and warrants or rights (other than a right to convert) to purchase, sell, or subscribe to a share or interest.

Eligibility Criteria and Terms and Conditions

The CARES Act imposes several eligibility requirements on these industry-specific loans and loan guarantees. It requires the Treasury Secretary to determine that:

1. The applicant is an eligible business for which credit is not reasonably available at the time of the transaction.
2. The intended obligation is prudently incurred.
3. The loan or loan guarantee is sufficiently secured, or is made at interest rates that reflect the risk of the loan and, if possible, not less than rates based on market conditions for pre-COVID-19 comparable obligations.
4. The loan terms be as short as possible (but cannot exceed five years).
5. The applicant has incurred or is expected to incur covered losses (i.e. losses incurred directly or indirectly as a result of coronavirus) such that the continued operations of the business are jeopardized.

In addition to the above eligibility requirements, the CARES Act imposes several terms and conditions as part of loan agreements. Borrowers will be required to certify that they are eligible to enter into the transaction. This includes certifying that their businesses (1) are created or organized in the United States or under the laws of the United States, and that they have significant operations in, and a majority of their employees are based in, the United States; and (2) are not subject to the abovementioned exclusion regarding businesses affiliated with the president, other senior officials, and their respective families.

Importantly, these borrowers must also agree to the following:

• To limit “total compensation” (defined as salary, bonuses, stock awards, and other financial benefits) for certain officers and employees during the loan term plus one year.

For individuals who earned between $425,000 and $3 million in 2019 (except for employees whose compensation is determined through a collective bargaining agreement entered into prior to March 1, 2020), annual total compensation cannot exceed the amount earned in 2019.

For individuals who earned over $3 million in 2019, annual total compensation can neither exceed the amount earned in 2019, nor exceed $3 million plus half of the amount of total compensation exceeding $3 million that was earned in 2019. (e.g. total compensation for an individual who earned $4 million in 2019 would be limited to $3.5 million).

Additionally, all individuals who earned over $425,000 in 2019 would be prohibited from receiving severance or other exit payments exceeding twice the amount earned in 2019.

• To refrain, during the loan term plus one year, from buying back any equity securities listed on a national securities exchange (including of their parent companies, if applicable), as well as paying dividends on common stock or making other capital distributions. Note that the stock buy-back prohibition also applies to the borrowers’ affiliates, but does not apply to contractual obligations in effect as of the date of enactment (March 27, 2020).

• To maintain, until September 30, 2020, existing employment levels as of March 24, 2020, to the extent possible, and, in any case, not to reduce employee levels by more than 10 percent.

Additionally, the legislation requires that borrowers provide collateral to the United States government. According to the recent Treasury guidance, borrowers must provide financial instruments for the purpose of allowing taxpayers to reasonably participate in equity appreciation or a reasonable interest rate premium. Publicly-traded businesses must provide a warrant or equity interest to the Treasury Secretary, and non-publicly-traded businesses must either provide a warrant or equity interest, or a senior debt instrument. Borrowers will be required to identify the financial instruments they propose to issue to the Treasury Department. The Treasury Secretary is empowered to sell, exercise, or surrender any warrant or senior debt instrument received, but is prohibited from exercising any voting power with respect to any shares of common stock received.

Lastly, the CARES Act provides that, until March 1, 2022, the Transportation Secretary may require air carriers that participate in the stimulus program or receive payroll support (discussed below) to maintain certain scheduled air transportation services. In exercising this authority, the Transportation Secretary must consider the needs of small and remote communities, as well as the need to maintain well-functioning healthcare and pharmaceutical supply chains. Note, however, that the CARES Act also suspends until January 1, 2021, certain aviation excise taxes, including aviation ticket taxes and taxes on kerosene.

Application Information

As noted, as of March 31, 2020, the Treasury Department has not yet released an application form or application instructions. Nonetheless, the recent guidance encourages prospective borrowers to compile the following information in order to expedite their ability to submit a loan application, including:

• A description of the borrower’s existing secured and unsecured debt, bank and other credit lines with outstanding and maximum balances, and major classes of existing security holders and creditors.
  
  
• A description of the borrower’s scheduled debt service for the next three years.
  
  
• The borrower’s employment levels, by head count and total compensation amount, as of March 24, 2020, and any proposed changes to the borrower’s employment levels, relative to March 24, 2020, during 2020.
  
  
• The consolidated financial statements of the borrower and any corporate parents for the previous three years, including, if available, financial statements that have been audited by an independent certified public accountant, including any associated notes, and any interim financial statements and associated notes for the current fiscal year.
  
  
• A description of the covered losses that the borrower has incurred or will incur as a result of coronavirus, by line items detailing the cause of the loss, such as reduced demand, unavailability of credit, unbudgeted medical expenses, or other causes.
  
  
• Evidence based on factors such as market conditions, the borrower’s circumstances, or relationships with existing and potential creditors that the borrower cannot reasonably obtain credit elsewhere.
  
  
• For passenger air carriers, the borrower’s available seat miles, revenue per seat mile, and cost per available seat mile for 2019, and a forecast of the same for 2020 that was prepared by or for the air carrier no earlier than October 1, 2019, including any assumptions underlying the forecast.
  
  
• For cargo air carriers, the borrower’s available ton miles, revenue per ton mile, and cost per available ton mile for 2019, and a forecast of the same for 2020 that was prepared by or for the air carrier no earlier than October 1, 2019, including any assumptions underlying the forecast.
  
  
• A description of the type and general value of all security, including but not limited to assets, property, and revenue streams, available to be pledged by the borrower and its subsidiaries to secure the loan, on both a senior and a subordinated basis.
  
  
• The purposes for which the borrower will use the loan proceeds.
  
  
• Quantitative information on the borrower’s financial needs for the remainder of 2020, including expected revenues, operating costs, and credit, and how the loan will address those needs together with other sources of funding and financing, such as the additional payroll support financial assistance to air carriers.
  
  
• A discussion of the borrower’s operating plan for the remainder of 2020 if the loan is approved, including how the proposed loan fits within the borrower’s business plan and an analysis showing that the loan is prudently incurred.
  
  
• A description of any plans the borrower has to restructure its obligations, contracts, staffing, or organization to improve the borrower’s financial condition.

The recent Treasury guidance notes that the agency may consult with the Department of Transportation on any aspect of application screening or evaluation, which may include disclosing any information submitted as part of an application.

Loans, loan guarantees, and other investments for US businesses generally

The remaining $454 billion (of the $500 billion), plus any funds leftover from the industry-specific $46 billion, will be used for loans, loan guarantees, and other investments (i.e. obligations purchased directly from issuers or in secondary markets) for “eligible businesses” (i.e. US businesses, including air carriers, that have not otherwise received adequate economic relief through loans or loan guarantees under the CARES Act), as well as states and local governments. Though the legislation provides the Treasury Secretary with broad discretion in making these loans, loan guarantees, and investments, it specifies that the programs must be consistent with the Federal Reserve Board’s authority under section 13(3) of the Federal Reserve Act, including requirements relating to loan collateralization, taxpayer protection, and borrower solvency.

Borrowers participating in this program are subject to several of the above industry-specific restrictions:

• These businesses must be created or organized in the United States, or under the laws of the United States, have significant operations in the US, and have a majority of their employees based in the United States.
  
  
• These borrowers must agree to the same buy-back and dividend prohibitions, and employee compensation caps discussed above.

The legislation, however, allows the Treasury Secretary to waive these prohibitions and/or compensation caps for these borrowers, if necessary to protect the interests of the federal government.  If the Secretary issues such a waiver, he must make himself available to testify before Congress regarding the reasons for the waiver.

• The same exclusion and self-certification related to businesses affiliated with the president, other officials and their families applies.

Potential new lending programs for small- and mid-sized businesses

With respect to the $454 billion allocated for loans, loan guarantees, and other investments, the CARES Act directs the Treasury Secretary “to endeavor” to establish a program that provides direct loans to mid-sized businesses (i.e. between 500 and 10,000 employees) and, to the extent practicable, nonprofit organizations. 

Such direct loans would be made at interest rates no higher than 2 percent, and with no interest or principal due on the loans for at least the first six months. Borrowers must make a “good-faith certification” to the following:

• The loan is necessary due to the uncertainty of economic conditions as of the date of the application.
  
  
• The borrowed funds will be used to retain at least 90 percent of the borrower’s workforce, at full compensation and benefits, until September 30, 2020.
  
  
• The borrower intends to restore at least 90 percent of its workforce that existed as of February 1, 2020, and to restore all compensation and benefits to its workers, within four months after the COVID-19 public health emergency declared by HHS ends.
  
  
• It is a US-domiciled business, created or organized in the United States or under the laws of the United States, and has significant operations and a majority of employees located in the United States.
  
  
• It is not a debtor in a bankruptcy proceeding.
  
  
• It will not pay dividends with respect to common stock, or repurchase an equity security listed on a national securities exchange of the recipient (or any parent company) while the direct loan is outstanding (except to the extent required under a pre-existing contractual obligation).
  
  
• It will not “outsource or offshore” any jobs during the loan term plus two years.
  
  
• It will not abrogate existing collective bargaining agreements during the loan term plus two years, and remain neutral in any union organizing effort during the loan term.

Separately, the CARES Act makes clear that the Federal Reserve Board may create a “Main Street Lending Program” to support lending to small and mid-sized businesses. For context, on March 23, 2020, before the CARES Act was passed, the Federal Reserve Board issued a press release that, among other announcements, merely noted that the agency “expects to announce soon the establishment of a Main Street Business Lending Program to support lending to eligible small-and-medium sized businesses, complementing efforts by the [Small Business Association].”

Oversight

The CARES Act provides several key measures to protect and oversee the loan, loan guarantee, and investment programs.

First, the legislation establishes for a five-year period, within the Treasury Department, an Office of the Special Inspector General for Pandemic Recovery. The Special Inspector General, who will be nominated by the president and confirmed by the Senate, is charged with auditing and investigating the granting, purchase management, and sale of loans, loan guarantees, and other investments made under the program. This includes collecting various data on the program, including a description of the categories of the loans, loan guarantees, and other investments made by the Treasury Secretary, a listing of the recipients, and an explanation of the reasons the Secretary determined it to be appropriate to make each loan or loan guarantee. 

Second, the legislation establishes a Congressional Oversight Commission to oversee the Treasury Department and the Federal Reserve Board. The commission is empowered to hold hearings, take testimony, and receive relevant information from any department or agency. It will be responsible for submitting reports to Congress every 30 days addressing (1) the Treasury Department and the Boards’ administration of this program; (2) the impact of the loans, loan guarantees, and investments on the U.S. economy and financial markets; (3) the extent to which these transactions contributed to market transparency; and (4) effectiveness of these transactions on minimizing long-term costs to the taxpayers and maximizing the benefits for taxpayers. The commission will dissolve on September 30, 2025.

Third, the legislation requires the Treasury Secretary to publish on the Department’s website detailed information about each transaction within 72 hours of executing such transaction. 

• The posted information must include a description of the action, including the identity of the counterparty, the amount of the loan or loan guarantee, and information regarding the applicable financial terms, including a copy of the final term sheet and contract.
  
  
• Additionally, the Treasury Secretary must submit a detailed financial report to Congress within seven days of making a loan or loan guarantee regarding the completed transactions; and then post this report on the Department’s website seven days later. Subsequent reports must then be published online every 30 days for as long as any loan or loan guarantee remains outstanding. Similar reporting requirements apply to the Federal Reserve Board.

Relatedly, the legislation temporarily relives the Federal Reserve Board from certain requirements imposed by the Government in the Sunshine Act if the Chairman determines in writing that “unusual and exigent circumstances exist.”  This would allow the Board to conduct meetings without various public record-keeping requirements until either December 31, 2020, or the COVID-19 national emergency declared by the president terminates.

Additional payroll support for air carriers

In addition to the above loans, loan guarantees, and other investments, the CARES Act provides financial assistance to air carriers and contractors exclusively for payroll support.  The Treasury Department released guidance on this program on March 30, 2020. This guidance provides additional information regarding the program, application procedures, and an application form.  Note that the guidance states that it is subject to change at any time.

Form, amount, and schedule of assistance

The CARES Act authorizes the Treasury Secretary to provide payments to air carriers and contractors that must be exclusively used to continue paying employees (i.e. individuals, excluding corporate officers, employed by an air carrier or contractor in the United States, including its territories and possessions) “wages, salaries, benefits, and other compensation.” The recent Treasury guidance defines this as remuneration “paid by the applicant to its employees for personal services and includes salaries, wages, overtime pay, cost-of-living differentials, and other similar compensation, as distinguished from per diem allowances or reimbursement for expenses incurred by personnel for the benefit of the applicant.”

For air carriers, the amount of the payroll support will be a function of the salaries and benefits reported by the air carrier to the Department of Transportation pursuant to 14 C.F.R. part 241 for the period from April 1, 2019, through September 30, 2019. For air carriers not subject to this reporting requirement, as well as for contractors, the amount of the payroll support will be the amount that such carrier/contractor certifies, using sworn financial statements or other appropriate data, of wages, salaries, benefits, and other compensation paid to employees over the same time period. 

If the total amount of payroll support requested exceeds the total amount of authorized funds, the Treasury Secretary will reduce the support payments (within each respective category) on a pro rata basis.

The CARES Act directs the Treasury Secretary to begin providing the payroll support within 10 days of enactment (March 27, 2020). The Treasury Secretary will then determine an appropriate schedule for subsequent payments, if any.

Eligible Borrowers

The CARES Act allocates:

• Up to $25 billion for passenger air carriers (defined in the recent Treasury guidance as an air carrier that, during the time period from April 1, 2019 to September 30, 2019, derived more than half of its air transportation revenue from the transportation of passengers).
  
  
• Up to $4 billion for cargo air carriers (defined in the recent Treasury guidance as an air carrier that, during the time period from April 1, 2019 to September 30, 2019, derived more than half of its air transportation revenue from the transportation of property or mail, or both).
  
  
• Up to $3 billion for airline “contractors.” Contractors are defined as individuals and businesses under contract (or subcontract) with a passenger air carrier performing either catering functions or ground support functions.

Catering functions include the preparation, assembly, or both, of food, beverage, provisions and related supplies for delivery, and the delivery of such items, directly to aircraft or to a location on or near airport property for subsequent delivery to aircraft.

Ground support functions include functions on the property of an airport that are directly related to the air transportation of persons, property, or mail, including but not limited to the loading and unloading of property on aircraft; assistance to passengers under 14 C.F.R. part 382; security; airport ticketing and check-in functions; ground-handling of aircraft; or aircraft cleaning and sanitization functions and waste removal.

As with the other programs, the legislation defines “air carriers” as US citizens, US-owned partnerships, and US-controlled corporations or associations undertaking by any means, directly or indirectly, to provide air transportation. 

Required assurances and other conditions

In order to receive this payroll assistance, the CARES Act requires applicants to agree to the following restrictions:

1. To use the payments exclusively for the continuation of employee wages, salaries, and benefits.
2. To refrain from furloughing workers or reducing pay rates and benefits until September 30, 2020.
3. To refrain, until September 30, 2021, from buying back any equity securities listed on a national securities exchange (including of their parent companies, if applicable), as well as paying dividends on common stock or making other capital distributions. Note that the stock buy-back prohibition also applies to the borrowers’ affiliates, but does not apply to contractual obligations in effect as of the date of enactment (March 27, 2020). Also of note, the recent Treasury guidance also subjects the borrowers’ subsidiaries to the stock buy-back prohibition.
4. To agree that, through September 30, 2020, neither the Treasury Department nor any other actor, department, or agency of the Federal Government may condition the payroll support payments on the applicant’s implementation of measures to enter into negotiations with the certified bargaining representative of a craft or class of employees (under the Railway Labor Act or the National Labor Relations Act) regarding pay or other terms of employment.
5. To limit, from March 24, 2020 through March 24, 2022, “total compensation” (defined as salary, bonuses, stock awards, and other financial benefits) for certain employees.

For individuals who earned between $425,000 and $3 million in 2019 (except for employees whose compensation is determined through a collective bargaining agreement entered into prior to March 1, 2020), annual total compensation cannot exceed the amount earned in 2019.

For individuals who earned over $3 million in 2019, annual total compensation can neither exceed the amount earned in 2019, nor  exceed $3 million plus half of the amount of total compensation exceeding $3 million that was earned in 2019.

Additionally, all individuals who earned over $425,000 in 2019 would be prohibited from receiving severance or other exit payments exceeding twice the amount earned in 2019.

Additionally, the CARES Act authorizes the Treasury Secretary to receive financial instruments issued by the recipients (e.g. warrants, options, preferred stock, debt securities, or notes), which, in the Secretary’s discretion, “provide appropriate compensation to the Federal Government for the provision of the financial assistance.” Notably, unlike the $46 billion allocated for industry-specific loans (discussed above), the Treasury Secretary is not required to receive such financial instruments.

Lastly, as noted above, the CARES Act provides that, until March 1, 2022, the Transportation Secretary may require air carriers that receive payroll support to maintain certain scheduled air transportation services.

Application Information

Businesses must complete the five-page “Payroll Support Application” to apply for the payroll support.  Note that this application incudes, among other requirements, a section in which the applicant must identify “a financial instrument (or instruments) and proposed terms for such instruments that would provide appropriate compensation to the Federal Government in exchange for payroll support.” Businesses must also complete a “Payroll Support Agreement.”  This document will be provided by the Treasury Department after an application is received.

Pursuant to the Treasury guidance, applicants should submit their completed application materials not later than 5 pm EDT on April 3, 2020. Applications received after 5 p.m. EDT on April 3 will be considered, but may not be approved as quickly. Those received after 11:59 pm EDT on April 27, 2020 may not be considered, subject to the Treasury Secretary’s discretion. 

Note that the agency may consult with the Department of Transportation on any aspect of application screening or evaluation, which may include disclosing any information submitted as part of an application.   

Expansion of the Small Businesses Administration Loan Program

General Information

The Small Business Association (SBA) administers several different types of programs designed to provide access to capital for small businesses.  The CARES Act amends Section 7(a) of the SBA Act to create the new Paycheck Protection Program. In general, these loan programs are intended to help small businesses pay employee salaries, and stay current with mortgage payments, rent, utilities, and interest on debt obligations. Total funding for this program is $349 billion.

The CARES Act also provides an additional $562 million for SBA disaster loans, generally administered through economic injury disaster loans (EIDLs), as well as $10 billion for emergency EIDL grants.   

The Paycheck Protection Program

The CARES Act’s Paycheck Protection Program makes loans available for eligible for-profit small businesses, nonprofit organizations, veterans organizations, tribal businesses, sole proprietors, independent contractors, and self-employed individuals. The business must be either (1) fewer than 500 employees, including affiliates, or (2) if more than 500 employees, then not more than the qualifying size limit established by the SBA for that particular industry, including affiliates. The affiliate definition under the legislation is broad and requires consideration of a number of factors relating to control. Businesses in the hospitality industry (i.e. those with industry codes that start with 72) that employ no more than 500 employees per physical location are also eligible. 

To be eligible for a Section 7(a) loan, the business must apply for the loan during the covered time period, which spans from February 15, 2020 until June 30, 2020. Borrowers must have been in operation as of February 15, 2020, and had employees whom the business paid salaries or paid independent contractors.

According to guidance from the SBA and the Department of Treasury, small businesses and sole proprietorships may begin processing loan applications as soon as April 3, 2020. Companies should not wait to apply, as funding will be limited. The maximum loan amount is $10 million. Under the formula to be used for these loans, however, borrowers will be limited to two and half times the company’s average total monthly payments for payroll costs incurred during the one-year period before the date on which the loan is made, plus the outstanding amount of any existing SBA disaster loan being used for a different purpose made during the period beginning on January 31, 2020 and ending December 31, 2020. Payroll costs can include salary, wages, cash tips and similar compensation, in addition to other enumerated expenditures, and exclude compensation of an individual employee in excess of $100,000 annually or any compensation of an employee whose principal place of residence is outside of the United States. Payroll costs also exclude qualified paid family and sick leave pursuant to the Families First Coronavirus Response Act.

Under the CARES Act, the loan terms cannot exceed 10 years, and cannot have interest rates exceeding four percent. The legislation requires lenders to defer payments of principal, interest, and fees for at least six months and not more than one year. The SBA Guidance limited this further, stating that all loans under the program will have the following identical features:

• A maturity of 2 years
  
  
• An interest rate of 0.5 percent
  
  
• First payment to be deferred six months
  
  
• 100 percent guaranteed by the SBA
  
  
• No collateral
  
  
• No personal guarantee
  
  
• No borrower or lender fees will be payable to the SBA

For these loans, borrowers must make a “good faith certification” that (1) the loan is necessary to support ongoing operations due to the uncertainty of current economic conditions, and (2) that funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments. Loan applicants must also certify that they are not “double dipping” – i.e. applying for multiple loans (including through the SBA’s Disaster Loan Program, discussed below)  that pay for the same purposes. Of note, applicants are neither required to show that they are unable to obtain credit elsewhere, nor provide a personal guarantee for the loan.

During the covered period, borrowers may use the loan funds proceeds for:

• Payroll costs (which includes salaries, commissions, or similar compensation; payment for vacation, parental, family, medical, or sick leave (excluding that provided under the Families First Coronavirus Response Act)); allowances for dismissal or separation; and payments for group healthcare benefits, retirement benefits, and state or local taxes assessed on employee compensation.
  
  
• Costs related to the continuation of group healthcare benefits during periods of paid sick, medical, or family leave, and insurance premiums.
  
  
• Employee salaries, commissions, or similar compensation.
  
  
• Payments of interest on any mortgage obligation (which shall not include any prepayment of or payment of principal on a mortgage obligation).
  
  
• Rent (including rent under a lease agreement).
  
  
• Utilities.
  
  
• Interest on any other debt obligations that were incurred before February 15, 2020.

Borrowed funds that are spent on particular allowed uses during the covered period will be forgiven. If funds are used for non-allowed purposes, they will have to be repaid. Loan forgiveness may also be proportionally reduced for employee salaries that are reduced by more than 25 percent of the employee’s last calendar quarter during the applicable period. Allowable use of funds include:

• Payroll costs (as defined above).
  
  
• Payments of interest on any mortgage obligation (exclusion any prepayment of or payment of principal on a mortgage obligation).
  
  
• Rent (including rent under a lease agreement in place before February 15, 2020).
  
  
• Utilities (only for distribution of electricity, gas, water, transportation, telephone, or internet access in place before February 15, 2020).

SBA’s Disaster Loan Program

The CARES Act also provides additional funding to the SBA to expand the agency’s Disaster Loan Program, which includes EIDLs for an amount of up to $2 million. All of the US states and territories have been declared disaster areas due to COVID-19, which enables qualifying small businesses located in each state to apply for SBA disaster loan.  EIDL funds should be utilized as working capital to resume normal business operations and cover additional expenditures necessary to alleviate the specific economic injury caused by COVID-19.

Importantly, the legislation temporarily (from January 31 until December 31, 2020) expands program eligibility, opening the program to businesses with fewer than 500 employees, individuals who operate under a sole proprietorship, with or without employees, or as an independent contractor; cooperatives with fewer than 500 employees, Employee Stock Ownership Plans (ESOPs) with fewer than 500 employees, and tribal small businesses.

The legislation also temporarily waives certain program requirements. The SBA will not require personal guarantees from applicants seeking advances and EIDLs of $200,000 or less. Further, while applicants must have been in business on January 31, 2020, applicants need not to have been in business for one year before the disaster. Applicants are also not required to be unable to obtain credit elsewhere. Lenders may approve applicants based solely on their credit scores or “alternative appropriate methods to determine an applicant’s ability to repay.”

The CARES Act also provides an additional $10 billion for SBA to provide emergency EIDL grants until December 31, 2020. Those applying to the SBA’s Disaster Loan Program can also seek an emergency grant of up to $10,000. These emergency funds can be used for:

• Providing sick leave to employees unable to work due to direct effect of COVID-19.
  
  
• Maintaining payroll during business disruptions during substantial slow-downs.
  
  
• Meeting increased supply chain costs.
  
  
• Making rent or mortgage payments.
  
  
• Repaying debts that cannot be paid due to lost revenue.

Notably, businesses are not required to repay the $10,000, even if their underlying EIDL application is later denied. However, if the applicant is approved for a Payment Protection Loan, the $10,000 will be reduced from the loan forgiveness amount for a loan for payroll costs. Applicants can apply for both an EIDL and a Payment Protection Loan so long as the funds are used to cover distinct purposes. Lastly, an EIDL cannot be forgiven, whereas Payment Protection loans can.

Business tax provisions 

Employer payroll taxes. The CARES Act allows businesses to defer payment of employer payroll taxes, including the 6.2 percent Social Security tax on employee wages, for up to two years. If the business defers payment of payroll taxes, half of such taxes will be due on December 31, 2021, with the remaining amount due on December 31, 2022.

Employer retention credit.  The Act provides companies with a refundable payroll tax credit for 50 percent of wages paid by employers to employees during the COVID-19 crisis. The credit is available to employers whose (1) operations were fully or partially suspended, due to a COVID-19-related shut-down order, or (2) gross receipts declined by more than 50 percent when compared to the same quarter in the prior year. The credit is based on qualified wages paid to the employee. For companies with greater than 100 full-time employees, qualified wages are wages paid to employees when they are not providing services due to the COVID-19-related circumstances described above. For companies with 100 or fewer full-time employees, all employee wages qualify for the credit. The credit is provided for the first $10,000 of compensation, including health benefits, paid to an eligible employee, and is provided for wages paid or incurred from March 13, 2020 through December 31, 2020.

Net operating losses. The Act provides businesses with increased flexibility for net operating losses (NOLs). The bill allows businesses to reduce income in a prior year by allowing businesses to carry back NOLs from 2018, 2019, and 2020 for five years. Further, the 80 percent taxable income limitation on NOL carryovers is temporarily suspended, allowing such losses to fully offset their taxable income.

Pass-through excess loss limitation. The Tax Cuts and Jobs Act imposed limitations on the deductibility of excess losses from a pass-through business against non-business income. The CARES Act suspends that limitation for 2018, 2019, and 2020.

AMT credits. The Act allows businesses to claim alternative minimum tax (AMT) refundable tax credits on an accelerated schedule. Previously, the AMT tax credits were spread out over several years ending in 2021.

Business interest deduction. The Act increases the amount of interest expense businesses are allowed to deduct on their tax returns for 2019 and 2020 from 30 percent to 50 percent.

Charitable contributions. The corporate charitable contribution limit is increased to 25% of taxable income, up from 10 percent. The charitable contribution deduction limit for food is increased to 25 percent. 

Qualified improvement property. The Act allows businesses to immediately write off improvements on certain qualified property instead of depreciating such improvements over the 39-year life of the property. This is a long-anticipated technical correction to the Tax Cuts and Jobs Act, correcting a drafting error that excluded qualified improvement property from bonus depreciation treatment.

Excise tax waiver for alcohol used to produce hand sanitizer: For 2020, no excise tax will be imposed upon any distilled spirits used or contained in hand sanitizer.

Healthcare provisions

The CARES Act provides for $100 billion in aid specifically for healthcare providers for necessary healthcare-related expenses and to reimburse for expenses or lost revenues attributable to coronavirus. Eligible healthcare providers include public entities, Medicare or Medicaid enrolled suppliers and providers, and for-profit and not-for-profit entities as the Department of Health and Human Services (HHS) may specify.  HHS will review applications and make payments on a rolling basis under this provision.  This funding is available for “construction of temporary structures, leasing or properties, medical supplies and equipment including personal protective equipment and testing supplies, increased workforce and trainings, emergency operation centers, retrofitting facilities, and surge capacity.”  In addition, $250 million is made available for grants or cooperative agreements with grantee or sub-grantee entities that are part of the Hospital Preparedness Program. The Act also provides $1.32 billion in supplemental funding to community health centers on the front lines of testing and treating patients for COVID-19.

Additional appropriations of note 

Agricultural producers. $9.5 billion to the US Department of Agriculture to support agricultural producers impacted by COVID-19, including producers of specialty crops, producers that supply local food systems, and livestock producers. 

Fishery participants. $300 million to the US Department of Commerce to support fishery participants affected by COVID-19. Of note, the legislation provides that the assistance may include direct relief payments. The funds would remain available until September 30, 2021. To be eligible, a fishery-related business must have incurred as a result of COVID-19 a 35 percent or greater revenue loss (compared to the prior 5-year average), or “any negative impacts to subsistence, cultural, or ceremonial fisheries.” Funds can be awarded on a rolling basis.

Rural development programs. $20.5 million to the US Department of Agriculture for the cost of loans for rural business development programs authorized by Section 310B of the Consolidated Farm and Rural Development Act.  The funds will remain available until September 30, 2021. The Act will also appropriate $25 million for telemedicine and distance learning services in rural areas. These funds will remain available until expended.

Food and Drug Administration. $80 million to the Food and Drug Administration for the development of necessary medical countermeasures and vaccines, advanced manufacturing for medical products, the monitoring of medical product supply chains, and related administrative activities. The funds will remain available until expended.

Support for manufacturing. $60 million to the US Department of Commerce of which $50 million will go to the Hollings Manufacturing Extension Program to help small- and medium-sized manufacturers recover by finding value within the supply chain and expanding markets; and an additional $10 million to the National Network for Manufacturing Innovation to support development and manufacturing of medical counter-measures and biomedical equipment and supplies.  The funds will remain available until September 30, 2021.

Defense Production Act Purchases. $1 billion to allow the Department of Defense to invest in manufacturing capabilities that are key to increasing the production rate of personal protective equipment and medical equipment to meet the demand of healthcare workers all across the nation. The funds will be available until expended.

Education. Over $30 billion to the Education Stabilization Fund, including funding for the Elementary and Secondary School Emergency Fund and the Higher Education Emergency Relief Fund.

Airports. $10 billion to the Federal Aviation Administration for “Grants-In-Aid for Airports.”

The Coronavirus Preparedness and Response Supplemental Appropriations Act

On March 6, 2020, the Coronavirus Preparedness and Response Supplemental Appropriations Act 2020 (CPRSA) (H.R. 6074) was enacted, providing federal agencies with approximately $8 billion in emergency funding. The entire bill text can be found here.

Funding of HHS programs

The majority of the funds under this bill ($6.2 billion) were designated for the Department of Health and Human Services (HHS), including, for instance, more than $2 billion for the research and development of vaccines, therapeutics, and diagnostics. In addition:

• The Act provides $100 million to the Health Resources and Services Administration (HSRA) for grants to health centers under the Health Center Program, which focuses on improving healthcare to people who are geographically isolated or medically or economically vulnerable.
  
  
• The Act includes a waiver removing restrictions on Medicare providers and allowing them to offer telehealth services to beneficiaries regardless of whether the beneficiary is in a rural community at an estimated cost of $500 million.

Small Business Loans

The CPRSA authorizes the Small Business Administration (SBA) to provide an estimated $7 billion in low-interest disaster loans to small businesses in the form of economic injury disaster loans (EIDLs), under section 7(b) of the SBA statute.

• EIDLs are available only after a state governor makes a disaster declaration pursuant to the Stafford Act and the president subsequently approves the declaration.
  
  
• EIDLs offer up to $2 million in assistance per small business.
  
  
• This program is available for small businesses, small agricultural cooperatives and most nonprofits in declared-disaster areas.
  
  
• The SBA defines a “small business” as one that typically makes a maximum of $750,000-$38.5 million in annual revenue and has fewer than 100-1,500 employees, depending on the industry.
  
  
• The funds may be used to pay fixed debts, payroll, accounts payable or employee sick leave.

The Families First Coronavirus Response Act

On March 18, 2020, the Families First Coronavirus Response Act (H.R. 6201) (FFCRA) was enacted. It contains eight main provisions. Those relevant to most businesses are discussed below. The entire bill text can be found here.

Employee Paid Family and Medical Leave and Associated Employer Tax Credit

FFCRA amends the Family and Medical Leave Act (FMLA) to include leave under certain circumstances needed to care for an employee’s minor child whose school or care provider is unavailable due to a publicly-declared coronavirus public health emergency, and provides employers with a tax credit for the amounts required to be paid. This provision expires on December 31, 2020.

• Covered employees. The paid family and medical leave may only be used by employees who have been employed by their current employer for at least 30 calendar days and who work for a covered employer. Certain health care workers and emergency responders may be excluded from the leave provisions.
  
  
• Covered employers. With respect to the private sector, the paid family leave requirements apply to employers with fewer than 500 employees. FFCRA, however, allows the Secretary of Labor to exempt employers with fewer than 50 employees from the paid leave requirements if they “would jeopardize the viability of the business as a going concern.”
  
  
• The benefit and employer tax credit. After 10 days of family and medical leave, employers must begin providing paid leave that is at least two-thirds of the employee’s pay rate. An employee’s paid leave cannot exceed $200 per day and $10,000 in the aggregate. Employers can claim a tax credit for 100 percent of the amount required to be paid in family leave, subject to the $200 per day cap discussed above. Additionally, the tax credit amount can be increased by the amount employers pay for an employee’s healthcare plan while they are on leave.

Employee Paid Sick Leave and Associated Employer Tax Credit

FFCRA requires provision of paid sick time to certain employees of private employers with fewer than 500 employees who are unable to work (or telework) due to coronavirus-related medical and caregiving needs. Employers must provide up to 80 hours (10 workdays) of paid sick leave to their full-time employees. For part-time employees, the number of hours is prorated by the average number of hours worked in a two-week period. The maximum amount that must be paid in sick leave depends on the purpose for which the employee is taking the leave. 

• Employers can claim a tax credit for 100 percent of the amount required to be paid in sick leave wages, subject to caps set forth in the statute.
  
  
• This provision expires on December 31, 2020.

The Defense Production Act of 1950

The president has invoked his powers under the Defense Production Act of 1950 (“DPA”), announcing that FEMA would need to implement DPA authorities in order to secure necessary medical equipment. On Friday, March 27, 2020, the president enforced the DPA in this context, ordering General Motors to produce ventilators to combat the coronavirus, after days of hesitating to use the powers in the law. The DPA provides the president with a broad set of authorities to ensure that domestic industry can meet national defense and security requirements. Among other powers, the DPA provides the president with the ability to direct private industry to prioritize the performance of government contracts to ensure the timely availability of critical materials and equipment. 

Title III of the DPA also authorizes the president to provide financial incentives to develop, maintain and expand the production capacity of domestic sources for critical components, technology, materials and industrial resources necessary for the national security. In addition to a very rarely invoked loan guarantee program, Title III authority has principally been used for the following:

1. Purchasing industrial resources or critical technology items.
   
   
2. Making subsidy payments for domestically produced materials.
   
   
3. Installing and purchasing equipment for government and privately owned industrial facilities to expand their productive capacity.

This authority allows for incentives to be structured in different ways, including direct purchases or subsidies of goods.  It requires, however, that the president first determine that there is a domestic industrial base shortfall for a particular resource, material or technology, that threatens the national defense. The DPA contains a provision directing the president to afford a strong preference for small businesses when issuing contracts under DPA authorities.

Agency responses

The Federal Reserve 

Support for Critical Market Functioning. The Federal Reserve announced on March 23, 2020 that it will buy Treasury bonds and mortgage-backed securities “in the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions and the economy.” This plan replaces an earlier limit of $700 billion on these bond-buying programs. In addition, the Federal Open Market Committee will start buying commercial mortgage-backed securities.

Establishment of the Primary Dealer Credit Facility: On March 17, 2020, the Federal Reserve established the Primary Dealer Credit Facility (PDCF), a term loan facility that provides funding to primary dealers in exchange for a broad range of collateral and is intended to foster the functioning of financial markets more generally. The facility will allow primary dealers to support smooth market functioning and facilitate the availability of credit to businesses and households.

Expansion of the Money Market Mutual Fund Liquidity Facility (MMLF) and Commercial Paper Funding Facility (CPFF): On March 23, 2020, the Federal Reserve expanded the MMLF to include a wider range of securities, including municipal variable rate demand notes and bank certificates of deposit, and expanded the CPFF to include high-quality, tax-exempt commercial paper at a reduced price. These actions support the flow of credit to municipalities and increased liquidity to aid individuals and businesses impacted by COVID-19.

Establishment of Three Lending Facilities. On March 23, 2020, the Federal Reserve established three new lending facilities (described below), which, taken together, will provide up to $300 billion in new financing. The US Treasury, by use of the Exchange Stabilization Fund, will provide $30 billion in equity to these facilities.

• The Primary Market Corporate Credit Facility (PMCCF) for new bond and loan issuance will be open to investment grade companies and will provide bridge financing of four years. Borrowers may defer interest and principal payments during the first six months of the loan in order to free up additional cash to pay employees and suppliers.The Federal Reserve will finance a special purpose vehicle (SPV) to make loans from the PMCCF, and the Treasury will make an equity investment in the SPV.
  
  
• The Secondary Market Corporate Credit Facility (SMCCF) will provide liquidity for existing corporate bonds. The SMCCF will purchase corporate bonds in the secondary market, and the Treasury will make an equity investment in the SPV established by the Federal Reserve for this facility.
  
  
• The Term Asset-Backed Securities Loan Facility (TALF) will support credit flow to consumers and businesses. Under the TALF, the Federal Reserve will lend on a non-recourse basis to holders of certain AAA-rated asset-backed securities backed by student loans, credit card loans, and loans guaranteed by the Small Business Administration.

Main Street Business Lending Program. The Federal Reserve expects to announce a Main Street Business Lending Program to support lending to eligible small- and medium-sized businesses to complement the efforts of the SBA.

The Internal Revenue Service

Delayed Tax Filing Deadline. On March 21, 2020, the Internal Revenue Service announced that the federal income tax filing due date will be extended from April 15, 2020, to July 15, 2020. Under this automatic delay program, taxpayers and businesses can defer federal income tax payments due on April 15, 2020, to July 15, 2020, without penalties and interest, regardless of the amount owed.

People First Initiative. On March 25, 2020, the Internal Revenue Service announced the People First Initiative which will temporarily postpone certain payments related to Installment Agreements and Offers in Compromise, as well as limiting certain enforcement actions. The projected start date is April 1, 2020 and will initially run through July 15, 2020.

The US Small Business Administration

The Small Business Administration is providing access to several loan programs, including the following:

Economic Injury Disaster Loans (EIDL).  See above.

Section 7(a) of the Small Business Act program. See above.

Express Loan Program. This program provides loans up to $350,000 for no more than seven years with an option to revolve. The uses of proceeds are the same as the standard 7(a) loan.

Community Advantage Loan Pilot Program. This program allows mission-based lenders to assist small businesses in underserved markets with a maximum loan size of $250,000. The uses of proceeds are the same as the standard 7(a) loan.

504 Loan Program. This program is designed to foster economic development and job creation and/or retention. The eligible use of proceeds is limited to the acquisition or eligible refinance of fixed assets.

Microloan Program. This program involves making loans through nonprofit lending organizations to underserved markets. Authorized use of loan proceeds includes working capital, supplies, machinery & equipment, and fixtures (does not include real estate). The maximum loan amount is $50,000 with the average loan size of $14,000.

The Federal Trade Commission and US Department of Justice Antitrust Division

On March 24, 2020, the Federal Trade Commission and the US Department of Justice Antitrust Division issued a joint statement providing guidance for businesses working together to address COVID-19 and detailing an expedited antitrust procedure under which agencies will respond to all COVID-19-related requests, and resolve those requests addressing public health and safety, within seven calendar days of receiving all information necessary to vet any COVID-19 related proposals.

The expedited procedure requires that an applicant provide the FTC or Justice Department a written description of the proposal, including the parties that would be involved in the effort or activity, and the name and contact information of a person from whom the agencies could obtain additional information. This expedited procedure is for use solely for coronavirus-related public health efforts and may be invoked at the option of the requestor, in lieu of the agencies’ standard procedures for handling requests for advice.

The US Securities and Exchange Commission

The SEC has provided targeted assistance and relief to various classes of market participants and certain specific entities, including the following:

• On March 4, 2020, the SEC issued an order providing conditional regulatory relief for publicly-traded companies, permitting an additional 45 days to file¹ certain disclosure reports that would otherwise have been due between March 1 and April 30, 2020.
  
  
• On March 13, 2020, the SEC issued two exemptive orders providing temporary relief to regulated funds and investment advisors affected by the coronavirus. The orders provide relief regarding board actions that ordinarily must be taken at in-person board meetings and certain filing and delivery requirements for regulated funds and certain investment advisers.

Environmental Protection Agency

On Thursday, March 26, 2020, the Environmental Protection Agency (EPA) issued a suspension of the enforcement of environmental laws stating that that the agency would apply enforcement discretion for noncompliance:  (i) during the period of the policy (ii) that results from the COVID-19 pandemic. The EPA stated that it will not seek penalties from companies for noncompliance with routine monitoring and reporting obligations. Entities must make every effort to comply and, if compliance is not reasonably practicable, must act to minimize the effects and duration of noncompliance. In addition, entities should keep a record of their own noncompliance, along with identifying how the coronavirus was a factor.

The policy is retroactive to March 13, 2020 and will run until seven days following future notice by the agency. The policy does not apply to: (i) enforcement by state and local environmental agencies; (ii) criminal matters; (iii) Superfund and RCRA Corrective Action enforcement instruments; and (iv) imports (e.g., pesticides, engines, etc.).

Export-Import Bank

On March 12, 2020, the Export-Import Bank of the United States (EXIM) offered relief measures, including waivers, deadline extensions, streamlined processing, and flexibility to US customers and lenders for an initial period of 30 days (with the possibility of a further extension of the period, at EXIM’s discretion) for various programs, including: the Working Capital Guarantee Program, the Multi-Buyer and Single-Buyer Short-Term Insurance Program, and the Medium-Term Single-Buyer Insurance Policies issued to Exporters.

Federal Communications Commission

On March 30, 2020, the Federal Communications Commission (FCC) announced the “COVID-19 Telehealth Program” for supporting telehealth services for hospitals and other healthcare providers.  The FCC will receive about $200 million for telehealth under the CARES Act, and under the COVID-19 Telehealth Program, public hospitals, community health centers, and other public and non-profit healthcare providers would be eligible to apply for funding to cover all telehealth costs, including information technology, internet services and new devices. Eligible participants include post-secondary education institutions offering healthcare instruction, teaching hospitals and medical schools, rural health clinics, skilled nursing facilities, and community mental health centers.  The FCC now has the three votes necessary to advance the program.  Once the program is approved, the FCC will have an application process and make funding decisions on a rolling basis.