CARES Act Update - March 27, 2020

Last Updated Friday, March 27, 2020, 3:20PM

The third piece of major legislation addressing the ongoing impact of the COVID-19 Pandemic was officially signed into law this afternoon. The first was signed March 6, 2020 allocating $8.3 billion of immediate emergency funding to help fight the COVID-19 virus. Then, on March 18, 2020, the President signed the Families First Coronavirus Response Act (“FCCRA”), which included a requirement for all employers to provide certain paid leave to employees missing work as a direct or indirect result of the virus.

Now, the third major legislative action, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), is officially law. The CARES Act is a $2.2 trillion stimulus package primarily intended to address the economic impact that many have suffered as a result of the government’s aggressive efforts to slow the spread of the virus. While the Act has now been signed into law several Departments, including the Department of Labor and the Treasury Department among others, are now required to promulgate rules and regulations implementing the provisions in the law.

There are many provisions included within the CARES Act that cover everything from extended benefits for the sick and unemployed to the authorization of direct cash payments to qualifying American individuals. However, the focus of this write up is on the major pieces of the Act that will have the greatest impact on small businesses. While the intent and effect of these provisions are straightforward, some of the logistics regarding the implantation may require further guidance from the various Departments.

As passed, the CARES Act provides significant relief to small business owners in three separate but related sections:

  • Section 1102 – Paycheck Protection Plan
  • Section 1106 – Loan Forgiveness
  • Section 1112 – Subsidy of Existing Small Business Administration (SBA) Loans

Each of these provisions create important tools for small businesses intended to help them remain operational during the COVID-19 pandemic. Notably, the Act incentivizes businesses to retain and continue paying their employees during this difficult time in an effort to provide significant assistance to both the American worker and the American economy as we all deal with the impact of the pandemic.

Paycheck Protection Plan

The Act’s Paycheck Protection Plan amends Section 7(a) of the Small Business Act, authorizing a new $349 billion in loans be made available to businesses with fewer than 500 employees (with certain exceptions). A qualified business may borrow 2.5 times its average monthly payroll costs, up to a maximum of $10 million. Payroll is calculated from the one-year period preceding loan origination, with seasonal employers able to elect a different calculation.

Loan eligibility is based solely on business size, payroll cost and whether the business was in operation on February 15, 2020. The Paycheck Protection Plan waives the “no credit elsewhere” rule generally applicable under Section 7(a) and it does not require any other special showing. An interested business applying for the loan must only show that it was operational and had payroll on February 15th and provide a good faith written certification that:

  1. The uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient.
  2. The funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments; and
  3. The eligible recipient does not have an outstanding loan or pending application for a loan under this subsection for the same purpose and duplicative of amounts applied for or received under a covered loan.

The Paycheck Protection Plan streamlines the application process authorizing qualified lenders to make and approve the loans without having to go through the SBA and it waives all loan fees for borrowers and lenders. Current Section 7(a) lenders are required to opt into the program before being eligible to provide loans under this Plan and the Treasury Department will establish additional criteria allowing new lenders to participate in the program if desired.

Paycheck Protection Plan loan proceeds may be used for payroll costs; employee salaries; utilities (including electricity, gas, water, transportation, telephone, or internet); plus; payments on mortgages (but not prepayment or payment of principal); rent; and interest on any debt if such additional payments were entered into or incurred before February 15, 2020.

The loans are 100% federally guaranteed through December 31, 2020 after which the guarantee reverts to a standard Section 7(a) loan guarantee. There is no personal guaranty or pledged collateral requirements. Interest is capped at 4% and payments of principal and interest are eligible for deferment of at least 6 months up to a year.

Finally, while participation in the Paycheck Protection Plan may disqualify businesses from certain other relief provided in the CARES Act, under certain circumstances businesses may still be eligible for a loan under this program even if the business received an economic injury disaster loan (“EIDL”). Such circumstances may include if the EIDL is made before loans are available under this Plan and if the EIDL is not being used for a purpose covered by this loan, or if the borrower received the EIDL for a disaster other than COVID-19. Businesses should consult with a professional if they have already applied for and/or received an EIDL and are now interested in applying for a loan under the Paycheck Protection Plan.

Paycheck Protection Program Loan Forgiveness

One of the most important pieces of the CARES Act’s Paycheck Protection Program is the opportunity for businesses to receive up to 100% forgiveness of loan amounts used for payroll, rent, mortgage interest and utility expenses for the eight-week period commencing at loan origination. Canceled debt under this program will not be included in the business’s taxable income, but it will disqualify the business from certain other benefits under the CARES Act, such as the payroll tax deferral.

The full eight-week forgiveness is available to businesses that retain their number of employees and the compensation paid to those employees from February 15, 2020 to June 30, 2020 (“Forgiveness Period”). If these numbers are not maintained, the amount of loan forgiveness will be reduced (i) proportionately by a reduction in the average number of employees during the Forgiveness Period as compared to the average number of employees during the same period in 2019; and/or (ii) dollar for dollar by the reduction in compensation beyond 25% of any employee earning less than $100,000 as compared to the compensation during the most recent full quarter of employment.

Employers who have already reduced the number of employees or the amount of compensation paid to their employees still have an opportunity to qualify for full forgiveness. In an effort to encourage the rehiring and full compensation of employees, the CARES Act provides an exemption to the forgiveness reduction to any business that rehires and/or eliminates the reduction in employee salaries back to the February 15, 2020 levels by June 30, 2020.

In order to receive forgiveness the borrowers must provide: (i) payroll tax filings; (ii) state income, payroll and unemployment insurance filings; and (iii) documentation verifying non-payroll payments including mortgage, rent, and utilities (e.g. cancelled checks payment receipts, transcripts of accounts, etc.). Upon filing for forgiveness, businesses must also certify the documentation is true and correct and that the proceeds of the loan were actually used for those purposes.

Subsidy of Existing Small Business Administration Loans

In addition to the opportunity afforded to businesses by the Paycheck Protection Plan, the CARES Act also includes certain provisions to assist businesses with existing SBA business loans. Section 112 of the Act allocates $17 billion to subsidize any qualified business with an existing SBA loan, which includes 7(a) and 504 loans. This amount is more than half of the $28 billion of total SBA loans guaranteed in FY19.

The provision provides that the SBA will pay all principal, interest, and fees on all existing SBA loan products for six months. The CARES Act does not currently have any requirement for businesses to qualify for the subsidy except that the SBA loan must have existed prior to enactment of the legislation.

This loan payment subsidy specifically excludes loans made pursuant to the Paycheck Protection Plan and will not apply to disaster relief loans applied for under the SBA.

Businesses and lenders are encouraged to contact their legal and tax professionals with any questions regarding how they may take advantage of the opportunities afforded under this new law or how the implementation of the CARES Act may affect their businesses. If needed, our business team has been working diligently to stay on top of all of the ongoing changes caused by the pandemic response and we are prepared to answer your questions and serve as a resource to your business.

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