Overview of CARES Act (COVID-19 stimulus bill) Business Provisions
1. SBA Loans “Paycheck Protection Program”. The CARES Act expands the current Small Business Administration’s (“SBA”) Section 7(a) loan program to provide SBA guaranteed loans to companies impacted by COVID-19. These loans will be obtained through an SBA lender/bank (you will not apply to the SBA directly), and they will be nonrecourse/unsecured, have no personal guarantees, a maximum interest rate of 4%, deferral of payments for 6 to 12 months, and no loan origination fees. In addition, principal of the loan can be forgiven in an amount equal to the cost of payroll, mortgage interest, rent and utilities incurred for an 8-week period, subject to certain reductions to the forgiven amount to account for reductions in workforce and salaries.
a. Loan Availability. These loans will be available for loan commitments made before June 30, 2020. The CARES Act has appropriated $349 billion to this program.
b. Eligibility. Businesses eligible to receive these loans include small businesses, nonprofits and veterans’ organizations with 500 or fewer employees. Individuals who operate under a sole proprietorship or as an independent contractor and eligible self-employed individuals will also be eligible. To determine whether a business is eligible for a loan, lenders are required to determine: (i) whether a business was operational on February 15, 2020, (ii) whether the business had employees to whom it paid salaries and payroll taxes, or paid independent contractors, and (iii) whether the business was substantially impacted by COVID-19. The legislation also gives more deference to lenders regarding eligibility determinations than with typical SBA loans, so hopefully this will streamline underwriting.
c. Maximum Loan Amount. The maximum amount of the loan will be determined using the following formula and cannot exceed $10,000,000:
Your average total monthly “payroll costs” (based on the 1-year period prior to the loan) multiplied by 2.5
“Payroll costs” include salaries, wages, commissions, paid leave, cash tips or equivalents, healthcare premiums, retirement benefits, and state and local taxes on compensation of employees, but it does not include compensation for any employee with an annual salary over $100,000 or overseas workers. For example, if your average monthly payroll costs are $50,000, you will eligible for a loan up to $125,000.
d. Allowable Uses of Loan Funds. Loan funds can only be used for the following purposes:
i. salary, wages, commissions, paid leave, healthcare payments and retirement benefit payments;
ii. mortgage interest payments;
iii. lease payments; and
iv. utilities payments.
e. Loan Terms. These loans will be nonrecourse, except if the proceeds are used for an unauthorized purpose. No personal guarantee or collateral will be required. Interest on the loans will be capped at 4% and the lender is required to offer at least 6 months (up to 1 year) of deferred payments on the loan. The SBA’s fee is waived and the lender’s origination fee is to be paid by the SBA and not the borrower. If you have a loan balance after loan forgiveness (discussed below) the maximum maturity on the loan will be 10 years.
f. Good Faith Certification. You will be required to make a “good faith” certification as follows in order to obtain the loan:
i. the current uncertainty makes the loan necessary to support ongoing operations;
ii. the funds will be used to retain workers and maintain payroll or to make mortgage payments, lease payments, and utility payments; and
iii. you will not apply for duplicative loans.
g. Loan Forgiveness Amount. Subject to the reductions discussed below, you will be eligible to have a portion of the loan forgiven. The loan forgiveness amount will be determined based on the following costs incurred and payments made during the 8-week period following the date of the origination of the loan (this period is called the “covered period”):
i. payroll costs (see definition above);
ii. mortgage interest payments;
iii. lease payments; and
iv. utilities payments.
Qualified sick leave or family leave wages for which a credit is allowed under the Families First Coronavirus Response Act are not included in the forgiveness amount as you will get reimbursed for those through a refundable payroll tax credit as part of that act.
h. Forgiveness Amount Reduction. The forgiveness amount will be reduced for the following reasons:
i. Reduction in Workforce: Amounts forgiven will be reduced proportionately based on reduction in your average number of full-time equivalent employees during the covered period as compared to a prior period. Importantly, the borrower gets to select between 2 options for what prior period the covered period will be measured against. Those options are either (A) February 15, 2019 to June 30, 2019 or (B) January 1, 2020 to February 29, 2020. This is helpful because, even if your average number of full-time equivalent employees during the covered period has decreased from before the outbreak of COVID-19, if your average number of full-time equivalent employees during the covered period is higher than during the 2019 comparison period, your forgiveness amount will not be reduced. Any reduction will be determined by multiplying the forgiveness amount times the quotient of the following:
Average # of full-time equivalent employees during the covered period
divided by
Average # of full-time equivalent employees during the comparison period you select
For example, if the average # of full-time equivalent employees during the covered period was 100 and the lowest average # of full-time equivalent employees you had during either of the comparison periods was 125, you would multiply the forgiveness amount by .80 and would be eligible for 80% of the forgiveness amount. You cannot receive additional forgiveness if the quotient is greater than 1 (i.e., your staffing increased).
ii. Reduction in Salary. Amounts forgiven will also be reduced by the amount of any reduction in total salary or wages of any employee during the covered period that is in excess of 25% of the total salary or wages of the employee during the most recent full quarter during which the employee was employed before the covered period. This reduction does not apply to the salaries of any employees who made more than $100,000 in 2019.
i. Re-Hires. If you re-hire workers by June 30, 2020 that were previously laid off, your forgiveness amount will not be reduced for having a reduced workforce or payroll during the covered period.
j. Tipped Employees. If you have tipped employees, for purposes of calculating the forgiveness amount, you can include in your payroll costs additional wages paid to those tipped employees to offset a reduction in their tips.
k. Tax Treatment of Forgiveness Amount. Indebtedness that is forgiven will not be included in the borrower’s taxable income.
l. How Your Loan Will be Forgiven. Following the end of the covered period, you will apply to your lender for the loan forgiveness and the lender will have up to 60 days from the date of application to process and approve the forgiveness application. With your application for forgiveness, you will need to provide the following documentation to support the forgiveness amount:
i. documentation verifying the number of full-time equivalent employees on payroll and pay rates for the relevant periods;
ii. documentation supporting mortgage interest, lease, and utilities payments for the covered periods; and
iii. a certification that the above are true and correct and that the forgiveness amount was used to retain employees and make the covered mortgage interest, lease, and utilities payments.
m. What to Do Next. All current SBA 7(a) lenders are eligible lenders. Contact your banker to determine if they handle SBA lending. If they do not, ask for a referral to a lender who does or here is a link to the 100 most active SBA lenders - https://www.sba.gov/article/2020/mar/02/100-most-active-sba-7a-lenders. We anticipate that this loan program will be very popular and lenders are likely to be flooded with requests, so you should act quickly if you think you will need one of these loans.
n. Alternative – Economic Injury Disaster Loan. If you need a loan due to the impact of COVID-19, but need more flexibility on how funds can be used than provided by the Paycheck Protection Program loan discussed above, you may also consider applying for an SBA Economic Injury Disaster Loan (“EIDL”). EIDLs are lower interest loans of up to $2 million, with principal and interest deferment available for up to 4 years, an interest rate of 3.75%, and repayment terms of up to 30 years. EIDL’s are available to pay for payroll and operating expenses. The CARES Act also establishes a grant program that can provide small businesses with up to a $10,000 advance on an EIDL that does not have to be repaid. The upside of EIDLs are greater flexibility with how the funds are used and better payment terms. The downside is that they do not have the forgiveness component, applications must be made directly with the SBA, and the approval process may take longer.
2. Employee Retention Credit. The CARES Act creates a refundable payroll tax credit against an employer’s 6.2% FICA payroll taxes for 50% of the qualified wages paid to an eligible employee from March 13, 2020 through December 31, 2020. The credit is available to employers whose (a) operations were fully or partially suspended due to a COVID-19-related shut-down order, or (b) gross receipts declined by more than 50% when compared to the same quarter in the prior year. For employers 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 eligible employers with 100 or fewer full-time employees, all employee wages qualify for the credit, regardless of whether the employer is open for business or subject to a shut-down order (for example, if they remain open because they are an essential business). The credit is provided for the first $10,000 of compensation, including health benefits, paid to an eligible employee. Wages do not include those taken into account for purposes of the payroll credits for required paid sick leave or required paid family leave, nor for wages taken into account for the employer credit for paid family and medical leave (IRC sec. 45S). The credit is not available to employers receiving assistance through the Paycheck Protection Program (see above). We suggest that you reach out to your accountant and payroll processor to discuss how to implement the employee retention credit.
3. Deferral of Employer Payroll Taxes. In addition to the Employee Retention Credit, the CARES Act allows employers to defer payment of 50% of the employer’s share of the 6.2% FICA payroll taxes for wages paid between March 13, 2020 through December 31, 2020. Payroll tax deferment is also available for self-employed individuals. Deferred payroll taxes must be paid over the following two years, with half of the amount required to be paid by December 31, 2021 and the other half by December 31, 2022. Deferral is not provided to employers receiving assistance through the Paycheck Protection Program (see above). We suggest that you reach out to your accountant and payroll processor to discuss how to implement the deferral.
4. Business Tax Changes. The CARES ACT changes certain tax rules to your benefit by increasing your ability to carryback net operating losses, waiving certain limitations on losses, removing certain limitations on Excess Business Losses, and modifying business interest expense limits. We suggest that you reach out to your accountant/tax preparer to discuss these changes to the tax rules and how they may benefit you.
5. Unemployment Benefits. The CARES Act provides for additional unemployment benefits to employees in the event that you do need to lay anyone off.
The above is an only an overview of the CARES Act and is not intended to be a comprehensive summary. Please feel free to reach out to us if you have any questions about the CARES Act or any other legal issues related to COVID-19 or otherwise. We’re here to help and hope you and your families and businesses are safe, well, and persevering.
