As was widely reported, today the President will sign the CARES Act. This unprecedented economic relief act provides help for individuals and businesses on a number of fronts, including emergency lending for businesses, which is the focus of this update.
Paycheck Protection Program:
The CARES Act provides loans through the Small Business Administration (sba.gov) to meet payroll obligations, continue group benefits, pay rent and utilities and pay the interest on mortgage obligations or other debt incurred prior to the current public health care emergency. Expenses incurred between February 15, 2020 and December 31, 2020 are eligible for payment with these loans. These loans are eligible for forgiveness if used for the stated uses and importantly, employers are able to retain employees.
Eligible businesses include small business, nonprofits, sole proprietorships and independent contractors who either have fewer than 500 employees or meet SBA’s industry specific size standards. Sole proprietorships, independent contractors and self-employed entities will need to provide appropriate documentation to confirm eligibility. These may include copies of IRS payroll filings, 1099-MISC forms, and Profit and Loss statements.
The applicant may only take one loan under this program and as part of the application process must certify that the purpose of the loan is to retain workers. Loan caps are determined by the lesser of multiplying the average monthly payroll cost by 2.5, or $10 million. In calculating payroll costs, paid leave resulting in a tax credit does not count, and payments to independent contractors are capped at $100,000. If an entity has not been in business for a year, there are alternative formulas that can be used. To make these loans more accessible, the Small Business Administration has waived fees, personal guaranties and the requirement that the business be unable to retain credit elsewhere. Interest rates are capped at 4%.
Payments on these loans are deferable for at least six months but not to exceed one year. Principal loan forgiveness is available to the extent that the loans are used for payroll costs, rent, utilities, and mortgage interest. Forgiveness is determined by the ratio of full-time equivalent employees from either February 15, 2019 to June 30, 2019, or January 1, 2020, to February 29, 2020, compared with February 15, 2020 to June 30, 2020. The amount of the loan forgiven may be reduced to the extent the wages of any salaried employee earning less than $100,000 are reduced more than 25%. For any balance remaining after the forgiveness reduction, the maximum available term is ten years. We expect further guidance will issue regarding what documentation employers will need to produce in order to obtain the loan forgiveness.
Payroll Tax Relief Program:
For those employers who do not obtain a loan under the Payroll Protection loan program, the CARES Act also includes a payroll tax relief provision. This provision will allow employers, including nonprofits, a 50% refundable quarterly payroll tax credit on wages paid during the covered period. The employer’s operations must have been completely or partially suspended as a result of a COVID-19 related government order or experienced more than a 50% decline in quarterly gross receipts as compared to the same quarter in the prior year. For nonprofits, the credits will be available for any covered quarter during which the nonprofits’ operation was completely or partially suspended.
The bill expands the definition of disaster to include the current public health emergency allowing businesses and nonprofits with less than 500 employees to apply for economic injury disaster loans through the Small Business Administration. Importantly, there is a provision to permit emergency funds of up to $10,000 which supposedly a business may receive in as little as three days, based solely on the applicant’s credit score. This is intended to permit emergency aid while disaster loan applications are being reviewed. Although such emergency funds will be considered an advance on the loan, if the loan is denied, the business does not need to repay the advanced emergency funds. Such funds would, however, be counted toward the loan forgiveness available under the Payroll Protection Loans program.
Treasury Loans Under the Coronavirus Economic Stabilization Act:
For businesses and nonprofits with more than 500 employees, the Treasury Department will be developing a program that may include both direct lending and loan guarantees. However, unlike the Small Business Administration loans, there is no loan forgiveness available for these loans. Additionally, employers will be required to certify (1) economic need, (2) that they will retain at least 90% of their work force at full compensation until September 30, 2020 and (3) that they will restore at least 90% of their work force within 4 months of the conclusion of the of COVID-19 emergency. Details about the actual loan programs are not yet available. Nonetheless, the pending legislation does include a number of restrictions and compliance issues including but not limited to restrictions on stock buy backs, executive pay increases, and payments of dividends during the loan period and for twelve months thereafter.