For our business clients who are navigating the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), which was signed into law on March 27, 2020, here are the highlights for businesses that wish to keep their workers employed and paid but need a bridge to cover employee compensation and benefits as well as other essential expenses such as rent, mortgage interest, utilities and interest on previously undertaken debt.
- The Paycheck Protection Program
- Emergency Economic Injury Disaster Loans
- Credits against Employment Taxes
- Deferral of Employment Taxes
The Paycheck Protection Program
This Program, which is administered by the Small Business Administration (“SBA”) and implemented through SBA approved lenders, is designed to keep workers employed and paid, incentivize businesses to retain employees, and allow businesses with not more than 500 employees affected by the COVID-19 outbreak to borrow funds to cover employee compensation (for those earning less than $100,000). These loans also allow eligible businesses to continue health care benefits, payroll costs, and other essential expenses such as rent, mortgage interest, utilities and interest on debt previously undertaken.
- In some instances, qualified businesses are eligible for loan forgiveness of these loans.
The loans are available from January 15, 2020 through June 30, 2020. Regular SBA 7(a) loan eligibility is expanded to allow any business in operation on February 15, 2020 to apply. Even if you subsequently had to close your business due to the COVID-19 outbreak, your business would still be eligible so long as it was in operation on January 31, 2020. Sole proprietors, independent contractors and nonprofit, charitable organizations exempt from Section 501(c)(3) of the Internal Revenue Code, are also eligible.
The maximum amount for a loan is 250% of the average total monthly payroll, mortgage payments, rent payments, and payments on any other debt obligations or up to $10 million. Interest rates are not more than 4%. There are no loan fees, the maximum term for amounts not forgiven is 10 years, and there are no prepayment fees. Principal and interest payments can be deferred for 6 months up to a year. There are no personal guarantees or collateral required. All or a portion of the loans under this Program may be forgiven, but the rules around forgiveness are fairly complicated and need to be worked through carefully based on the particular circumstances of the business.
The forgivable portion of these loans are the amounts spent by the business during an 8-week period after the date the loan is originated on rent, payroll costs for workers earning less than $100,000, mortgage interest and utility payments. The forgivable amount is reduced by any reduction in employees retained. A business can rehire workers who were laid off due to the COVID-19 outbreak, and it will not be penalized to the extent it reduced its payroll during the 8-week period. Payroll costs that can be forgiven do not include sick leave or family leave wages for which a credit is allowed under the Families First Coronavirus Response Act.
Emergency Economic Injury Disaster Loans (“EIDLS”)
EIDLS are available from January 31, 2020 through December 31, 2020, and businesses with under 500 employees are included as well as sole proprietors, independent contractors and charitable organizations. EIDLs are lower interest loans of up to $2 million, with principal and interest deferment at the SBA’s discretion, that are available to pay for expenses that could have been met had the disaster not occurred, including payroll and other operating expenses.
- A business can request an advance of $10,000 within 3 days of applying for an EIDL, and the advance is not subject to repayment even if the EIDL application is denied. The advances, which are considered grants, may be used to keep employees on payroll, to pay for sick leave, meet increased production costs due to supply chain disruptions, or pay business obligations, including debts, rent and mortgage payments. There are no personal guarantees for EIDLs up to $200,000. A business must have been in operation on January 31, 2020 in order to qualify. A business can be in operation for less than a year in order to qualify.
Credits against Employment Taxes
Under the CARES Act, there may be credits available to businesses and charitable organizations in each calendar quarter for employment taxes equal to 50% of each employee’s wages not exceeding $10,000 each quarter per employee. To be eligible for the credits, the business must have been in operation in 2020 and have fully or partially suspended operations due to the COVID-19 outbreak. The credit may also be provided to businesses who have experienced a more than 50 % reduction in quarterly receipts, with receipts measured based on 2019 against 2020. The gross receipts of the business should be less than 50% for the same calendar quarter of 2019. The credits end once the gross receipts of the business are more than 80% for the same calendar quarter in 2019. The credit is not available to businesses receiving assistance through the Paycheck Protection Program. The credit is available through December 31, 2020.
Deferral of Employment Taxes
The CARES Act allows a business to defer the employer portion of employment taxes from March 27, 2020 through December 31, 2020. 50% of the deferred taxes are due by the end of December 31, 2021 and 50% of the deferred taxes are due by the end of December 31, 2022. The deferral is not available if the business has received assistance through the Paycheck Protection Program.
You can find helpful guidance on the Paycheck Protection Program here:https://www.uschamber.com/sites/default/files/023595_comm_corona_virus_smallbiz_loan_final_revised.pdf
We are monitoring updates from the federal government for additional guidance.
If you are interested in pursuing any of the financing made available under the CARES Act, you can check with your bank to determine if they are an SBA approved lender. You can also find an approved lender here https://www.sba.gov/funding-programs/loans/lender-match, or contact us for assistance in identifying one.
There is a lot to digest here. If we can be helpful regarding your options under the CARES Act or in any other way as you navigate through this very challenging time, please contact us.