The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”)

On Friday, March 27, 2020, President Trump signed into the law the CARES Act. It is 335 pages long and covers a wide range of programs, tax credits, and industries.

We read it this weekend, so you don’t have to. It is so long, we’re sending out two blogs this week. The first one (this one) pertains to business loans, grants, and taxes, as well as unemployment. The second blog will deal with individual benefits and healthcare provisions.

     1. Paycheck Protection Program under 7(a)(2)(F)

From February 15, 2020 through June 30, 2020, qualifying businesses can apply for a loan equal to 2.5 X the business’s average monthly payroll costs, plus any refinance of (b)(2) loans (Economic Injury Disaster Loans), up to $10 million. Qualifying businesses are businesses which existed as of February 15, 2020, and include businesses with up to 500 employees or which meet the applicable size standard for the industry per SBA's existing regulations; businesses in the accommodation and food services industries with no more than 500 employees at each physical location; nonprofit organizations; and 1099 workers, sole proprietors, and eligible self-employed individuals.

The loans will be made through SBA-approved banks, credit unions, and some nonbank lenders. Within thirty days from the passage of the CARES Act, the SBA must issue guidance to the approved lenders. So far, these loan applications are not yet available. Borrowers must certify that: (1) they’ll only use the loan proceeds for qualified payroll costs, rent/mortgage, utilities, and interest on mortgage and other debt obligations; they do not have an application pending for a loan under 7(a)(2) for the same purpose and duplicative of amounts applied for or received under a covered loan; and (3) from February 15, 2020 to December 31, 2020, that they have not received amounts under 7(a)(2) for the same purpose and duplicative of amounts applied for or received under a covered loan. Qualified payroll costs include vacation, health care and retirement benefits, and most taxes, but it does not include compensation for a single employee in excess of $100,000, compensation for non-U.S. residents, and qualified sick or family leave for which a credit is allowed under the FFCRA passed last week.

Lenders are required to defer repayments and interest for no less than six months but no more than a year. Interest rates are capped at 4%. No personal guarantees are required, and the law provides that owners are not subject to personal liability for non-payment. Finally, there is no requirement that the business be unable to get credit elsewhere.

Loan forgiveness is available in an amount equal to the 8 weeks of payroll and other qualified expenses (meaning, expenses the borrower was obligated to as of Feb. 15, 2020) starting on the date of the origination of the loan, not to exceed the actual loan amount. The loan forgiveness amount is reduced if the business lays off an employee or reduces an employee’s pay by more than 25%. If an employee is rehired within thirty days of the enactment of this Act, they do not count negatively.

In order to get the forgiveness, the borrower needs to present accurate employment, expense, and tax records to the lender (who shall enter a decision within 60 days). Therefore, you should work with an accountant during this period of time to ensure you can take advantage of this. The forgiven amount is not included in gross income. If there is any loan balance remaining after the forgiveness, the maximum maturity of the loan is ten years, at which time the borrower can again apply for forgiveness of the remainder of the loan.

Finally, express loans have been increased from $350,000 to $1 million.

     2. Emergency Economic Injury Disaster Loans and Grants

The CARES Act also expands eligibility for borrowers applying for Emergency Economic Injury Disaster Loans under 7(b)(2). Qualifying businesses must be in business as of January 31, 2020, and suffering substantial economic injury, and include businesses, cooperatives, and ESOPs with up to 500 employees (including affiliates), private non-profits, and 1099 workers, sole proprietors, and eligible self-employed individuals.

The Act waives the requirements that (1) the borrower provide a personal guarantee for loans up to $200,000, (2) the business be in operation for one year prior to the disaster, and (3) the borrower be unable to obtain credit elsewhere. The SBA may approve “small dollar loans” solely on the basis of the applicant’s credit score or other alternative methods without the applicant having to provide tax returns or transcripts.

Most importantly, applicants may request an emergency advance of up to $10,000 upon self-certification, under penalty of perjury, that the business is eligible to receive an emergency economic injury disaster loan. The SBA must provide the funds within three days after receipt of the application. If the application is denied, the business does not have repay the $10,000 advance. Emergency advance funds must be used for payroll costs, sick leave, increased material costs, rent or mortgage payments, or for repaying obligations that cannot be repaid due to lost revenue. If the business later receives loan forgiveness through a 7(a) Paycheck Program Loan, the $10,000 advance will be deducted from the forgiveness amount.

     3. Subsidy for Certain Loan Payments

For SBA-issued 7(a), 504, and microloans, the SBA will pay the principal, interest, and associated fees for 6 months starting with the first payment due after the enactment of the Act (whether pre-existing or entered-into within the six-month period following the enactment of the Act, so you can still apply for these and take advantage of the deferment). The SBA will extend maximum loan maturity during the year following the enactment of the Act.

     4. Pandemic Unemployment Assistance

This law greatly expands the classes of people who are eligible to include unemployment benefits, to include furloughed, self-employed, and those who have exhausted all other available federal and state unemployment benefits. The only individuals expressly excluded from coverage are those who have the ability to telework with pay and those who are receiving paid sick leave or other paid benefits. To qualify, a person must be unable to work for essentially any coronavirus-related issue; however, the individual must also be actively seeking work unless unable to do so due to a coronavirus-related issue. The law applies to both loss of full-time employment and a reduction in hours of employment.

The unemployment benefits will be administered by each state, which can waive the typical waiting periods. The total benefit cannot extend more than 39 weeks (which includes any waiting periods for benefits under applicable state law AND any unemployment benefits received under existing state or federal law, unless the duration of other state and federal benefits is extended, in which case the total benefit may extend beyond 39 weeks) during the period January 27, 2020 through December 31, 2020.  The amount of the benefit is the employee’s regular compensation as determine by state law. Additionally, if the state of North Carolina agrees, the federal government will also fund an additional $600 per week starting on the date of the law’s enactment through July 31, 2020.

Finally, the Labor Department was ordered to establish a process for making Pandemic Unemployment Assistance available for the weeks beginning on or after January 27, 2020, through the date of enactment of the Act.

     5. Employee Retention Credit for Employers

This provision would provide a refundable payroll tax credit for 50 percent of wages paid by eligible employers and non-profits whose operations have been fully or partially suspended as a result of a government order limiting commerce, travel or group meetings. The credit is also provided to employers who have experienced a greater than 50 percent reduction in quarterly receipts, measured on a year-over-year basis.

Wages of employees who are furloughed or face reduced hours as a result of their employer’s closure or economic hardship are eligible for the credit. For employers with 100 or fewer full-time employees, all employee wages are eligible, regardless of whether an employee is furloughed. The credit is provided for wages and compensation, including health benefits, and is provided for the first $10,000 in wages and compensation paid by the employer to an eligible employee. Wages do not include those taken into account for purposes of the payroll credits for required paid sick leave or required paid family leave, nor for wages taken into account for the employer credit for paid family and medical leave. This credit is not available if the employer is receiving assistance through the Paycheck Protection Program.

     6. Delay of Payment of Employer Payroll Taxes

This provision would allow taxpayers to defer paying the employer portion of FICA and half of SICA payroll taxes through the end of 2020, with all 2020 deferred amounts due in two equal installments, one at the end of 2021, the other at the end of 2022.

     7. Modification of Net Operating Losses, Limitations of Losses, Limitations of Interest Expenses, and more – Go see your accountant!