What Employers Need to Know About The Coronavirus Aid, Relief and Economic Security (CARES) Act
On Friday, President Trump signed the $2 trillion Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The CARES Act provides the third wave of federal emergency relief to those suffering the economic fallout of COVID-19. While much attention has been devoted to unemployment benefits and subsidies to individuals, the aid package also offers direct financial relief to small and big businesses alike, as well as tax benefits.
SMALL BUSINESS RELIEF
In sum, the CARES Act provides emergency grants, forgivable loans and relief for existing loans to companies with 500 or fewer employees including:
- $10 billion to grants to cover immediate operating costs. Each grant may be in an amount up to $10,000.
- $350 billion dollars for the Small Business Administration to provide loans of up to $10 million dollars per business. Any portion of that loan that is used for payroll, to keep workers employed or to pay for rent, mortgage and existing debt is eligible for forgiveness, provided workers stay employed through the end of June 2020. (The Act requires the Small Business Administration to issue regulations on the forgiveness provisions within the next 30 days.)
- $17 billion dollars to cover six months of payments for small businesses that already have Small Business Administration Loans.
What grants are available? Those who apply during the covered period for a Small Business Administration loan through the Small Business Act’s Disaster Loan Program because of COVID-19, may request up to a $10,000 advance, which does not have to be repaid even if the loan application is later denied. Advances are to be awarded within three days of making an application.
Who is eligible for a grant? The CARES Act expands the Small Business Act’s Disaster Loan Program during the period of January 31, 2020 through December 31, 2020 to include businesses, cooperatives and employee stock ownership plans with 500 or fewer employees; sole proprietorships, with or without employees, and independent contractors; and tribal small business concerns.
What are the permissible uses of grant money? Advances may be used to provide sick leave to employees who are unable to work due to the direct effect of COVID-19, maintaining payroll during business disruptions during slowdowns, meeting increased supply chain results, making rent or mortgage payments, and repaying debts that cannot be paid due to lost revenue. If a business that receives an advance is later approved for a loan under the Business Loan Program (below), any loan forgiveness will be reduced by the advance.
What else should I know about the Disaster Loan Program aspect of this? For loan applicants, the CARES Act waives rules related to personal guarantees on advances and loans of $200,000 or less for all applicants, waives the one year in business prior to the disaster requirement, waives any requirement that the applicant be unable to find credit elsewhere, and allows lenders to approve applicants solely on credit scores or alternative methods to determine an applicant’s ability to repay.
New Small Business Loans
What’s available? For the covered period of February 15, 2020 to June 30, 2020, the CARES Act allows the Small Business Administration to provide 100% federally backed loans (either directly or in cooperation with the private sector), to eligible businesses to help pay operational costs, including: payroll (wages, commissions, cash), paid leave, severance payments, group health benefits, insurance premiums, retirement benefits, state and local payroll taxes, rent, mortgage, mortgage interest, utilities and interest on other debt obligations. The Act also permits loan proceeds to be used to cover up to $100,000 in one year is for sole proprietors, independent contractors, and commission based compensation.
Who is eligible for a loan? Any business (including Tribal businesses), nonprofit, or veteran organization that employs not more than the greater of:
- 500 employees (whether employed full-time, part-time, or on other bases); or
- the Small Business Act’s definition of a qualifying business for that industry.
Hospitality Businesses are eligible for loans if they have more than one physical location and (i) employ 500 or fewer employees per location; and (ii) are in the “accommodation and food services” sector (Sector 72) under the North American Industry Classification System.
Certain Small Business Act regulations, such as those that affect the eligibility of hospitality, restaurants and franchises under 13 CFR 121.103, are waived for the covered period.
Sole proprietors, independent contractors, and self-employed individuals, who meet these definitions in the Families First Coronavirus Response Act, and satisfy the documentation requirements, are eligible to receive loans under this part of the Act.
What’s required? An applicant must certify that:
- The loan is necessary to continue operations during the COVID-19 public health emergency;
- The loan will be used to retain workers, maintain payroll and make mortgage, lease, and utility payments;
- The applicant does not have any other application pending under the program for the same purpose;
- From February 15, 2020 until December 31, 2020, the applicant has not received duplicative amounts under the new Business Loan Program.
What size loan can I get? Basically, the maximum loan amount is the lesser of:
- $10 million;
- 2.5 times the average total monthly payroll costs incurred in the one year period before the loan is made plus the outstanding amount of a loan made under the Small Business Act’s Disaster Loan Program between January 31, 2020 and the date on which such loan may be refinanced as part of this new Business Loan Program (if the business is seasonal, the determination is calculated from the average monthly payroll cost for 12 weeks from February 15, 2019, or from March 1, 2019 to June 30, 2019); or
- For businesses that did not exist during February 15, 2019 to June 30, 2019, 2.5 times the average total monthly payroll payments from January 1, 2020 to February 29, 2020, plus the outstanding amount of any loan made under the Small Business Act’s Disaster Loan Program between January 31, 2020 and the date on which such loan may be refinanced under this Act.
What amounts are subject to forgiveness? These loans are eligible for forgiveness and excluded from gross income in an amount equal to payroll costs, rent, utilities, and mortgage interest payments incurred and paid during the covered period. If an employer cuts employees or reduces their wages, the forgiveness amounts will be reduced in amounts that are determined by whether the employer reduces wages, permanently terminates employment, rehires employees, and/or has employees who receive tips.
How do I apply for loan forgiveness? Borrowers who want to seek loan forgiveness under this program must submit the following information to their lender:
- Documentation verifying full time employees on payroll and their tax rates;
- Documentation of costs/payments (mortgage, rent, utilities);
- Certification from a business representative that the documentation is true and correct and that forgiveness amounts requested were used to retain employees and make other forgiveness-eligible payments; and
- Any other documentation the Small Business Administration or lender may require.
Where do I apply? Lenders authorized to make loans under the Small Business Act’s current Business Loan Program are automatically approved to make and approve these loans and the Department of the Treasure may add more private sector lenders.
What are other important terms to know? No collateral or personal guarantee is required for a loan. The interest rate is capped at 4%. There will be no subsidy recoupment fee associated with the loans and no prepayment penalty for any payments made. Additionally, the Small Business Administration has no recourse against any individual, shareholder, member or partner of an eligible loan recipient for non-payment, unless the individual uses the loan proceeds for unauthorized purposes. Loan amounts that are not forgiven will have a maximum maturity date of 10 years from the date the borrower applied for loan forgiveness.
Prior SBA loan amounts may be refinanced under this new loan program: A loan made under the Small Business Act’s Disaster Loan Program on or after January 31, 2020, may be refinanced as part of a covered loan under this new Business Loan Program as soon as the new business loans are made available.
Will I qualify to receive this loan? The CARES Act contains guidance to the Small Business Administration intended to ensure that processing and distribution of loans under the new Business Loan Program prioritizes small business concerns, entities underserved and rural markets (including veteran communities), small business concerns owned by socially and economically disadvantaged individuals, women, and businesses that have been operating for fewer than 2 years.
Other CARES Act Benefits to Small Businesses
The CARES Act also contains tax provisions that: affect whether loan proceeds are included in gross income for federal income tax purposes; provide employee retention tax credits; and postpone due dates for employer payroll tax deposits and self-employment taxes.
ECONOMIC STABILIZATION AND ASSISTANCE TO SEVERELY DISTRESSED SECTORS OF THE UNITED STATES ECONOMY
Five hundred billion dollars is apportioned to non-forgivable loans for other eligible businesses, who must commit to maintaining at least 90% of their employment levels as of March 24, 2020 through September 20, 2020. Approximately $39 billion of this apportionment is designated to air carriers and U.S. businesses that haven’t yet received adequate economic relief from other loans or loan guarantees (those necessary to national security). The remaining $454 billion is designated for the Federal Reserve to create facilities that support lending to other eligible businesses. The Act requires the Treasury Secretary to publish procedures and minimum requirements for loans, loan guarantees and other investments within 10 days of the CARES Act’s enactment.
For loans under this Title of the CARES Act, the borrower must agree not to buy back stock or pay dividends for a period of time that extends one year beyond the term of the loan and, for the term of the loan, the borrower can invest or loan only to other American businesses. Also, in order to receive the benefit of one of these CARE Act programs, a borrower must cap all employee compensation (salary, stock and bonuses) for a period ending one year after the loan is repaid. Employees receiving more than $425,000 cannot receive more compensation than they received in 2019, and severance pay at termination cannot exceed twice the 2019 compensation amount. Officers or employees that receive more than $3 million per year cannot receive compensation that exceeds the total of $3 million plus 50% of everything over $3 million.
Within these provisions, is the authority for a mid-size direct lending program to aid small to mid-size businesses and non-profits with 500-10,000 employees. Only U.S. domiciled businesses, whose employees are predominantly located in the U.S. and who demonstrate that alternative financing is not reasonably available, are eligible for a loan. These small to mid-size business loans will come from private lenders, be subject to a 2% interest rate cap, and subject to a minimum six month deferral on principal and interest payments.
The eligible borrower must self-certify that the loan is necessary to support the borrower’s ongoing business operations, the borrower must retain 90% of its workforce at full compensation and benefits until September 30, 2020, and the borrower will not outsource or offshore jobs for a period of time ending two years after repayment of the loan. There are affirmative requirements that the employer intend to restore 90% of its workplace from February 1, 2020 and employee compensation and benefits within four months of the termination of the COVID-19 public health emergency. Also, additional restrictions prohibit company stock buy-back, dividends, capital distributions, workforce reduction of more than 10%.
There are conditions that also specifically impact the issuance of loans, loan guarantees or investment where collective bargaining agreements are involved.
We await the Treasury Secretary’s elaboration and clarification of all these programs in the coming days.