The CARES Act: What multinational businesses operating in the U.S. should know
By Hanna Mialik, Senior Associate, Global International Tax Advisory
The U.S. Congress signed the Coronavirus Aid, Relief, and Economic Security Act into law on 27 March 2020. Known as the CARES Act, it provides $2.2 trillion of support for citizens, businesses and other groups affected by the pandemic.
The CARES Act was preceded by the $8.3 billion Coronavirus Response package, signed in early March by President Trump to provide domestic and global relief due to the outbreak. That measure was followed two weeks later by a $112 billion relief bill to aid individuals affected by COVID-19.
The CARES Act is the third, and by far the most significant, legislative response to the coronavirus pandemic. It is the largest financial aid package in U.S. history, including the state bailouts that were extended during the 2008 global financial crisis.
This article summarizes some critical elements of the CARES Act that multinational businesses operating in the U.S. should understand.
Help for businesses
The biggest portion of relief from the Act — $908 billion of the total — will go to help large and small businesses as well as nonprofits. Exactly one half of that amount (or $454 billion) will support Federal Reserve liquidity facilities for businesses.
Here are some specific incentives organizations should consider.
Social security payment deferrals
Employers may defer paying a portion of their 2020 social security tax contributions to 2021 and 2022. The deferral applies to payroll taxes from the Act’s enactment date on 27 March through the end of this calendar year.
The Employee Retention Credit
Certain employers that are forced to suspend their commercial activities due to the coronavirus outbreak, but continue paying their employees, will be eligible to claim the Employee Retention Credit. The refundable tax credit is 50 percent in wages paid (up to $10,000) by an eligible employer. Eligible wages are paid after 12 March 2020 and before 1 January 2021, and include not just cash but also part of the cost of employer-provided healthcare.
For employers that had an average of 100 or fewer employees in 2019, the Employee Retention Credit is based on wages paid to all employees, regardless of whether they worked or not. For employers that had an average of more than 100 employees in 2019, the credit applies only to wages paid to employees who did not work during the calendar quarter. Employers may request advance payments of the credit by completing a Form 7200.
The Paycheck Protection Program
As an alternative to the Employee Retention Credit, employers may apply for a loan through the Paycheck Protection Program, run by the U.S. Small Business Association (SBA). The program provides an incentive for small businesses to keep workers on their payrolls. Eligible small businesses, nonprofits and veteran organizations may receive assistance to maintain payroll for a period of up to eight weeks. Notably, sole proprietors, independent contractors and the self-employed are also eligible.
Loans are tied to total payroll and 100 percent guaranteed by the federal government. Loan payments are deferred for six months. SBA will forgive loans, provided all employees are kept on the payroll for eight weeks and the loan is used for payroll, rent, mortgage interest or utilities.
Those eligible may apply for a loan through any SBA-approved lender by 30 June 2020. Loans are available on first-come, first served basis, so applying sooner is better than later.
Keep in mind that applying for a Paycheck Protection Program loan may disqualify a business from receiving an Employee Retention Credit and payroll taxes deferral. Eligible businesses should, then, weigh and compare each benefit carefully.
Other available benefits for businesses
Interestingly, the CARES Act temporarily modifies some of the Tax Cuts and Jobs Act (TCJA) provisions by allowing five-year net operating loss (NOL) carryback and lifting the 80 percent limitation. This modification should be a significant relief for businesses.
The Act increases the business interest expense limitation from 30 percent to 50 percent of earnings before interest, tax, depreciation and amortization (EBITDA) for the 2019 and 2020 tax years. Businesses may also calculate their 2019 interest deduction by using their 2019 EBITDA if it is higher than their 2020 EBITDA.
The Act also encourages charitable deductions by lifting the 60 percent Adjusted Gross Income (AGI) limitation.
Other business highlights include changes to the accelerated alternative minimum tax (AMT) credit, suspension of aviation and other excise taxes (such as 2020 excise taxes on alcohol used to produce sanitizing products), and qualified improvement property expensing.
Help for individuals, local governments and other groups
Multinationals with U.S. operations should have a basic understanding of how the CARES Act helps sectors of the U.S. economy that are not directly related to business. Some of these benefits will of course help their employees, while others will help sustain the infrastructure of the world’s largest economy.
Individuals and families
An estimated $591 billion of the Act will go to tax relief and direct cash injections to help individuals and families, and businesses, with a near equal split of $292 billion and $280 billion respectively.
Subject to the AGI limitation, a single individual will receive $1,200, and a married couple filing jointly will receive $2,400. An additional $500 will be paid for each qualifying child.
The Internal Revenue Service (IRS) will start issuing stimulus checks on 9 April. The speed of receiving a check largely depends on the status of the recipient’s 2019 individual income tax return and whether the IRS has the recipient’s banking information on file. Some Americans may not receive checks until September 2020, according to the IRS’ schedule.
The Act also modifies unemployment insurance programs by broadening eligibly criteria, increasing the benefits term by 13 weeks after state benefits are exhausted, and increasing weekly payouts by $600. $260 billion will be spent on unemployment insurance programs across the U.S.
Agencies and state and local governments
$492 billion will be appropriated to federal agencies and states and municipalities, along with territories and tribes. 80 percent of federal aid will flow through to state and local governments. The allotment will be calculated using a complex formula based on population, with an emphasis on ensuring food-supply safety and on bolstering the Medicare and Medicaid systems.
The healthcare system
The Act will inject significant cash into hospitals incurring COVID-19 expenses and losses. It will also help frontline medical staff and patients by providing personal protective equipment, ventilators and other medical supplies. In addition, it will ensure that COVID-19 vaccines will be fully covered by health insurers, and that COVID-19 testing will be reimbursed by employers or insurance companies. The Federal Emergency Management Agency (FEMA) and Centers for Disease Control and Prevention (CDC) will also receive benefits under the Act.
The CARES Act was an emergency response to the coronavirus outbreak, the goal of which was to provide quick aid to American individuals and businesses. Not surprisingly, many of the Act’s passages will need clarification, especially as the measures are put into practice. Additional guidance will likely be introduced soon. In the meantime, Congress is working on the next policy phase, which is expected in late April or early May.