On Friday, March 27, 2020, the U.S. Congress passed and President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act. This is the third aid package from Congress and is meant to keep businesses and individuals afloat during an unprecedented freeze on the majority of American life due to the novel coronavirus (COVID-19).
By the end of June, the Small Business Administration, which administers the PPP, had approved 4.9 million loans totaling over $520 billion, leaving nearly $130 billion in funds untapped. The PPP resumed accepting applications July 6, in response to President signing the program's extension legislation. The new deadline to apply for a Paycheck Protection Program loan is August 8.
You can access the application for the Paycheck Protection Program here.
Nationwide, small businesses are slated to get about $350 billion from the massive relief bill. The provision of most concern to small businesses is the Paycheck Protection Program which provides 100% federally guaranteed loans to small businesses who maintain their payroll during this emergency. That can translate into loans of up to $10 million per company, depending on their monthly payroll. Importantly, these loans may be forgiven if borrowers maintain their payrolls during the crisis or restore their payrolls afterward.
Step 1: Seek Professional Guidance. As with any major business transaction, businesses are encouraged to discuss any action with their accountants, financial advisors and attorneys before taking any action. This document is only intended as a general summary of the legislation and suggestions for businesses. Each individual business will need to decide if this is an opportunity that meets their needs.
Step 2: Determine Eligibility. You are eligible under the CARES Act if you are:
- A small business with fewer than 500 employees
- The 500-employee threshold includes all employees: full-time, part-time, and any other status.
- A small business that otherwise meets the SBA’s size standards
- 501(c)(3) with fewer than 500 employees.
- An individual who operates as a sole proprietor
- An individual who operates as an independent contractor
- An individual who is self-employed who regularly carries on any trade or business
- A Tribal business concern that meets the SBA size standard A 501(c)(19) Veterans Organization that meets the SBA size standard
- Eligible applicants will have been in operation on February 15, 2020 and will have paid employees and payroll taxes or independent contractors.
In addition, some special rules may make you eligible: If you are in the accommodation and food services sector (NAICS 72), the 500-employee rule is applied on a per physical location basis.
If you are operating as a franchise or receive financial assistance from an approved Small Business Investment Company the normal affiliation rules do not apply.
The CARES Act also establishes an Emergency Grant to allow an eligible entity who has applied for an EIDL loan due to COVID-19 to request an advance on that loan, of not more than $10,000, which the SBA must distribute within 3 days. The CARES Act establishes that applicants shall not be required to repay advance payments, even if subsequently denied for an EIDL loan. Advance payment may be used for providing paid sick leave to employees, maintaining payroll, meeting increased costs to obtain materials, making rent or mortgage payments, and repaying obligations that cannot be met due to revenue losses.
Step 3: Gather documentation and determine amount needed. While we await specific rules from the Small Business Administration (SBA), businesses can begin gathering necessary documents to prove their payroll. The law provides a formula by which the loan amount is tied to payroll costs incurred by the business. Borrowers will verify through documentation to lenders their payments during the period. Documentation may include, but not limited to, payroll tax filings by the business and other payroll records. You will need to demonstrate the number of employees and their salaries, not to exceed $100,000.
Lenders that receive the required documentation will not be subject to an enforcement action or penalties by the Administrator relating to loan forgiveness for eligible uses. Loans can be up to 2.5 times the borrower’s average monthly payroll costs, not to exceed $10 million. Average monthly payroll costs are calculated based on the one-year period prior to the loan disbursal date except for seasonal employers and employers not in business between February 15, 2019 and July 30, 2019. Payroll costs include: employee salary, wages and commissions; payment of cash tips; payment of vacation; parental, family, medical or sick-leave; allowance for dismissal or separation; payment required for group health benefits (including insurance premiums); payment of retirement benefits; or payment of state or local tax assessed on employee compensation; and sole proprietor income or independent contractor compensation not in excess of $100,000.
Payroll costs exclude: compensation of an individual person in excess of $100,000 (as prorated for the period); federal employment taxes imposed or withheld taxes; compensation to an employee whose principal residence is outside of the U.S.; qualified sick leave for which a credit is allowed under Section 7001 of the Families First Coronavirus Response Act; and qualified family leave wages for which a credit is allowed under Section 7001 of the Families First Coronavirus Response Act.
In determining the amount to apply for, remember that uses of the loan that may be forgiven include payroll costs, interest payment on any mortgage incurred prior to February 15, 2020, payment of rent on any lease in force prior to February 15, 2020, and payment on any utility for which service began before February 15, 2020. Any amount borrowed above the forgiven amount will become a loan requiring repayment at an interest rate of 4%. The business doesn’t have to demonstrate hardship as with other traditional government disaster loans, nor do they have to provide collateral or a personal guarantee, because the government will fully back the credit.
Step 4: Other Immediate Actions. While waiting on specific rules under the CARES Act, other actions that a business may take to help manage their operating costs include:
- Review all expenses to determine any that may be deferred or eliminated.
- Look at alternatives for providing a revenue stream, i.e. restaurants continuing by providing take-out, curbside pickup, drive through or delivery services.
- Speak to your landlord to determine any rent deferrals or reduced payments that may help you conserve cash. You need to do this before your rent is due.
- Speak to your utility providers to explain your situation and seek deferrals and payment plans.
- Speak to your bank, credit card provider, or other financial institutions where you have obligations to explain your financial situation and again ask for payment deferrals or payment plans.
Click here to view the Independent Contractor's Guide to the PPP.
Step 5: Where to apply. Eligible businesses may file applications with an SBA-approved lender. Lenders have been delegated authority to make loans without SBA review.
Delegated authority for approving these loans include all current 7(a) lenders who make these loans to small businesses and provides that same authority to lenders who join the program and make these loans. The SBA should be providing a list. Congress’ goal is to get funds into the hands of small businesses as quickly as possible, so we anticipate a very simple application form and many lenders being designated to provide these loans. Visit with your current financial services providers to see if they will be providing loans under this program. More information will be forthcoming.
Step 5: Certification. The CARES Act requires eligible borrowers to make a good faith certification that:
- the loan is necessary due to the uncertainty of current economic conditions caused by COVID-19;
- they will use the funds to retain workers and maintain payroll, lease, and utility payments; and
- are not receiving duplicative funds for the same uses from another SBA program, i.e. Economic Injury Disaster Loan (EIDL). The $10,000 Emergency
As these loans are guaranteed by the US Treasury, no collateral or personal guarantees will be required.
Step 6: The loan may be forgiven. The covered loan period is designated as beginning on February 15, 2020 and ending on June 30, 2020. The borrower shall be eligible for loan forgiveness equal to the amount spent by the borrower during an 8-week period after the origination date of the loan on payroll costs, interest payment on any mortgage incurred prior to February 15, 2020, payment of rent on any lease in force prior to February 15, 2020, and payment on any utility for which service began before February 15, 2020. Amounts forgiven may not exceed the principal amount of the loan. Eligible payroll costs do not include compensation above $100,000 in wages. Forgiveness on a covered loan is equal to the sum of the following payroll costs incurred during the covered 8 week period compared to the previous year or time period, proportionate to maintaining employees and wages.
Borrowers must apply for forgiveness with the lender servicing the loan. Lenders have 60 days to review and make a determination. Any portion of the loan that is forgiven will be excluded from gross income.
The amount forgiven will be reduced proportionally by any reduction in employees retained compared to the prior year and reduced by the reduction in pay of any employee beyond 25 percent of their prior year compensation. To encourage employers to rehire any employees who have already been laid off due to the COVID-19 crisis, borrowers that re-hire workers previously laid off will not be penalized for having a reduced payroll at the beginning of the period. Reductions in workforce, salaries and wages that occur from February 15, 2020 to April 26, 2020 will be disregarded for purposes of reducing the forgiveness amount so long as the reductions are eliminated by June 30, 2020.
The remaining loan balance will have a maturity of not more than 10 years, and the guarantee for that portion of the loan will remain intact. The CARES Act sets a maximum interest rate of four percent and ensures borrowers are not charged any prepayment fees.
Step 7: Other provisions. There are certain other provisions that will be beneficial to the economy.
- Cash payments: Estimated to total $300 billion. Most individuals earning less than $75,000 can expect a one-time cash payment of $1,200. Married couples would each receive a check and families would get $500 per child. That means a family of four earning less than $150,000 can expect $3,400.
- Extra unemployment payments: The $260 billion estimated cost is subject to change based on the number of people filing for unemployment. This bill adds $600 per week from the federal government on top of whatever base amount a worker receives from the state. That boosted payment will last for four months. The legislation also adds 13 weeks of additional unemployment insurance. People nearing the maximum number of weeks allowed by their state would get an extension. New filers would also be allowed to collect the benefits for the longer period.
- Tax returns: Some people have not filed their 2019 tax returns, but that's OK. The filing deadline has been extended to July 15.
- Insurance coverage: The bill requires all private insurance plans to cover COVID-19 treatments and vaccine and makes all coronavirus tests free.
- All businesses: The bill establishes a fully refundable tax credit for businesses of all size that are closed or distressed to help them keep workers on the payroll. The goal is to get those employees hired back or put on paid furlough to make sure they have jobs to return. The credit covers to 50 percent of payroll on the first $10,000 of compensation, including health benefits, for each employee.
- Immediate Expensing of Costs Associated With Improving Qualified Improvement Property. The CARES Act corrects an error in prior legislation that prevented businesses from expensing certain costs for improvements to “qualified improvement property”, and required the costs to be depreciated over the 39-year life of the building. Qualified improvement property is any improvement to the interior of a nonresidential building that is placed in service after the building is first placed in service. Qualified improvement property does not include improvements that are attributable to the enlargement of the building, elevators or escalators, or the internal structural framework of the building. The change is retroactive to the date of enactment of the TCJA.
- Tax-Free Employer Repayment of Employee Student Loans. Under the CARES Act, an employer’s repayment of up to $5,250 of an employee’s student loan debt would be tax-free to the employee if made after the enactment of the CARES Act and before January 1, 2021 (i.e., the repayment is excluded from the employee’s income). The $5,250 cap would apply to the total employer educational assistance provided to an employee under current law (e.g., tuition, fees, and books) and the new provision in the CARES Act.
Sources: US Chamber of Commerce, The National Law Review