Coronavirus Aid, Relief and Economic Security Act (CARES Act)

April 6, 2020

The CARES Act contains a mixture of relief measures for businesses, including:

Paycheck Protection Program

The Emergency Small Business Loan program within the Small Business Administration’s 7(a) Loan Program – also known as the Paycheck Protection Program or PPP.  This $349 Billion authorization extends through December 31, 2020 and allows loans up to $10 million to for-profit small businesses (including sole proprietors, self-employed, independent contractors, § 501(c)(3) organizations and § 501(c)(19) organizations) with fewer than 500 employees if they were in existence on February 15, 2020.  The covered loan period begins on February 15, 2020 and ends on June 30, 2020.

The Act permits all current 7(a) lenders to make determinations on borrower eligibility and instead of determining repayment ability, lenders are required to determine whether a small business was operational on February 15, 2020 and had employees for whom it paid salaries and payroll taxes, or a paid independent contractor.

The CARES Act also provides for forgiveness of up to the full principal amount of qualifying loans guaranteed under the PPP.

You can apply for a PPP loan if you have 500 or few employees (full, part-time and any other status) whose principal place of residence is in the US or are a business that operates in a certain industry and meet the applicable SBA employee-based size standards for that industry AND you were in operation on February 15, 2020 and either had employees for whom you paid salaries and payroll taxes or paid independent contractors as reported on a Form 1099-MISC.  You are also eligible for a PPP loan if you are an individual who operates under a sole proprietorship or as an independent contractor or eligible self-employed individual and were in operation on February 15, 2020.

You can apply today if you are a small business or sole proprietorship and if you are an independent contractor or self-employed individual, you can apply starting April 10.  However, because there is a funding cap, you should apply as quickly as you can.

You can apply through any existing SBA lender – visit https://www.sba.gov/paycheckprotection/find for a list of SBA lenders – or through any federal insured depository institution, federally insured credit union, or Farm Credit System institution that is participating.  Call your local lender and see if they are participating.

You must submit such documentation as is necessary to establish eligibility such as payroll processor records, payroll tax filings, or Form 1099-MISC, or income and expenses from a sole proprietorship.

The Application:  https://www.sba.gov/page/coronavirus-covid-19-small-business-guidance-loan-resources

Submit SBA Form 2483 (Paycheck Protection Program Application Form) to your lender; e-signatures are permissible.  A representative of the applicant can certify for the business as a whole if the representative is legally authorized to do so.

The loan may be used for:

  • Payroll costs, including benefits
  • Interest on mortgage obligations, incurred before Feb. 15, 2020
  • Rent under lease agreements in force before February 15, 2020
  • Utilities for which service began before Feb. 15, 2020, such as electricity, gas, water, transportation, telephone or internet

What counts as payroll?

  • Salaries, wages, commissions or tips - capped at $100k on an annualized basis for each employee
  • Employee benefits such as paid sick or medical leave, vacation, parental, family, medical or sick leave; allowance for separation or dismissal (severance)
  • Health and other insurance premiums and retirement benefits, severance payments,
  • State and local employment taxes
  • For a sole proprietor or independent contractor, wages, commissions, income, or net earnings from self-employment capped at $100k on an annualized basis for each employee

How Much Can I Borrow?

The maximum loan amount is $10 million and there is a formula by which the loan amount is tied to payroll costs to determine the size of the loan (generally 2.5 times the average total monthly payroll costs from the prior year).  Payroll costs are capped at $100k annualized for each employee.

There are some exclusions, including but not limited to:  compensation of an employees in excess of $100k; any compensation of an employee whose principal place of residence is outside the U.S.; and qualified sick leave wages for which a credit is allowed under the Families First Coronavirus Response Act or qualified family leave wages for which a credit is allowed.

How Much Can Be Forgiven?

You are eligible for forgiveness equal to the amount spent 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 and the eligible payroll costs which may be forgiven do not include compensation of individual employees, independent contractors, or sole proprietors in excess of $100,000 in annual salary, compensation of employees with a principal place of resident outside the United States, or leave wages already covered by the Families First Coronavirus Response Act.  If the loan amount is used for anything other than approved uses, you will owe money when the loan is due.

The interim regulations which make clear that not more than 25% of the forgiven amount may be used for non-payroll costs.  Employers that maintain employment for the 8 weeks after loan origination or rehire employees by June 30 will have their loans forgiven in whole or in part, effectively turning the loan into a grant.  The amount forgiven is 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% of their prior year compensation.

Borrowers that re-hire employees previously laid off due to the COVID-19 crisis will not be penalized for having a reduced payroll at the beginning of the period.  Borrowers will need to submit documentation to their lenders verifying their payments during the period.  Canceled indebtedness under this provision is not included in the borrower’s taxable income.  Any loan amounts not forgiven at the end of one year is carried forward as an ongoing loan with terms of a maximum of 2 years at a maximum of 1% interest.  Borrowers must apply for loan forgiveness to their lenders by submitting required documentation and are required to receive a decision within 60 days.

The loan terms are the same for EVERYONE

  • The SBA’s usual requirement that you try to obtain loan funds from other sources is waived
  • No collateral
  • NO loan fees may be charged for loan applications
  • No personal guarantees
  • Only one PPP loan per business
  • No prepayment penalty
  • The first six months of payments (principal and interest) are automatically deferred.
  • Any PPP loan amount forgiven is NOT considered gross income for federal tax purposes
  • The SBA has no recourse against any individual, member, partner, or shareholder for non-payment unless the individual uses the loan proceeds for unauthorized purposes

Emergency Economic Injury Disaster Loans (EIDL) and Emergency Grants

The CARES Act appropriates an additional $10 billion into the EIDL loan program and Section 1110 expands eligibility to Economic Injury Disaster Loans (EIDL) and waives some requirements for applicants, which include businesses with fewer than 500 employees.  Businesses may apply for both PPP loans and EIDL loans as long as they are not used for the same purpose.

A personal guarantee is not required, the borrower is not required to demonstrate unavailability of credit elsewhere, and the business must have only been in operation on January 31, 2020.  A $10,000 advance grant may be obtained, which does not have to be paid back if the EIDL loan is denied.

  • Employee Retention Payroll Tax Credits
  • Deferred employment taxes
  • Other State and local relief provisions