In an effort to alleviate the effects of the Coronavirus on the US economy, the CARES Act provides financial relief to eligible companies impacted by the Coronavirus pandemic. Below is an overview of provisions relating to Paycheck Protection Loans, Economic Injury Disaster Loans, Employer Payroll Tax Deferrals, and Employee Retention Tax Credits under the CARES Act.
I. Paycheck Protection Loans
The hallmark of the robust CARES Act legislation is the Paycheck Protection Loan and its loan forgiveness provisions. Here is a snapshot of what employers need to know:
Who is eligible?
The loans are available for businesses with 500 or fewer employees during the covered period (beginning February 15, 2020 and ending on June 30, 2020). Affiliation rules apply, but there are carveouts for businesses in the hospitality/ restaurant industry with an NAICS Code of 72. For businesses in this classification, eligibility will be determined using the amount of employees at each location.
How much can we get approved for?
Loans will be the LESSER OF (1) average monthly payroll costs for the prior 12-months multiplied by 2.5; or (2) $10,000,000.
What is a payroll cost?
“Payroll costs” are defined to include payments for salary, wage, commission, or similar compensation; payments for cash tips or equivalent; payments for vacation, parental, family, medical, or sick leave; allowance for dismissal or separation; payment required for the provision of group health care benefits; payment of any retirement benefit; payment of state or local tax assessed on the compensation of employees; payments of any compensation or income of a sole proprietor or independent contractor that is an amount not more than $100,000 in 1 year, as prorated for the covered period.
Payroll costs do NOT include payments of more than 100k in one year per employee (prorated for the covered period), paid leave for which a credit is available under new federal COVID-19 laws, or taxes imposed or withheld under Chapter 21, 22, or 24 of the Internal Revenue Code.
What may the loan be used for?
Proceeds from a Paycheck Protection Loan may be used for payroll costs; costs related to the continuation of group health care benefits during periods of paid sick, medical or family leave, and insurance premiums; employee salaries, commissions or similar compensations; payments of interest on any mortgage obligation (not including any prepayment of or payment of principal on a mortgage obligation; rent (including rent under a lease agreement); utilities; and interest on any other debt obligations incurred before February 15, 2020.
How does the forgiveness feature work?
Loan amounts are eligible for forgiveness in an amount equal to the amount spent in qualifying costs (not to exceed the principal amount of the financing made available) for the period of 8 weeks beginning on the date of the origination of the loan.
Qualifying costs for forgiveness include payroll costs, payment of interest on mortgage obligations incurred before February 15, 2020, payment of rent under leases in force before February 15, 2020, and payments for utility services that began prior to February 15, 2020.
The amount of forgiveness will be reduced by certain reductions in the workforce when compared to the average number of full time equivalent employees during one of two time periods (as elected by the borrower) or reductions in compensation paid to any employee (making not more than $100,000 in annualized salary or wages) exceeding 25% as compared to the most recent quarter prior to origination of the loan.
The amount of loan forgiveness will not be reduced as a result of a reduction in employees or in wages and salaries that occurs between February 15, 2020 and April 26, 2020, if the reduction is reversed by June 30, 2020.
Any amounts forgiven will be excluded from gross income for tax purposes.
What are the terms of the loan?
Payments will be deferred for a minimum of 6 months, but not to exceed 1 year. Any remaining balance not forgiven will be payable over a term of up to 10 years at an interest rate of no more than 4%. There is no prepayment penalty for any payment made on the loan. Personal guarantees and collateral are not required. Further, there is no recourse against any individual shareholder, member or partner of an eligible recipient of the loan for nonpayment of the loan, except to the extent that the shareholder, member or partner uses the loan proceeds for a purpose not authorized under the program.
What if I already laid employees off?
Loan forgiveness is determined without regard to reductions in the workforce or reduction in the salary of one or more employees during the period beginning February 15, 2020 and April 26, 2020, if the reductions are eliminated prior to June 30, 2020.
Can I apply for a Paycheck Protection Loan and an Economic Injury Disaster Loan?
Yes, nothing shall prohibit a recipient of an Economic Injury Disaster Loan made during the period beginning January 31, 2020 and ending on the date the covered loans are made available for a purpose OTHER than paying payroll costs and other qualifying costs under the CARES Act program. Moreover, an Economic Injury Disaster Loan made on or after January 31, 2020 may be refinanced into a Paycheck Protection Loan.
Are there options available for companies with more than 500 employees during the covered period?
Yes. The CARES Act references, without details, a “Main Street Lending Program” apparently under consideration by the Federal Reserve to extend loans to small and mid-sized businesses of 500 to 10,000 employees. We will provide further details as they become available.
To be eligible for such loans, the following certifications would need to be made. Some, but not all of the certifications are as follows:
- The uncertainty of economic conditions as of the date of application makes necessary the loan request to support operations;
- The funds will be used to retain at least 90% of the workforce, at full compensation and benefits, until September 30, 2020;
- The recipient intends to restore not less than 90% of the workforce that existed as of February 1, 2020;
- The recipient will not pay dividends with respect to common stock of the eligible business, or re-purchase an equity security listed on a national securities exchange of the recipient or any parent company while the direct loan is outstanding.
- Recipient will not outsource or offshore jobs for the term of the loan and 2 years after;
- Recipient will remain neutral in any union organizing effort for the term of the loan.
How do I apply for a Paycheck Protection Loan?
Applications will be processed through participating private lenders approved by the SBA to extend SBA loans.
II. Economic Injury Disaster Loans
In addition to the Paycheck Protection Loan, certain small businesses, private non-profit organizations, sole proprietorships and independent contractors located within a declared Coronavirus related economic injury disaster area may be additionally eligible for an Economic Injury Disaster Loan (EIDL) under Section 7(b) of the Small Business Act. However, an EIDL must be used for a purpose other than that of the Paycheck Protection Loan.
When can I apply?
The EIDL program is available until December 31, 2020.
What are the requirements?
An eligible business is required to have suffered substantial economic injury as a direct result of the declared disaster, such that the business is unable to meet its obligations as they mature or to pay its ordinary and necessary operating expenses. A loss of anticipated profits or a drop in sales is not considered substantial economic injury. Under the CARES Act, the definition of a “small business” for an EIDL has been similarly expanded to cover businesses with no more than 500 employees (but without the waiver of certain affiliation rules, which are available under Paycheck Protection Loan program).
What are the terms of the loan?
The maximum loan amount under the SBA disaster loan program is $2 Million to any one applicant, including its affiliates (as defined), for any one declared disaster (with exceptions possible for applicants qualifying as a “major source of employment” in a disaster impacted community). The interest rate is 3.75% for small businesses (and 2.75% for non-profits), with loan terms, based on ability to repay, available for up to 30 years. The first payment due on the EIDL is deferred for one year. Further, under the CARES Act, there is a waiver of (i) personal guaranties for loans and advances of not more than $200,000, (ii) the requirement to have been in business for the 1-year period before the disaster (so long as the business was in operation as of January 31, 2020) and (iii) the requirement to demonstrate the inability to obtain credit from other sources.
What may the loan be used for?
The proceeds of an EIDL may only be used for working capital necessary to carry the business until resumption of normal operations and for expenditures necessary to alleviate the specific economic injury, but not to exceed that which the business could have provided had the economic injury not occurred. This would include paying sick leave to employees unable to work due to the direct effect of COVID-19; maintaining payroll to retain employees; meeting increased costs to obtain materials unavailable from the business’s original source because of supply chain issues, rent or mortgage payments; and repaying certain obligations that cannot be met due to revenue losses (see supra, on not duplicating the purpose and use of any Payroll Protection Loan).
However, the proceeds may not be used to refinance indebtedness incurred prior to the disaster; make payments on loans owned by another federal agency; pay, directly or indirectly, any obligations resulting from a federal, state or local tax penalty as a result of negligence or fraud or any non-tax criminal fine, civil fine, or penalty for non-compliance with a law, regulation or order of a governmental agency or similar matter; repair physical damage; or pay dividends or other disbursements to owners, partners, officers or stockholders, except for reasonable remuneration directly related to their performance of services for the business.
$10,000 Emergency Advance is available.
Upon request, within three days of submitting an application for an EIDL, an applicant that is an eligible entity for an EIDL will receive a $10,000 emergency advance, which does not have to be repaid (but will reduce the total amount eligible to be forgiven should the applicant later receive a Paycheck Protection Loan).
How do I apply?
Applications may be submitted directly to the SBA, using the following link: https://www.sba.gov/disaster/apply-for-disaster-loan/index.html Funds come directly from the U.S. Treasury.
III. Employer Payroll Tax Deferral
Under the CARES Act, Employers may defer their portion of the Social Security Payroll Tax (6.2%) due on employee covered wages for the period of March 27 until December 31, 2020. The deferred amounts are to be repaid in two installments, with half of the deferred amount due on December 31, 2021 and the other half due on December 31, 2022. Employers who have had indebtedness forgiven under a Paycheck Protection Loan are not eligible for this Social Security Payroll Tax deferral.
IV. Employee Retention Tax Credits
The CARES Act additionally provides for an employee retention tax credit, but this credit is not available to employers that receive a Paycheck Protection Loan. This credit provides a refundable payroll tax credit for 50% of the first $10,000 in qualified wages paid to an eligible employee during the COVID-19 crisis and applies to wages paid between March 13, 2020 and the end of the 2020 calendar year.
This tax credit is available for businesses who are required to suspend operations related to a shutdown order or whose gross receipts declined by more than 50% as compared to the same quarter of the previous year.