By Toni Y. Long
With the coronavirus (COVID-19) sweeping the globe and upending the U.S. economy, the Senate passed the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) on March 25, 2020. The House of Representatives passed the Act, and it was enacted into law on Friday, March 27, 2020. The CARES Act includes a nearly $2 trillion stimulus package aimed at delivering critical assistance to the U.S. economy by providing financial stability and relief for individuals and businesses affected by COVID-19.
This newsletter includes a summary of key provisions of the CARES Act that we believe are important to highlight for businesses and employers.
RELIEF FOR SMALL BUSINESSES AND EMPLOYERS
Paycheck Protection Program: Small Business Working Capital Loans
A provision of the CARES Act provides short-term cash flow assistance to small businesses to help companies and their employees deal with the immediate economic impact of the COVID-19 pandemic. Loans will be made by lenders certified by the Small Business Administration (“SBA”) until June 30, 2020, and guaranteed by the federal government.
Businesses and nonprofits can receive loans of up to 2.5 times their average monthly payroll cost for the 2019 year. The loans will be eligible for forgiveness for amounts spent on payroll costs, utilities, rent and mortgage interest during the 8-week period after the loan origination date, with such forgiveness amount reduced proportionately by any reduction in employee headcount or certain reductions in salary or wages. The SBA will administer the PPP.
Key aspects of the PPP include:
- Eligible Borrowers. In addition to entities currently eligible for the loans, the CARES Act includes (1) non-profits, sole proprietors, independent contractors and other self- employed individuals, such as “gig economy” workers, and (2) businesses in the Accommodation and Food Services industry with more than one physical location and which employ fewer than 500 employees per physical location. Borrowers are not be required to demonstrate that they cannot obtain credit elsewhere, as is typically required for SBA loans.
- Certification. Borrowers must make a good faith certification: (1) that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient, (2) to acknowledge that funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments and utility payments, and (3) that the recipient has not received, and does not have another application pending, for SBA loans for the same purpose.
- Maximum Loan Amount. The lesser of $10,000,000 or 2.5 times the average total monthly payments for covered payroll costs incurred during the 1-year period preceding the date of the loan.
For example, if you apply for a loan on May 1, 2020, and your business had $1.2 million in payroll costs for the period May 1, 2019, to May 1, 2020, then your monthly average is $100,000. You qualify for a loan of up to $250,000 or 2.5 times your average monthly payroll cost.
- Maturity and Interest Rate. The Department of the Treasury has set a maximum maturity of two (2) years from the date of the loan (there is no prepayment penalty) and a maximum interest rate of 0.5% per year.
- Allowable Uses. Businesses that receive loans under the PPP must use loan funds to pay payroll costs (i.e., salaries, wages, vacation, parental, family, medical, or sick leave, severance, retirement benefits, and state or local taxes assessed on compensation), costs related to group health care benefits (i.e., insurance premiums), employee commissions and tips, interest on mortgage obligations, rent, including rent under a lease, utilities or interest on other debt, incurred before February 25, 2020.
The following are expressly excluded from payroll costs: any compensation of an individual employee in excess of an annual salary of $100,000, compensation to employees whose principal place of residence is outside the U.S., qualified sick leave or family leave wages for which a credit is allowed under Section 7001 of the Families First Coronavirus Response Act.
- No Collateral Requirements or Personal Guarantees. Borrowers will not be required to post collateral and normal personal guarantee requirements for SBA loans are waived. The SBA’s requirement that the business is not able to access credit elsewhere is also waived. If a business uses PPP loan proceeds for the purposes described above, the loan will be nonrecourse to the business’ shareholders, members and partners.
- Fee waiver. The SBA’s guaranty fee and annual servicing fee are waived.
- Loan Forgiveness. If the business uses the principal amount on PPP loans to pay rent, interest payments on mortgages, utilities and payroll costs to maintain its workforce (during the 8-week period beginning on the date of the loan), then the principal of the loan will be forgiven, and the company will only need to pay back the accrued interest. The amount of a PPP loan that may be forgiven cannot exceed the principal amount of the loan. To get the full benefit of loan forgiveness, businesses must keep their employees and pay them at least 75% percent of their prior-year compensation.
To apply for forgiveness, businesses must submit documentation regarding the eligible uses of loan funds (payroll costs, mortgage interest, utilities, etc.), a certification that such documents are true and correct, as well the amount to be forgiven, and any other documentation the SBA Administrator deems necessary. Borrowers would not recognize any income for federal tax purposes on the portion of the loans that are forgiven. The SBA will purchase any loan forgiveness amounts from its certified lenders.
The SBA is required to issue guidance and regulations implementing these loan forgiveness provisions no later than thirty (30) days after the enactment of the CARES Act and other rules implementing the SBA provisions are to be adopted within fifteen (15) days after implementation.
- Deferral. For principal amounts that exist after any loan forgiveness under the PPP, payments of remaining principal and interest under the loans would be deferred for at least six (6) months and not more than a year. Under the PPP, all borrowers are allowed to apply for deferment and all lenders have to apply complete deferment for all remaining balances for at least six (6) months. Thus, businesses under the PPP can get a substantial portion of their loan forgiven in the first eight (8) weeks after the loan is issued, and not have to make any payments for up to a year.
How to Obtain a PPP Loan
PPP loans are made by SBA-certified lenders (over 800 financial institutions currently), in all 50 states, through delegated authority from the SBA. In addition, the SBA Administrator and Secretary of Treasury may further authorize additional lenders to join the program, as needed. SBA-certified lenders simply need to verify that a small business was in operation on February 15, 2020, and paid employee salaries and payroll taxes or paid independent contractors, as reported on Form 1099- MISC, for eligibility in the PPP.
- Small businesses, including non-profits, and sole proprietorships can apply for a PPP loan beginning April 3, 2020, through existing lenders.
- Independent contractors and self-employed individuals can apply for a PPP loan beginning April 10, 2020, through existing lenders.
For additional information, please visit:
- The U.S. Treasury CARES website which includes information for borrowers as well as an application for information purposes only.
- The U.S. Chamber of Commerce Combating the Coronavirus website and its Emergency Loans Small Business Guide and Checklist.
Do not visit your bank. The application and instructions will be available online. Go to the website of a bank that participates in the SBA program to start the loan application process if your business has been negatively impacted by COVID-19. For a list of the 100 most active SBA lenders, please click here.
Subsidy for Certain Loan Payments
The CARES Act provides benefits to those with current SBA loans in the form of a government subsidy in which the SBA will pay six months of principal, interest and fees on qualifying loans. Contact your lender if your business already has an outstanding SBA loan to see if you qualify.
Employee Retention Credit
The CARES Act offers one-year only credit against the 6.2% share of Social Security payroll taxes for any business that is forced to suspend or close its operations due to COVID-19, but continues to pay its employees during the shut-down. For businesses that remained open, but had gross receipts during any quarter of 2020 that were less than 50% of what they were for the same quarter in 2019, employers will be entitled to a credit for that quarter. No employee retention credit is available if an employer takes out a payroll protection loan referenced above.
If your business was completely shut down or your business was open and it suffered more than a 50% reduction in gross receipts in any quarter of 2020, you might be entitled to the Employee Retention Credit. Your CPA should notify you if or when you qualify for this credit by preparing your quarterly financials.
Payroll Tax Deferment
The CARES Act allows businesses to pay 50% of their 2020 payroll taxes by the end of 2021 and the remaining 50% by the end of 2022. This deferral is not available to any business that takes out a payroll protection loan that is forgiven as discussed above.
Rental Property Owner Protections
Owners of rental properties with five or more units and federally-backed mortgages can request forbearance if they were current on mortgage payments as of February 1, 2020. An owner must contact the company or agency to which they make mortgage payments and affirm that they are experiencing financial hardship due to COVID-19. The mortgage company or agency must provide forbearance for thirty (30) days. The property owner can request two additional thirty (30)-day forbearance periods.
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We know this is a lot of information to digest. If you have any questions relating to these new laws or any other issues, please do not hesitate to contact either Toni Y. Long or Randy A. Lopez directly.
| Toni Y. Long(310) 989-6896 | Randy A. Lopez(626) 689-2201 |