On March 25, 2020, the U.S. Senate unanimously passed the Coronavirus Aid, Relief and Economic Security Act (CARES Act). The CARES Act consists of a $2 trillion package that includes significant expansions to small business lending, tax relief to both individuals and employers, unemployment insurance and substantial funding for economic stabilization, which may be available to larger businesses, states and municipalities.
Paycheck Protection Program
A new $349 billion Paycheck Protection Program will be offered to help small businesses, 501(c)(3) nonprofits, 501(c)(19) veteran’s organizations and Tribal business concerns with no more than 500 employees, sole proprietors, independent contractors and other self-employed individuals. The Program will assist businesses suffering due to the coronavirus pandemic to make payroll and cover other expenses, including rent, utilities, mortgage interest and interest on other debt obligation. Such entities need to apply on or before June 30, 2020 with an SBA approved lender. Eligible entities may borrow up to $10 million, based on a formula tied to 2.5 times average monthly payroll, covering employees making up to $100,000 per year. The loans are eligible for deferral of principal and interest payments for not less than six months or more than one year. Interest is capped at 4%.
Of particular interest to employers, is the loan forgiveness element of the Paycheck Protection Program. The loan forgiveness element is intended to incentivize companies to retain employees. Under the program, loans may be forgiven up to an amount used in the ordinary course of business to pay payroll, rent, utilities and mortgage interest during the eight weeks following the loan disbursal. Such loan forgiveness amount will be reduced proportionally by a reduction in the workforce or reduction in wage and salary levels by more than 25%. Temporary workforce and wage and salary reductions from February 15, 2020 through 30 days after the passage of the CARES Act will not reduce the amount forgiven, so long as such workforce and wage and salary reductions are eliminated by June 30, 2020.
The Program waives certain rules that would otherwise limit business eligibility. The Program waives affiliation rules for any business with less than 500 employees in the accommodation and food services industry, certain franchise businesses and small businesses that receive financing through the Small Business Investment Company Act. The program also waives the credit available elsewhere rule and certain personal guarantee and collateral requirements.
Importantly, borrowers should take note that loan forgiveness only applies to the Paycheck Protection Program. No other SBA Disaster Loans will be eligible for such forgiveness.
Disaster Loan Program Updates
Eligibility for Economic Injury Disaster Loans (EIDLs) will be expanded. Individuals or entities eligible for such loans will include: (1) any individual operating as a sole proprietor or independent contractor; (2) private non-profits and (3) tribal businesses, cooperatives and ESOPs with fewer than 500 employees from January 31, 2020 to December 31, 2020. The requirement of a personal guarantee on loans under $200,000 and the credit elsewhere requirements for Disaster Loans will be temporarily waived. The Act also establishes emergency grants, which allow up to $10,000 advances on EIDLs. Most importantly, advances provided in accordance with the Act do not have to be repaid, even if the EIDL is subsequently denied.
SBA Express Loans.
Currently, the maximum loan for an SBA Express loan is $350,000. The maximum loan has been temporarily increased to $1 million through December 31, 2020.
Business Tax
Business taxpayers may be eligible for various tax credits and deferrals. Certain business will be eligible for an employee retention credit. The credit will be equal to 50% of wages paid, with a cap of $10,000 per employee per quarter. The credit is to be made available for (1) employees of an employer with greater than 100 employees, with respect to wages paid to employees who are not providing services due to the pandemic; and (2) employees of an employer with 100 or less employees, with respect to all wages paid to such employees.
Provides a deferral of payment for the 6.2% payroll tax paid by both employers and self-employed individuals for the Social Security Trust fund. Such a deferral may assist employers concerned about additional costs incurred due to new paid leave requirements under the Families First Coronavirus Response Act (FFCRA).
Families First Modifications
The CARES Act amends the FFCRA. Perhaps most importantly, the CARES Act provides advance refunding of payroll credits for required sick leave and required paid family leave. Employers may apply a credit in the amount calculated under subsection (a) of section 7001 or 7003 of the FFCRA, subject to the limitations placed by subsection (b) of section 7001 and 7003, both calculated through the end of the most recent payroll period in the quarter. In anticipation of a credit, the credit may be advanced according to forms and instructions to be provided by the Department of Labor. The CARES Act provides that the Secretary of Treasury shall waive any penalty under section 6656 of the Internal Revenue Code of 1986 for failure to make a deposit of the tax imposed under section 3111 (a) or 3221(a) of such Code if failure was due to anticipation of credit allowed under the FFCRA.
The CARES Act also amends the FFCRA to offer paid leave for certain rehired employees. An employee may be eligible for paid FMLA leave under the FFCRA if the employee (1) was laid off by the employer on March 1, 2020, or later, (2) had worked for the employer for not less than 30 of the last 60 calendar days, prior to the employee’s layoff, and (3) was rehired by the employer.
Liesl Muehlhauser and Logan Stevens