Dear Retail Clients and Friends,
This edition of Morgan Lewis Retail Did You Know? examines how the Coronavirus Aid, Relief, and Economic Security (CARES) Act impacts companies in the retail and hospitality sector, which has been severely impacted by the coronavirus (COVID-19) pandemic due to the government-mandated shutdown of “non-essential businesses” in some states, as well as the decrease in customer traffic given the uncertain economic climate. Companies in the retail and hospitality sectors should carefully consider the eligibility requirements for CARES Act relief measures.
US President Donald Trump on March 27 signed into law the CARES Act, which provides numerous economic stimulus measures to eligible US companies. The CARES Act relief that is most impactful to retail and hospitality companies includes (1) small business loans under the Paycheck Protection Program, (2) Treasury loans for various businesses that do not otherwise receive targeted relief under the CARES Act, and (3) various tax credits and incentives.
For many retail and hospitality businesses, this relief is desperately needed. State and local executive orders and regulations have forced many “non-essential” physical retail locations to close. Although what is “non-essential” varies by order, most orders limit “essential” in-person physical retail to grocery stores, pharmacies, home repair stores, or office supply retailers. Virtually all of the relevant orders require restaurants to limit their service offerings to take-out options only, and many retailers have voluntarily closed physical retail operations even in places where there is no order requiring closure.
Combined with decreased demand for many products, a general decrease in discretionary spending, and decreased foot traffic even to stores that are allowed to remain open, the COVID-19 pandemic threatens the very existence of many retailers that rely primarily on physical retail in “non-essential” spaces. Ecommerce has also suffered; faced with required or voluntary shutdown of distribution facilities, reduced sales, and other challenges, some prominent ecommerce sites have gone completely dark in recent weeks. For these reasons, many retailers are looking to the CARES Act for critically needed financial relief.
The Keeping Workers Paid and Employed Act provides new and increased federally guaranteed Paycheck Protection Program (PPP) loans through the US Small Business Administration (SBA) to small businesses that keep their workers employed. The act waives the SBA “affiliation rules” to allow certain businesses in the food service, hospitality, and restaurant industries (fitting within business categories included in North American Industry Classification System (NAICS) Code 72), and certain franchises assigned a franchise number by the SBA, to qualify as small businesses eligible to receive the benefit of PPP loans.
By maintaining employees on their payroll through the duration of the crisis, these small businesses can qualify for PPP loan forgiveness. The act is also retroactive, incentivizing small businesses to rehire employees who have recently been laid off.
Eligible businesses can apply for a PPP loan at any lending institution that is approved to participate in the program through the existing SBA 7(a) lending program and additional lenders approved by the US Department of the Treasury. This could be the lender the business already uses, or a nearby bank. There are thousands of lenders that already participate in the SBA’s lending programs, including numerous community banks. Eligible businesses do not have to visit any government institution to apply for the program.
The CARES Act authorizes the secretary of the Treasury to make loans, loan guarantees, and other investments to support US businesses that have not otherwise received adequate economic relief through loan or loan guarantees under the CARES Act.
Direct loans under the Mid-Sized Businesses Banking Program will be available to businesses with between 500 and 10,000 employees (subject to a potentially different “affiliation rule” that may not always require counting the employees of all businesses under common control), and will be subject to an annualized interest rate of less than 2% per annum will no payments due for the first six months.
It is expected that additional loans will be available for companies under the Mainstreet Lending Program. This program is left to the Federal Reserve’s discretion and is intended to support lending to small and mid-sized businesses consistent with the key limitations outlined in the LawFlash linked immediately below. The Federal Reserve will announce these programs as they become available.
The CARES Act provides tax relief that could apply to retailers and hospitality companies for
The CARES 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-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. The credit is reduced by any credits received for paid sick or family leave under the Families First Coronavirus Response Act described below. This allows employers to receive an advanced credit from the Treasury.
For an employer that had greater than 100 full-time employees (determined using the Affordable Care Act's measure of 30 hours per week) during 2019, “qualified wages” are wages paid by such employer 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.
The CARES Act provides that payment of 50% of the employer share of the OASDI tax and Tier I of the RRTA tax (including the tax on employee representatives) and 50% of self-employment taxes and any estimated taxes due thereon by self-employed individuals between the enactment of the CARES Act and January 1, 2021, is delayed until December 31, 2021. The due date for the remaining 50% of the employment taxes is delayed until December 31, 2022.
The Families First Coronavirus Response Act provides a tax credit for OASDI or RRTA tax for each calendar quarter equal to 100% of certain qualified sick or family leave wages paid by any qualifying employer for such calendar quarter. This credit is available only to employers that are required to provide paid sick leave and family/medical leave under the Families First Coronavirus Response Act. For private employers, the mandate is limited to employers with fewer than 500 employees. This allows employers to receive an advanced credit from the Treasury for such paid family or sick leave.
The CARES Act contains provisions allowing greater utilization of losses that a business experiences. Under the CARES Act, the NOL limitations previously imposed by the Tax Cuts and Jobs Act (TCJA) are temporally suspended. Now, for taxable years beginning before January 1, 2021, taxpayers that have NOLs arising in 2018, 2019, and 2020, can utilize those NOLs to fully offset taxable income in other years. Additionally, the CARES Act permits taxpayers with NOLs arising in 2018, 2019, and 2020 to carryback those NOLs to the taxpayer’s five preceding taxable years.
Thus, taxpayers with losses generated during their 2018, 2019, and 2020 tax years, and taxable income in their preceding five tax years (carryback years), can file amended income tax returns in the carryback years to receive a refund. For carrybacks to pre-2018 tax years, corporations may obtain refunds of taxes paid at the pre-TCJA corporate rate of 35%. By allowing taxpayers experiencing losses due to COVID-19 to carryback to years in which they had greater income and were taxed at a higher rate, the CARES Act provides opportunities for businesses to receive needed cash refunds from the IRS.
As enacted in 2017, the TCJA contained a drafting error that subjected qualified improvement property (such as interior improvements to retail stores and restaurants) to a 39-year recovery period instead of the 15-year recovery period intended by Congress. The CARES Act fixed this “retail glitch” by shortening the applicable recovery period for any qualified improvement property by 15 years. These technical amendments make qualified improvement property eligible for additional first-year depreciation or “bonus depreciation,” meaning a taxpayer can deduct 100% of the cost of the improvement in the year in which the qualified improvement property was placed in service. This provision applies both retrospectively to 2018 and 2019 as well as prospectively to costs incurred during 2020, and through and before January 1, 2023.
Taxpayers that placed qualified improvement property in service during 2018 or 2019 should consider amending those income tax returns to fully expense their costs and obtain refunds or generate NOLs, which can be carried to other tax years. In the event that a taxpayer has an NOL in 2018, 2019, or 2020, those NOLs can be carried back to fully offset taxable income in the preceding five years as noted above.
Under the CARES Act, for tax years beginning in 2019 and 2020, the limitation of deductible business interest expense under Code Section 163(j) is increased. Rather than using 30% of the taxpayer’s adjusted taxable income (ATI) for the year in the formula to compute allowable interest, the taxpayer may use 50% of ATI.
Additionally, taxpayers may elect to use 2019 ATI amounts when computing their business interest deduction limitation in 2020. While the CARES Act provides special rules for partnerships, these entities may also take advantage of the increased limitation. For businesses forced to increase borrowing during 2020 to address liquidity needs or finance operations, this change will allow them to deduct a greater portion of their interest expense.
The CARES Act relaxes the limitations imposed by the TCJA and permits corporations with AMT credit carryovers to accelerate the recovery of refundable AMT credit carryovers. The CARES Act specifically limits Code Section 53(e) to taxable years beginning in 2018 and 2019, and for taxable years beginning in 2020 and 2021, the increased Code Section 53(c) limitation no longer applies.
The CARES Act also increases the AMT refundable credit to 100% beginning in 2019 (rather than 2021, as prescribed under the TCJA). Importantly, this section allows taxpayers to elect to claim the full amount of the AMT refundable credit, without reduction by reason of the Code Section 53(c) limitation, for its taxable year beginning in 2018.
Corporations with newly allowed refundable AMT credits in 2019 can file an application for a tentative refund for that year. The application must be filed prior to December 31, 2020, and within 90 days from the date filed, the IRS will process and pay the refund claim.
For additional information on COVID-19-related tax law changes that can benefit retail businesses, please see our LawFlashes on (1) the major tax changes brought by the CARES Act, containing a full discussion of the provisions noted above; (2) The state and local tax responses to the COVID-19 pandemic; and (3) The IRS’s extension of filing and payment deadlines for 2019 and the first quarter of 2020.
Our combined retail, finance, SBA, tax, and labor and employee benefit teams can work with you to evaluate what relief you are eligible for under the CARES Act. We have experience advising clients on eligibility for CARES Act relief and are able to guide you through the process of obtaining this urgently needed aid.
For our clients, we have formed a multidisciplinary Coronavirus COVID-19 Task Force to help guide you through the broad scope of legal issues brought on by this public health challenge. We also have launched a resource page to help keep you on top of developments as they unfold. If you would like to receive a daily digest of all new updates to the page, please subscribe now to receive our COVID-19 alerts.
If you have any questions or would like more information on the issues discussed in this Retail Did You Know?, please reach out to your Morgan Lewis contact, the article authors, or any of our retail team leaders: