The Coronavirus Aid, Relief, and Economic Security (CARES) Act was recently passed to provide emergency economic relief for businesses negatively impacted by COVID-19.
Forgivable SBA Loan Program
The CARES Act creates a new type of loan for the United States Small Business Administration (the “SBA”) to administer. Unlike the disaster loans currently available through the SBA, these loans are potentially forgivable up to 100% of the principal amount borrowed. Additionally, unlike the disaster loans, these forgivable loans are not tied directly to establishing losses suffered during the national disaster — there is a presumption of negative impact from COVID-19. These loans do not require collateral or guarantees. What this means to you is that the other eligibility requirements of the SBA loan participation (e.g., average annual receipts) are not applicable, and this program is available (i) to many new businesses not otherwise able to avail themselves to the SBA loan programs, and (ii) provides much friendlier terms than traditional SBA loan programs.
Businesses, nonprofits, and veterans’ organizations and tribunal concerns with less than 500 employees are eligible (unless the applicable industry has a higher size standard under the SBA rules). Certain businesses (food services and accommodation) with more than 500 employees are eligible if they have no more than 500 employees at each physical location. The loan program is even available to sole proprietors, independent contractors, and self-employed individuals (subject to additional requirements). In calculating the number of employees, business generally need to include the employees of all affiliates. This could result in portfolio companies of private equity companies and other business with common controlling ownership not being eligible for the loans. The CARES Act waives the strict SBA affiliation rules for this new loan for: (i) businesses with no more than 500 employees that is assigned a NAICS code beginning with 72; (ii) businesses operating as a franchise that is assigned a franchise identifier code by the SBA; and (iii) businesses that receive financial assistance from a company licensed under section 301 of the Small Business Investment Act. Businesses not provided a waiver to the SBA affiliation rules by the CARES Act would need to determine if a waiver under existing law applies.
In addition, we recommend gathering the documentation below so you can be prepared once the program is available.
- 2019 IRS Quarterly 940, 941 or 944 payroll tax reports.
- Last 12 months of Payroll Reports beginning with your last payroll date and going backwards 12 months.
- Payroll report must show the following for the time period above:
- Gross wages for each employee, including the officer(s) if paid W-2 wages.
- Paid time off for each employee.
- Vacation pay for each employee.
- Family medical leave pay for each employee.
- State and Local taxes assessed on the employee’s compensation for each employee.
- 1099s for 2019 for independent contractors that would otherwise be an employee of your business.
- Do NOT include 1099s for services.
- Documentation showing total of all health insurance premiums paid by the Company Owner under a group health plan.
- Include all employees and the company owners.
- Document the sum of all retirement plan funding that was paid by the Company Owner (do not include funding that came from the employee’s out of their paycheck deferrals).
- Include all employees, including company owners.
- 401K plans, Simple IRA, SEP IRAs.
Amount of Loan
Generally, the amount of the loan is capped at the lesser of $10 million and 2.5 times the average monthly payroll costs incurred in the one-year period before the date of the loan. Payroll costs include salary/wages/tips, sick/family leave/PTO, severance payments, group health benefits (including insurance premiums), retirement benefits, and state or local taxes assessed on employee compensation. However, for any employee who is paid more than $100,000 salary, only the amount up to $100,000 (prorated for the covered period) is calculated into the number.
We have also created a worksheet to help you understand the amount you could potentially borrow, as well as the amount of forgiveness possibly available to you. It is available to be downloaded below.
Terms of Loan
An eligible borrower may receive one covered loan, and such proceeds may be used for: payroll costs; continuation of group health care benefits during periods of paid sick, medical, or family leave, or insurance premiums; salaries or commissions or similar compensation; interest on mortgage obligations; rent; utilities; and interest on other outstanding debt. The terms of the amount of any portion of the loan that is not forgiven will be for a term not to exceed 10 years and at an interest rate of no more than 4%.
The amount of the loan that is forgivable is the sum of the payroll costs, mortgage interest payment, rent, and utilities incurred or paid by the borrower during the 8-week period beginning on the loan origination date. Any portion of the loan that is forgiven is excluded from taxable income. If the recipient of the loan laid off employees or reduced wages/salaries of its workforce in the period between February 15, 2020 and June 30, 2020, the amount of forgiveness is reduced proportionally by (i) any reduction in employees retained compared to historical levels, and (ii) the decrease in pay of any employee beyond 25% of their historical compensation. Notably, furloughs would necessarily impact this loan forgiveness analysis as well. To encourage workforce stabilization, the CARES Act takes into account that many businesses might already have or are planning to lay off personnel or cut salaries. If those changes were made between February 15, 2020 and April 26, 2020, those changes are not counted if the business rehires the number of personnel or returns the adjusted salary, as applicable, by June 30, 2020.
The CARES Act also creates a new grant program under the SBA’s Office of Disaster Assistance to provide quick relief for applications awaiting processing of SBA Economic Injury Disaster Loans (“EIDL”). Loan applicants can get up to $10,000 to cover immediate payroll, mortgage, rent, and other specified expenses. This grant does not have to be repaid. A business that receives an EIDL can apply for, or refinance its EIDL into, the forgivable loan product.
Further, lenders on existing SBA backed loans are encouraged to provide payment deferments and extend maturity dates to avoid balloon payment or requirements that would increase debt as a result of deferment. The SBA will pay lenders the deferred principal and interest for a period.
The CARES Act also provides assistance to businesses through the modification of rules related to net operating losses (“NOLs”), interest expense deductions, alternative minimum tax credits and trade or business losses of non-corporate taxpayers. Many of these modifications are designed to provide critical cash flow and liquidity to businesses during the COVID-19 emergency, including through amending prior tax returns to obtain tax refunds. What this means to you is that employers have several tools available to them to help with cash flow, claim tax refunds, or reduce upcoming tax payments.
Employee Retention Credits
Under the CARES Act, employers may be eligible for a refundable tax credit for the employer’s share of the 6.2% Social Security tax (the “SSI Tax Credit”). The potential SSI Tax Credit is for 50% of the first $10,000 in qualified wages (including health plan expenses) paid to each employee commencing on March 13, 2020. To be eligible, an employer must (i) have had operations fully or partially suspended because of a shut-down order from a governmental authority related to COVID-19, or (ii) have had gross receipts decline by more than 50% in a calendar quarter when compared to the same quarter in 2019 (and will remain eligible until the earlier of (i) gross receipts exceeding 80% relative to the same quarter in the prior year, or (ii) December 31, 2020). For employers with more than 100 employees (based on 2019 employment levels), qualified wages are limited to wages paid to employees who were not providing services due to the COVID-19 crisis. Note, however, that the SSI Tax Credit is not available if the employer receives a covered loan from the SBA, as discussed above under Forgivable SBA Loan Program.
Payroll Tax Deferral
In addition to potentially receiving the SSI Tax Credit, the CARES Act allows employers to defer the payment of the employer’s share of the 6.2% Social Security tax on wages paid beginning on March 27, 2020 and ending on December 31, 2020. A corresponding deferral is also permitted for the equivalent portion of self-employment taxes. The deferred amounts are payable in two installments, with 50% of such taxes being due on December 31, 2021, and the remainder due on December 31, 2022. This deferral of Social Security taxes is not, however, allowed where the employer has had a covered loan forgiven, as discussed above under Forgivable SBA Loan Program.