by Jake Cormier

On March 27, 2020, President Trump signed the “Coronavirus Aid, Relief, and Economic Security Act” (the CARES Act). The CARES Act is “Phase Three” of the national response to the COVID-19 emergency. The 880-page bill provides funds, forgivable loans to small businesses, employer social security tax payment deferral, favorable changes to business and personal tax provisions including employee retention payroll tax credits, expansion of unemployment insurance, direct cash payments to qualifying individuals, funding for support to the healthcare industry, targeted assistance to “severely distressed sectors,” and other miscellaneous provisions.

This update focuses on those provisions in the CARES Act that directly impact small businesses and their access to immediate funds to pay for operational costs such as payroll, rent, interest on mortgages, utilities, health benefits, and insurance premiums. The loans provide capital for businesses to re-hire workers and avoid having to make future lay-offs. If businesses satisfy certain conditions (described below) the loans are forgivable.

Businesses That Qualify

Eligibility is broad and inclusive. Any business qualifies so long as it employs not more than the greater of—

  • 500 employees (includes full-time, part-time, and those employed on other bases); or
  • If applicable, the number of employees established by the administration for the industry in which the entity operates.

Businesses in the hospitality or dining industries with more than one physical location that employ 500 or fewer employees per location and are assigned to the “accommodation and food services” sector (Sector 72) under the North American Industry Classification System (NAICS), are eligible to receive a loan.

Sole proprietors, independent contractors, and eligible self-employed individuals as defined in Congress’s last COVID-19 bill and the Families First Coronavirus Response Act are also eligible loan recipients.

The requirements include a good-faith certification that:

  • the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient;
  • funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments;
  • the eligible recipient does not have an application pending for a loan under this subsection for the same purpose and duplicative of amounts applied for or received under a covered loan; and
  • during the period beginning on February 15, 2020 and ending on December 31, 2020, the eligible recipient has not received amounts under this subsection for the same purpose and duplicative of amounts applied for or received under a covered loan.
Loan Program Process

From February 15, 2020 to June 30, 2020 (the “covered period”), the SBA will provide 100% federally-backed loans up to a “maximum amount” to “eligible businesses” to help pay “operational costs” listed as: payroll, rent, health benefits, insurance premiums, and utilities. The program allows the SBA to make loans directly or in conjunction with private lenders. Either way, the loans are backed by the SBA and the U.S. Treasury. Payments are deferred for no less than 6 months, the interest rate is capped at 4%, and no personal guarantees or collateral is permitted as part of any loan under the program. The lender has no recourse against any individual, shareholder, member, or partner of an eligible loan recipient for non-payment, unless the individual uses the loan proceeds for unauthorized purposes.

 Maximum Loan Amounts

The maximum loan amount is capped at $10 million and is the lesser of:

2.5 times the average total monthly payroll costs incurred in the one-year period before the loan is made. For employers who hire seasonally the average monthly payroll costs for the 12 weeks beginning on February 15, 2019, or from March 1, 2019 to June 30, 2019 PLUS the outstanding amount of a loan made under the SBA’s Disaster Loan Program between January 31, 2020 and the date on which such loan may be refinanced as part of this new program; or

Upon request, for businesses that were not in existence during the period from February 15, 2019 to June 30, 2019, 2.5 times the average total monthly payroll payments from January 1, 2020 to February 29, 2020, PLUS the outstanding amount of a loan made under the SBA’s Disaster Loan Program between January 31, 2020 and the date on which such loan may be refinanced as part of this new program; or

$10 million.

Required Uses of Loan Funds

Borrowers may use the loans only for the following purposes:

  1. Payroll costs, which include: compensation to employees, such as salary, wage, commissions, cash, etc.; paid leave; severance payments; payment for group health benefits, including insurance premiums; retirement benefits; state and local payroll taxes; and compensation to sole proprietors or independent contractors (including commission-based compensation) up to $100,000 in 1 year, prorated for the covered period.
  2. Employee group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;
  3. Interest on mortgage obligations;
  4. Rent/lease agreement payments;
  5. Utilities; and
  6. Interest on any other debt obligations incurred before the covered period.
Loan Forgiveness

To be eligible for forgiveness, the loan must be used to pay payroll costs, rent, utilities, and interest on mortgages. Forgiveness amounts will be reduced for any employee cuts or reductions in wages. The reduction formula for fewer employees is:

  1. The maximum available forgiveness under the rules described above multiplied by:
  2. Average number of full-time equivalent employees (FTEs) per month – calculated by the average number of FTEs for each pay period falling within a month – during the covered period divided by (at borrower’s election):
  • Average number of FTEs per month employed from February 15, 2019 to June ; 30, 2019; or
  • Average number of FTEs per month employed from January 1, 2020 until February 29, 2020;

For seasonal employers –

  • Average number of FTEs per month employed from February 15, 2019 until June 30, 2019.

For reductions in wages, the forgiveness reduction is a straight dollar-for-dollar reduction and will be further reduced by any reduction in total salary or wages of any employee during the covered period that is in excess of 25% of the employee’s salary/wages. “Employee” is limited, for purposes of this subparagraph only, to any employee who did not receive a salary or wages at an annualized rate of pay over $100,000 during any single pay period during 2019.

Employers are able to rehire employees or make up for wage reductions by June 30, 2020. The forgiveness reduction “average” will not apply to an employer from February 15, 2020 to April 27, 2020.

If you have any questions about how the loan forgiveness provisions operate, we would be pleased to discuss and run through a few illustrations with you.

Employer Payroll Tax Due Date Pushback

At the option of the employer, the due date for depositing the remainder of 2020 employer payroll taxes and 50% of self-employment taxes related to Social Security (6.2%) and Railroad Retirement is pushed out to the end of 2021 and 2022. The deferred amounts would remain owed be payable over the next two years – half due December 31, 2021, and half due December 31, 2022.

Other Provisions

The CARES Act provides other business benefits related to the limitation on business interest expense, treatment of losses, corporate AMT credits and employee retention credits. You’ll want to review these favorable business tax revisions with your CPA and counsel as needed

If you have questions about this notice or any other issue currently facing your business during this ongoing crisis, we are here to help you. You can contact any one of our Business Practice Group at (503) 323-9000. Thank you, stay safe and together we will get through this.