11 Ways the CARES Act Impacts Health Care Organizations
By Chris Bell
Partner
Moss Adams Health Care Practice
Original Publish Date: April 7, 2020
The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27, 2020, to help individuals and businesses navigate the current economic challenges brought on by COVID-19.
Details on how some of these programs will be administered have not yet been announced, but a summary of key provisions health care organizations should pay attention to follows.
1. Emergency Fund for Public Health and Social Services
The CARES Act establishes $100 billion in funding for health care organizations to cover the costs of treating COVID-19 cases. These funds are also meant to assist health care organizations that have lost revenue as a result of the current pandemic.
Details on which organizations qualify and how to apply have not yet been released. As such, it will be important for health care organizations to carefully track incremental costs and lost revenue to take full advantage of these funds.
Accelerated or Advanced Medicare Payments
The CARES Act includes a program for providers to receive accelerated or advanced Medicare payments from the Centers for Medicare and Medicaid Services.
Majority of Qualifying Providers
Most qualifying providers will be able to request up to three months’ worth of Medicare payments. They’ll have up to 210 days to repay the loan.
Inpatient Acute-Care, Children’s Hospitals, and Certain Cancer Hospitals
These providers will be able to request six months’ worth of Medicare payments. They’ll have one year to repay the loan.
Critical Access Hospitals
These hospitals will be able to request 125% of their Medicare payments for a six-month period. They’ll have one year to repay the loan.
Vaccines and Medical Products
The CARES Act also includes $80 million for the US Food and Drug Administration to assist with both the development of vaccines and domestic manufacturing capacity for medical products.
2. Federal Reserve Programs for Mid-Sized Businesses
The Federal Reserve will provide financing to banks and other lenders that make direct loans to mid-sized businesses employing between 500 and 10,000 employees. Interest rates on such direct loans will be capped at 2%, and there will be a six-month deferral before the first loan payment is due. The Federal Reserve has not yet released information about the program or application process.
The CARES Act requires borrowers to certify:
- The loan is necessary to continue operations as a result of the COVID-19 situation
- The loan proceeds will be used in part to ensure employment levels are at least 90% of what they were on February 1, 2020
- The employment levels will maintain at, or greater than, the 90% threshold through September 30, 2020.
- They’re a US business
- They aren’t in bankruptcy
- The business won’t outsource or offshore jobs for at least two years after the loan is paid off
There are special rules if the employer has a union workforce. Borrowers also will be subject to restrictions on dividend payments, stock repurchases, and executive compensation.
3. Small Business Administration Loans
Small Business Administration (SBA) disaster-relief loans of up to $2 million at a 3.75% interest rate—2.75% for not-for-profits—for terms of up to 30 years were already available in the market.
The CARES Act establishes a new Paycheck Protection Program loan that must be used to do the following:
- Retain workers
- Maintain payroll
- Pay rent, lease, and utility expenses
Paycheck Protection loans are available up to $10 million at an interest rate of 1%, which may be forgiven if employers meet certain criteria. If not forgiven, the loan will have a term of up to two years.
Key forgiveness provisions are listed below:
- Eligible wages can’t exceed $100,000 for any employee.
- The amount forgiven will be reduced proportionally by the reduction in employees retained as compared with the prior year. It will be further reduced by the reduction in pay of any employee beyond 25% of their prior year compensation.
- To encourage rehiring of employees laid off as a result of the pandemic, borrowers who rehire previously laid off workers won’t be penalized.
- The forgiven loans won’t be treated as cancellation of debt income for federal income tax purposes.
Organizations participating in this loan program won’t be eligible for the employee retention tax credit, or the deferral of payroll tax deposits.
4. Employee-Retention Credits
A refundable payroll tax credit is now available for qualified wages paid from March 13, 2020, through December 31, 2020. The credit is 50% of employee wages, and the cap on wages is $10,000 per employee. This caps the credit at $5,000 per employee.
This credit is available to employers who meet one of two criteria:
- They have fully or partially suspended operations due to governmental orders limiting commerce, travel, or group meetings
- They see a decrease of more than 50% in quarterly receipts compared to the same period in 2019
While health care organizations may be exempt from some of the government shutdown orders, many organizations will still qualify under the 50% reduction in receipts provision.
For employers who had 100 or fewer employee on average in 2019, all employee wages are eligible for the credit—including payments to furloughed employees. For larger employers, only the wages of furloughed employees or those facing reduced hours are eligible.
Wages include the employer costs related to health insurance benefits. The employee retention credit is reduced by any payroll tax credits received under The Families First Coronavirus Response Act passed on March 18, 2020.
Employers taking advantage of the Payroll Protection SBA loans aren’t eligible for this credit.
5. Suspension of 2% Medicare Sequestration
The 2% Medicare sequestration will be suspended from May 1, 2020, through December 31, 2020.
6. Delay of Employer Payroll-Tax Deposit Payments
Payment of the employer-portion of social-security payroll taxes—from the date of enactment through December 31, 2020—may be deferred.
This payment will eventually be due in two installments:
- December 31, 2021—first 50% installment
- December 31, 2022—second 50% installment
Employers receiving loan forgiveness for the SBA Payroll Protection loans aren’t eligible for the payroll-tax deferral.
7. Expanded Telehealth Provisions
The CARES Act allows the US Department of Health and Human Services to waive telehealth coverage requirements for new patients during the crisis. This differs from prior legislation, which only covered existing patients.
It also contains provisions that allow for home-dialysis telehealth visits and expanded telehealth provisions for federally qualified health centers and rural health clinics.
8. Net Operating Loss Carrybacks
Net operating losses generated in 2018, 2019, or 2020 are now eligible to be carried back for five years to recoup taxes paid in a prior year.
This is a change from tax reform law, commonly referred to as the Tax Cuts and Jobs Act of 2017 (TCJA), which generally did not allow net operating losses to be carried back.
9. Improvement Property Correction
Qualified improvement property (QIP) is generally defined as nonstructural improvements to the interior portion of a commercial building, with some exceptions.
Under TCJA, QIP was intended to be depreciated over 15 years and be eligible for 100% bonus depreciation. There was an error in the drafting of the final bill, however, and QIP was inadvertently treated as 39-year property, which isn’t eligible for bonus depreciation.
The CARES Act fixes this issue retroactive to 2018, generally allowing bonus depreciation to be claimed on QIP property.
10. Interest Deduction Limitation Changes
The TCJA limited interest-expense deductions to no more than 30% of adjusted taxable income.
The CARES Act increases the allowable interest-expense deduction to 50%, which enables organizations to deduct the higher interest expenses they may incur by taking out bridge loans to get through the current economic crisis. This change applies to 2019 and 2020, except for partnerships where it only applies to 2020.
11.Suspension of Excess Business Loss Rules
Rules for excess business losses are now postponed until tax years beginning in 2021. These rules impact noncorporate taxpayers who report the tax results of their businesses on their personal tax returns.
Excess business loss rules limit the amount of losses that can be claimed in a given year. The temporary suspension is intended to allow taxpayers to claim losses without those limitations from the following business types:
- Partnerships
- Sole-proprietor practices
- S corporations
- Limited liability companies
- Other flow-through businesses
This suspension is retroactive to 2018.
Next Steps
The CARES Act is intended to help individuals and businesses access cash flow during these difficult times, but navigating its many provisions can be a complex process that helps to have the guidance of a trusted advisor.
During this unparalleled time, Moss Adams is closely monitoring the COVID-19 situation as it evolves so we can provide up-to-date guidance and support to help you combat uncertainty. For regulatory updates, strategies to help cope with subsequent risk, and possible steps to bolster your workforce and organization, please see Moss Adams dedicated web page detailing COVID-19 implications for you and your business, which also features an overview of the CARES Act for tax exempt organizations as well.
Chris has practiced public accounting since 2005. He provides tax, strategic planning, and transaction planning services to health care organizations. He can be reached at (916) 503-8164 or chris.bell@mossadams.com.
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