President Donald Trump signed the $2.2 trillion Coronavirus Aid, Relief, and Economic Security Act (CARES Act or the Act) into law on March 27. The CARES Act aims to offer economic relief to companies and their employees due to the coronavirus (COVID-19) pandemic in the United States. Although the Act does not expressly provide relief for energy companies, many of its provisions impact energy sector companies.
This LawFlash identifies several key statutory provisions, grouping them into three areas as summarized below: loans and loan forgiveness, employee benefits, and tax. As such, it only addresses key provisions applicable to businesses, and is not exhaustive of other available federal and state relief programs. The CARES Act also provides relief for individuals, which this summary does not address outside the context of employee and unemployment benefits. We anticipate additional guidance to be released by the Small Business Administration and the US Department of the Treasury in the coming weeks and will report on it as applicable.
The CARES Act contains various provisions addressing loans, loan guarantees, and loan forgiveness for small businesses and businesses “critical to maintaining national security.” These provisions could be pertinent to small businesses, in particular, in the energy sector. Such provisions provide loans to small businesses to keep their workers employed (Sections 1101-1114); provide loans to businesses “critical to maintaining national security” that have not otherwise received adequate economic relief under the CARES Act (Sections 4011-4029); and make borrowers eligible for loan forgiveness, where the borrower uses the loan to support its employees and its business (Section 1105).
Small Business Loans
Sections 1101-1114 of the CARES Act support workers and small businesses weathering the economic impacts of the COVID-19 crisis. The Act provides new and increased federally guaranteed Paycheck Protection Program (PPP) loans through the Small Business Administration (SBA) to small businesses that keep their workers employed. By maintaining employees on their payroll through the duration of the crisis, these small businesses can qualify for PPP loan forgiveness. The Act is retroactive, incentivizing small businesses to rehire employees that have recently been laid off.
Specifically, Section 1102 of the CARES Act authorizes the SBA to offer federally guaranteed loans of up to $10 million to small businesses under the PPP. It also expands the definition of “small business” for purposes of the PPP. To qualify for a loan under the PPP, the business must (1) employ no more than 500 employees, or (2) employ no more than the applicable size standard for the industry established by the SBA in 13 CFR § 121.201, if the size standard is greater than 500 employees. Several sectors of the energy industry have an SBA size standard that exceeds 500 employees. Businesses in the energy industry sectors listed below qualify for such small business loans if they employ no more than the indicated number of employees:
North American Industry Classification System
Size Standards (Number of Employees)
Natural Gas Extraction
Drilling Oil and Gas Wells
Fossil Fuel Electric Power Generation
Nuclear Electric Power Generation
Electric Power Distribution
Natural Gas Distribution
Pipeline Transportation of Crude Oil
Pipeline Transportation of Refined Petroleum Products
The SBA will guarantee 100% of the loans issued to small businesses under the PPP during the period of February 15, 2020, through June 30, 2020. Small businesses can use the loan proceeds to cover payroll costs (excluding individual employee compensation over $100,000), group healthcare benefits, mortgage interest payments, rent, utilities, and interest on other debt. For additional information on the Payroll Protection Program, please see our recent LawFlash on that topic.
In addition, under Section 1110 of the CARES Act, small businesses may be eligible for Economic Injury Disaster Loans (EIDLs), which can provide up to $2 million to cover fixed debts, payroll, accounts payable, and other working capital needed to cover substantial economic injuries caused by COVID-19. For additional information on the Emergency Economic Injury Disaster Loan Program, please see our LawFlash on that topic.
Relief for Businesses That Do Not Otherwise Receive Targeted Relief
Sections 4011-4029 of the CARES Act provide emergency relief for certain businesses, including businesses “critical to maintaining national security,” that have not otherwise received adequate economic relief under the CARES Act. The secretary of the Treasury has the discretion to determine which businesses will qualify for such assistance, particularly, which are “critical to maintaining national security.”
The Treasury on April 10 released updated criteria outlining which businesses are eligible to apply for CARES Act loans out of the $17 billion allocated for businesses “critical to maintaining national security.”
To meet the Treasury’s updated criteria, at the time of application, a business must be
Businesses that do not meet either of these criteria may nonetheless be considered for a loan if the secretary of the US Department of Defense or the US director of national intelligence recommends and certifies that the applicant is “critical to maintaining national security.”
The Treasury secretary maintains ultimate responsibility to review each recommendation and determine whether the business is critical to maintaining national security. If so, then the business may apply for relief under the program. If not, the applicant business should consult other CARES Act programs to determine if other assistance may be available.
In determining whether the Treasury secretary may deem that a business which does not meet the above specific criteria is nonetheless critical to national security, it may be informative to reference the Cybersecurity and Infrastructure Security Agency's (CISA's) April 17 updated advisory memorandum to identify which businesses and individuals are considered “critical” infrastructure. Among many other positions, the guidance clarifies that essential workers in the energy sector include those who provide “services related to” energy sector fuels, such as petroleum (crude oil), natural gas, propane, liquefied natural gas (LNG), compressed natural gas (CNG), natural gas liquids (NGL), nuclear, and coal. It also includes workers supporting energy facilities across all sectors through construction, manufacturing, transportation, permitting, operation/maintenance, engineering, physical and cybersecurity, monitoring, and logistics. For a full list of energy-related positions and more information on this guidance, please see our related blog post.
Numerous eligibility requirements and conditions apply to these business benefits, however. As an initial threshold for eligibility, the business must certify that it is created or organized in the United States. or under the laws of the United States with significant US operations and a majority of its employees in the United States. For additional information on the updated CISA guidance and requirements, please see our LawFlash on that topic.
Section 1105 of the Act provides that borrowers – including small businesses, among others – will be eligible for loan forgiveness where the borrower uses the loan to support its employees and its business, subject to certain limitations and reductions. Specifically, borrowers will be eligible for loan forgiveness for loans used to pay (i) payroll costs (including additional wages paid to tipped workers), (ii) mortgage interest payments, (iii) rent payments on leases in place before February 15, 2020, and (iv) utility payments. The loan forgiveness amounts cannot exceed the principal amount of the loan and will be reduced based on a number of stated criteria. In addition, the loan forgiveness amounts will be treated as nontaxable cancelled indebtedness and not as income.
The CARES Act contains various provisions addressing employee benefits that apply to companies of all sizes, including those in the energy industry. Such provisions promote employee retention (Section 2301); provide unemployment benefits and compensation (Sections 2102 – 2116); expand the scope of employees who are eligible for paid leave (Section 3605); incentivize certain distributions from eligible retirement plans (Section 2202(a)); and increase certain retirement plan loan limits (Section 2202(b)).
These key sections are summarized below. We invite interested clients to contact the Morgan Lewis labor, employment, and benefits group for more information.
Employee Retention Credits for Employers Subject to Closure or 50% Reduction in Gross Receipts Due to COVID-19
Section 2301 of the Act provides a refundable tax credit against the employer portion of Old Age, Survivors and Disability Insurance (OASDI) or Railroad Retirement Tax Act (RRTA) taxes for 50% of “qualified wages” for each employee from March 13, 2020, through December 31, 2020. The credit is available to any employer carrying on a trade or business in 2020 whose operations were fully or partially suspended due to a COVID-19-related shutdown order or whose gross receipts (or operations, for tax-exempt employers) declined by more than 50% as compared to the same calendar quarter in the prior year.
For an employer that had more than 100 full-time employees during 2019, “qualified wages” are wages paid to its employees who are not providing services due to the circumstances described above. For an employer with 100 or fewer full-time employees, all employee wages qualify for the credit whether or not the employer is open. The amount of qualified wages subject to the credit is limited to $10,000 of taxable compensation, including health benefits, paid to each employee.
This tax credit could provide some relief from the employment tax burden to vendors and service providers to the energy industry and to advanced reactor designers and developers whose activities are affected by the COVID-19 crisis, making it easier to retain their employees.
Unemployment Benefits and Compensation
Sections 2101-2116 of the CARES Act provide for additional unemployment compensation and benefits for employees through (i) a pandemic emergency unemployment compensation, (ii) an emergency increase in unemployment compensation benefits, and (iii) a new temporary “Pandemic Unemployment Assistance” program. The federal government will fund the unemployment compensation. Employers should consider providing information on the benefits available to newly separated employees.
Pandemic emergency unemployment compensation is available to individuals who have exhausted all rights to regular compensation under state or federal law, have no right to compensation under state or federal law or any state unemployment compensation, are not receiving unemployment compensation under Canadian law, and are able, available, and actively seeking work. States have the option of entering into an agreement with the secretary of Labor to provide these benefits. The program makes available $600 per week in addition to benefits payable under state law and would be made available to eligible individuals for up to 13 weeks.
To be eligible for benefits under the temporary Pandemic Unemployment Assistance program, the individual must certify that (i) he/she is able or available to work as defined by applicable state law, but is “unemployed, partially unemployed, or unable or unavailable to work” for reasons related to COVID-19; or (ii) is self-employed, seeking part-time employment, does not have sufficient work history, or otherwise would not qualify for regular unemployment or extended benefits under state or federal law or pandemic emergency unemployment compensation. Individuals who can telework for pay or who are receiving paid sick leave or other paid leave benefits are not eligible.
Emergency Family and Medical Leave Expansion Act
Section 3605 of the CARES Act expands the scope of employees who are eligible for paid leave. More specifically, an employee who was laid off on or after March 1, 2020, but was rehired by the employer is eligible for paid leave as long as the employee worked for that employer for no less than 30 of the last 60 days before the layoff. Employers with fewer than 500 employees who laid off employees may recall the employees to make them eligible for the paid leave benefit. Because of the tax credit associated with the bill, this would result in no cost to the employer.
Special Coronavirus Distribution Option for Eligible Retirement Plans
Under Section 2202(a) of the Act, an individual may be permitted to take “coronavirus-related distributions” of up to $100,000 (in the aggregate) from their 401(a) plans, 403(b) plans, IRAs, or eligible 457(b) plans.
A “coronavirus-related distribution” is a distribution to an individual (1) who is diagnosed, or whose spouse or dependent is diagnosed, with SARS-CoV-2 or COVID-19 using a CDC-approved test, or (2) who experiences adverse financial consequences because of an inability to work due to quarantine, furlough, lay off, reduced hours, loss of child care, or the closing or reduction of hours of a business owned or operated by the individual because of SARS-CoV-2 or COVID-19. Plan administrators can rely on an individual’s certification that he or she meets the eligibility requirements for a coronavirus-related distribution.
Coronavirus distributions will be exempt from any application of the 10% early-distribution penalty, and unless the recipient elects otherwise, any income from the distributions will be subject to federal income tax ratably over three years. Moreover, an individual can repay any coronavirus-related distribution during the three-year period beginning the day after the distribution date, and the repayment will be treated as a 60-day rollover in a direct trustee-to-trustee transfer. Importantly, although terminated employees might already be able to access their retirement plan accounts, under other existing provisions, a coronavirus withdrawal eliminates any 10% early distribution penalty that may otherwise be applied and allows for the resulting taxable income to be spread over three years.
Retirement Plan Loan Limits Expansion
Section 2202(b) of the Act increases the qualified retirement plan and 403(b) plan loan limit from the current limit of the lesser of $50,000 and 50% of the vested account balance to the lesser of $100,000 or 100% of the vested account balance for participants who meet the requirements to receive a coronavirus-related distribution (discussed above). This increase is effective for loans made within 180 days following the passage of the Act. In addition, the due date for any plan loan repayments that are due between the date of enactment (March 27, 2020) and December 31, 2020, will be extended for qualified individuals by one year (with interest), and subsequent loan repayments may be “appropriately adjusted” to reflect the delay. This extension is permitted even if the term of the loan is extended beyond five years (i.e., into a sixth year).
The Retirement Plan Loan Limits Expansion allows plan sponsors to offer participants the option to access funds through loans, which will be repaid to the plan, rather than withdrawals, which generally are not repaid. The delay of loan repayments, which applies to new loans as well as existing loans, may be helpful for participants working reduced hours or on furlough and appears to apply to new coronavirus-related loans issued during the 180-day period following passage of the Act.
The CARES Act contains various provisions that will have tax implications for US companies, including those in the energy sector. Such provisions will modify limitations on charitable contributions during 2020 (Section 2205); delay payment of employment taxes (Section 2302); modify net operating losses (Section 2303); modify credit for prior year minimum tax liability of corporations (Section 2305); and modify limitations on business interest (Section 2306), among others.
These key sections are summarized below. For additional information on the major tax changes under the CARES Act, please see our LawFlash on that topic.
Modifications for Limitations on Charitable Contributions During 2020
Section 2205 of the CARES Act suspends percentage limitations on charitable cash contributions for corporations during 2020. Corporations may deduct any qualified contributions that, in the aggregate, do not exceed 25% of the corporation’s taxable income. Corporations may carry over any contributions in excess of its taxable income to later tax years.
Delay of Payment of Employment Taxes
Section 2302 of the Act provides that payment of 50% of the employer share of the OASDI tax, Tier I of the RRTA tax, and 50% of self-employment taxes and any estimated taxes due thereon by self-employed individuals between the enactment of the Act and January 1, 2021, are delayed until December 31, 2021. The due date for the remaining 50% of the employment taxes is delayed until December 31, 2022. In the event that an agent or certified professional employer organization is directed to defer payment of employer payroll taxes under the Act by a customer, the Act makes the customer solely liable for the payment of the applicable employment taxes before the applicable deadline.
Modifications for Net Operating Losses
Section 2303 provides modifications for net operating losses (NOLs). Specifically, it temporarily repeals the 80% of taxable income limitation on the utilization of NOL carryovers imposed by the Tax Cuts and Jobs Act (TCJA) (PL 115-97). This means for a taxable year beginning before January 1, 2021, a taxpayer can fully offset its taxable income in that year with NOLs permitted to be carried to that year from other years. NOLs arising after December 31, 2020, however, will be subject to the 80% of taxable income limitation. Taxpayers can carry back NOLs arising in 2018, 2019, and 2020 to the taxpayer’s five preceding taxable years.
Taxpayers can file amended income tax returns in the carryback years to receive a refund if they generated losses during their 2018, 2019, and 2020 tax years. For carrybacks to pre-2018 tax years, corporations may obtain refunds of taxes paid at the pre-TCJA corporate rate of 35%.
Corporations requesting refunds in excess of $5 million should expect a significant delay in receiving the refunds. Additionally, filing amended federal returns will likely trigger state filing requirements, as well.
Modification of Credit for Prior Year Minimum Tax Liability of Corporations
Section 2305 permits corporations with alternative minimum tax (AMT) credit carryovers to accelerate the recovery of refundable AMT credit carryovers. Specifically, the Act limits Internal Revenue Code Section 53(e), which addresses AMT refundable credit amounts, to taxable years beginning in 2018 and 2019, and for taxable years beginning in 2020 and 2021, the increased Code Section 53(c) limitation on allowable credits does not apply.
The Act also increases the AMT refundable credit to 100% beginning in 2019 (as opposed to 2021, under the TCJA). This means that taxpayers can claim the full amount of the AMT refundable credit, without reduction by the Code Section 53(c) limitation, for its taxable year beginning in 2018.
Corporations with newly allowed refundable AMT credits can file an application for a tentative refund. The application is verified in the same manner as an application under Code Section 6411(a), which provides the guidelines for tentative carryback and refund adjustments, and must be filed before December 31, 2020. The secretary of the Treasury will process the refund claim within 90 days of the date of filing.
Modifications of Limitation on Business Interest
Section 2306 increases the limitation on deductible business interest expense under IRS Code Section 163(j) for tax years beginning in 2019 and 2020. Taxpayers can use 50% of its adjusted taxable income (ATI) rather than 30%. For partnerships, however, the increase in limitation only applies to tax returns filed for the 2020 tax year. Additionally, taxpayers can elect to use 2019 ATI amounts when computing their business interest deduction limitation in 2020.
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If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
 Section 1102 also identifies other categories of businesses that could qualify for a loan under the PPP, such as businesses in the hospitality and restaurant industries.