Updated Client Alert – The CARES Act Provides Relief for Small Businesses
The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act” or the “Act”)[i] became law on March 27, 2020, following approval by the House lawmakers earlier in the day. The Act presents small business entities an opportunity to borrow an amount equal to two and one-half times monthly payrolls and obtain forgiveness of that loan amount provided certain employee retention and other criteria are met. It is an extraordinary piece of legislation. As of this update, funding has been exhausted for the “Paycheck Protection” Plan, and on April 15, 2020, U.S. Treasury Secretary Steven T. Mnuchin and U.S. Small Business Administration (SBA) Administrator Jovita Carranza issued a statement that the SBA will not be able to issue new loan approvals once appropriations for the program lapses. Congressional Republicans and Democrats are currently in discussions to the replenish the fund.
The nearly 900-page CARES Act aims to provide relief to individuals and businesses impacted by the COVID-19 pandemic. The main provisions of the legislation for small businesses expand access to the SBA loan program in the form of emergency grants and forgivable loans for companies with 500 or fewer employees. The Act also increases access to bankruptcy relief for small businesses.
On March 30, 2020, Treasury Secretary Steven Mnuchin announced that he anticipated that details will be released on Monday, March 30, 2020, instructing small businesses on how they can apply for the SBA loans. [ii] The Treasury Secretary added that he expected loans to be available starting Friday, April 3, 2020, “which will be at lightning speed.”[iii] On March 31, 2020, the U.S. Department of the Treasury and the SBA released a sample application form for businesses to apply for and obtain loans under the newly-announced “Paycheck Protection” Program as well as an Information Sheet for Borrowers.[iv] On April 2, 2020, the SBA issued an interim final rule concerning the “Paycheck Protection” Plan, and on April 14, 2020, the SBA issued a second interim final rule. The SBA has also published a final loan application form. The interim final rule can be found here, the second interim final rule can be found here, the final application form can be found here, and the Information Sheet for Borrowers can be found here.
Overview of the Small Business “Paycheck Protection” Program
As part of the CARES Act, the SBA will administer $349 billion in loan commitments through the “Paycheck Protection” Program, which includes small business loans, loan forgiveness, relief for existing SBA borrowers, as well as an expansion of the SBA’s Economic Injury Disaster Loan (“EIDL”) program. Additional guidance has recently been provided about the “Paycheck Protection” Program.[v] All loans under this program will have the following features:
- Loans will be made on a first come, first served basis
- Interest rate of 1.0%
- Maturity of 2 years
- First payment deferred for six months
- 100% guarantee by SBA
- No collateral
- No personal guarantees
- No borrower or lender fees payable to SBA
Loan Eligibility and Terms
For a short window of time, the CARES Act greatly expands the category of business eligible for loans through the SBA.[vi] Specifically, from February 15, 2020 through June 30, 2020 (the “Covered Period”), eligible loan recipients under the Act are expanded to include (i) small business concerns – a defined term under legislation creating the SBA – as well as (ii) business concerns, nonprofit organizations, veterans organizations, or Tribal business concerns that employ not more than the greater of 500 employees, or the standard number of employees established by the SBA for the industry in which the business operates. Eligible loan recipients also include individuals who operate under a sole proprietorship or as an independent contractor and eligible self-employed individuals, as well as businesses in the accommodation and food services industry if such business employs no more than 500 employees per location.[vii] Both full-time and part-time employees are considered “employees” for purposes of this eligibility determination, and no threshold appears in the statute for part-time status.
No collateral or personal guarantee is required for a covered loan, and interest rates cannot exceed four percent.[viii] The CARES Act also contains a waiver of SBA existing affiliate rules, under which the SBA may ordinarily deem a loan applicant to be affiliated with another concern, a condition which could prove disqualifying due to size limitations.
Permitted uses of “Covered Loans” include payroll costs, rent, mortgage payments, utility costs, and preexisting debt.[ix] The maximum loan amount is the lesser of:
- 5 times the average monthly payroll costs incurred during the one-year period before the loan is made;
- For a business not in existence from February 15, 2019 to June 30, 2019, 2.5 times the average total monthly payroll payments from January 1, 2020 to February 29, 2020; or
The term “Payroll costs” is defined as follows: [x]
- Includes: employee salary, wages and commissions; payment of cash tips; payment of vacation; parental, family, medical or sick-leave; allowance for dismissal or separation; payment required for group health benefits (including insurance premiums); payment of retirement benefits; or payment of state or local tax assessed on employee compensation; and sole proprietor income or independent contractor compensation not in excess of $100,000 (prorated for the Covered Period).
- Excludes: compensation of an individual person in excess of $100,000 (prorated for the period); federal employment taxes imposed or withheld taxes; compensation to an employee whose principal residence is outside of the U.S.; qualified sick leave for which a credit is allowed under Section 7001 of the Act; and qualified family leave wages for which a credit is allowed under Section 7001 of the Act.
Another key feature of the “Paycheck Protection” Program is the forgiveness of a Covered Loan if the borrower meets certain criteria.[xi] For income tax purposes, the loan forgiveness amount is excluded from taxable income.[xii] Generally, indebtedness is forgiven for a Covered Loan in an amount equal to the following costs incurred during the Covered Period:[xiii]
- Payroll costs (excluding compensation above $100,000 annually as prorated for the Covered Period);
- Payment of interest on mortgages (not principal) incurred before February 15, 2020;
- Payment on rent obligated by a leasing agreement in force prior to February 15, 2020; and
- Any utility payment for which the utility service began before February 15, 2020.
To encourage employers to retain employees at existing salaries, however, the forgiveness amount is subject to reduction.[xiv] The Act provides for a reduction of the borrower’s loan forgiveness as follows:
- The amount attributable to any reduction will be equal to any workforce reduction in the average number of full-time equivalent employees per month employed by the eligible recipient during, at the recipient’s election, either the period between February 15 and June 30, 2019 (if the business was operational during this time) or, if not, the period between January 1 and February 29, 2020; and
- The total amount attributable to salary or wage reductions of employees in excess of 25 percent of the employees’ total salary or wages during the most recent full quarter each such employee was employed before the eight-week period following the origination date of the loan. The calculation only applies to employees who did not receive wages or salary at an annualized rate of pay of more than $100,000.
To motivate employers to rehire employees and undo salary reductions, reductions in workforce, salaries and wages that occur from February 15, 2020 to April 26, 2020 will be disregarded for purposes of reducing the forgiveness amount so long as the reductions are eliminated by June 30, 2020.[xv]
Borrowers must apply for forgiveness with the lender servicing the loan.[xvi] Required documentation under the Act includes evidence verifying the number of full-time equivalent employees on payroll and pay rates for the relevant periods.[xvii] The lender must issue a decision within 60 days of receipt of the application for loan forgiveness.[xviii]
SBA Economic Injury Disaster Loans
In addition to expanding the SBA’s general loan program, the CARES Act expands the SBA’s Economic Injury Disaster Loan Program (EIDL or Program).[xix] Generally speaking, the EIDL provides financial assistance to small businesses or private, non-profit organizations that suffer substantial economic injury as a result of a declared disaster. The changes to the Program include:
- EIDLs are now also available to Tribal businesses, cooperatives, and ESOPs with fewer than 500 employees. They are also available to all non-profit organizations, including 501(c)(6)s, and to individuals operating as sole proprietors or independent contractors.
- No personal guarantee requirement on all loans up to $200,000.
- EIDLs can be approved by the SBA based solely on an applicant’s credit score.
- Waives requirement that an applicant be unable to find credit elsewhere.
- Borrowers can receive a $10,000 emergency grant cash advance within three days of the SBA’s receipt of the application, which can be forgiven if spent on paid leave, maintaining payroll, increased costs due to supply chain disruption, mortgage or lease payments or repaying obligations that cannot be met due to revenue losses.
Bankruptcy Protections for Small Business
The CARES Act makes some important changes to various provisions of the United States Bankruptcy Code by increasing access to Bankruptcy relief for small businesses.[xx] For instance, the debt limit eligibility threshold is increased for small business reorganization from $2,725,625 to $7,500,000; thereby, enabling more businesses to elect the “small business case process” in Chapter 11 bankruptcy.[xxi] The Act also clarifies that payments made in connection with the COVID-19 emergency excluded from definitions of current monthly income and disposable income.[xxii] The bankruptcy relief is only effective for one year after the enactment of the CARES Act.
For more information regarding options for your business during this unprecedented time, please contact Hector Ruiz at [email protected] or (973) 757-1019, Christopher Hemrick at [email protected] or (973) 757-1033, or Sydney Darling at [email protected] or (973) 757-1034.
- [i]Coronavirus Aid, Relief, and Economic Security Act, H.R. 748, 116th Cong. (2020).
- [ii]Interview of Treasury Secretary Steven Mnuchin, March 30, 2020, Fox News Network.
- [iv]Press Release, With $349 Billion in Emergency Small Business Capital Cleared, SBA and Treasury Begin Unprecedented Public-Private Mobilization Effort to Distribute Funds (March 31, 2020).
- [vi]H.R. 748, § 1102.
- [vii]H.R. 748, § 1102(a)(2).
- [xi]H.R. 748, § 1106.
- [xii]H.R. 748, § 1106(i).
- [xiii]H.R. 748, § 1106(b).
- [xiv]H.R. 748, § 1106(d).
- [xvi]H.R. 748, § 1106(e).
- [xviii]H.R. 748, § 1106(g).
- [xix]H.R. 748, § 1110.
- [xx]H.R. 748, § 1113.
- [xxi]H.R. 748, § 1113(a).
- [xxii]H.R. 748, § 1113(b).
Walsh Pizzi O’Reilly Falanga LLP has prepared the content of this alert for general informational purposes. The content should not be considered advice, recommendations, or an offer to perform services. You should not act upon any information provided in this alert without seeking professional legal counsel from an attorney licensed to practice law in your jurisdiction. No representations are being made as to the completeness or accuracy of the information contained herein.