Today, the CARES Act (or the “Act”) was signed into law to address the COVID-19 pandemic. The sweeping 880-page bill amounts to seven landmark pieces of legislation in a single document, which is the third of three key phases of legislation passed in the past three weeks. This Legal Alert is designed to provide an overview of key considerations to assist both businesses and individuals to understand those matters that may be of pressing interest to them. Please note this summary does not constitute legal or tax advice, and additional governmental regulation could significantly alter how these programs are applied. If you would like to better understand how the Act might impact your situation, we would be happy to schedule a call for further discussion.
The public policy intent of the legislation is to inject an estimated $2 trillion into the economy to stabilize, preserve, and incentivize business operations and encourage employers to maintain current payroll levels. Employers and business owners should note that while the Act provides certain direct aid and tax relief for impacted consumers, a key component of the Act is the provision of unprecedented access to credit for the express purpose of incentivizing employers to retain current employees at their recent rates of compensation.
In certain circumstances, the Act provides loan forgiveness where a subject loan was used for payroll costs, mortgage interest payments, rent, and utility payments, subject to a forgiveness reduction if the current number of employees are reduced, or employees’ wages are reduced. As such, the Act attempts to use qualifying employers as a conduit through which to provide wages to employees while enabling employers to maintain their workforce in anticipation of an economic rebound. In addition, the Act includes an expansion of unemployment benefits.
Expansion of SBA Loans
The Act builds upon the Small Business Act to expand existing loan programs and provide new loans under the “Paycheck Protection Program.” Specifically, the Act provides for nearly $360 billion for existing Economic Injury Disaster Loans and loans extended under the Paycheck Protection Program. While Paycheck Protection Loans are nominally administered as an expansion of the Small Business Act’s § 7(a) loans, the scope of loans provided under this section has been dramatically expanded.
Between February 15 and June 30, 2020 (the “Covered Period”), the Act permits the Small Business Administration to provide full federal backing for loans up to a maximum threshold to qualified businesses for costs including payroll costs (including salary, commission, or other compensation up to an annual rate of pay of $100,000 per employee), health benefits, insurance premiums, rent, and utilities, and certain debt obligations incurred prior to February 15, 2020. As well, existing loans made on or after January 31, 2020, under the Disaster Loan Program may be refinanced.
Paycheck Protection Loan Eligibility
Qualified businesses must have been operational as of the beginning of the Covered Period, by having paid salaries and payroll taxes. While all businesses previously considered “small business concerns” under the Small Business Act qualify, any business concern, non-profit, veterans organization, or Tribal business concern is eligible for a Paycheck Protection Loan if such entity has no greater than 500 employees, as defined under the Small Business Act, which threshold is higher in certain industries. Sole proprietors, independent contractors, and self-employed individuals are deemed eligible based on certain additional requirements.
While SBA loans have considered companies’ affiliation in circumstances to evaluate revenue or employee thresholds, the Act waives such affiliation rules in various circumstances. This marks a significant expansion designed to include businesses that have been previously excluded from SBA loans and which have been immediately harmed by the economic downturn.
Borrowers must certify that the loan is needed to continue operations during the COVID-19 pandemic, that funds will be used to retain workers and maintain payroll or other payments including mortgages, leases, and utilities, and that the loan would not be duplicative of other loans under the program.
As the loans are 100% federally backed, the need for extensive credit analysis should not occur. As well, the previous requirement that a small business concern is unable to obtain credit elsewhere is waived.
Paycheck Protection Loan Terms
The maximum principal of a loan is based on a formula of 2.5 times the average total monthly payroll costs incurred during certain ranges within the previous year plus the amount outstanding on an existing Disaster Loan, with a maximum loan amount of $10,000,000. Interest rates are not to exceed 4%, with the first six month’s payments of principal and interest automatically deferred. Lenders cannot require application fees or closing costs. These loans require no collateral nor personal guarantee, and lenders will have no recourse against an entity’s principals in the event of non-payment except for unauthorized use of funds.
Paycheck Protection Loan Forgiveness
Borrowers are presumed to be eligible for forgiveness of Paycheck Protection Loans in an amount equal to payroll costs, regular payments on secured debts, rent, and utility payments coming due, incurred, and made during the Covered Period, not to exceed the principal amount. Critically, however, this repayment amount is reduced, pursuant to a fixed formula, based on certain reductions in full-time equivalent employees and certain wage reductions. Additional provisions allow for waiver of the reduction if borrowers in certain circumstances rehire employees and make up applicable wage reductions.
Documentation to show such costs will be required before forgiveness is processed.
Disaster Loan Expansion
The Act also expands the Disaster Loan Program for businesses with up to 500 employees and sole proprietorships similar to the Paycheck Protection Program. Businesses must only have been operating as of January 31, 2020. Extended working capital loans of up to $2 million for economic injury are to be repaid at a maximum 30-year term with interest rates of 3.75% for small businesses and 2.75% for non-profit organizations. Loans will be extended based on credit scores. Personal guarantees are not required for loans up to $200,000. Funds may be used to provide sick leave to employees, maintaining payroll to retain employees, covering increased costs resulting from interrupted supply chains, making rent or mortgage payments and other obligations that cannot be satisfied as a result of revenue losses.
Of particular note, Disaster Loan applicants may request an emergency advance of $10,000, which does not have to be repaid even if the application is denied, with advances extended within three days of an application, and which may be used for authorized purposes as described above.
Unemployment Insurance Expansion
Where employers are not able to retain employees—or where freelance workers have lost their source of income—the Act expands unemployment benefits.
Where gig-economy workers are harmed by the COVID-19 crisis and not otherwise covered by state unemployment benefits or such benefits have been exhausted, the federal government will provide qualifying gig-economy workers unemployment benefits in line with other wage earners.
The Act provides for agreements between state and federal governments to expand unemployment benefits, including to eliminate waiting periods, increase benefits by $600 per week for up to four months even where previous compensation was below this amount, and an additional 13-weeks of benefits.
Selected Additional Provisions
The Act has numerous other provisions, including certain payroll tax credits, delay of payroll tax deposits, and other potential beneficial tax modifications that businesses should discuss with their legal and tax professionals. Specifically, employers will be eligible for a refundable payroll tax credit on wages paid (up to $10,000 per employee, less credits already received under the Families First Coronavirus Response Act) during the COVID-19 crisis where the business was disrupted due to shutdowns or where gross receipts declined by 50% or more when compared to the same quarter of the prior year. With more than 100 employees, the credit can be claimed where an employee was retained but not working. With 100 or fewer employees, the credit can be claimed for all qualifying employee wages.
As well, the Act provides a tax rebate of $1,200 for individual and $2,400 for joint filers, increased by $500 per child, phased down at $75,000 and $150,000 respectively, calculated based on 2019 tax returns, if filed, or 2018 tax returns, if not filed.
The Act further makes a variety of favorable allowances for withdrawals and loans from qualified retirement accounts, delays in required minimum distributions from qualified retirement accounts, all of which should be discussed with the appropriate financial or legal advisor for individuals who are in or nearing retirement, or who may require access to funds saved for retirement.
Additionally, to support charitable organizations, the Act adds a $300 deduction for cash contributions even where a taxpayer does not itemize deductions.
If you wish to discuss the impact of the Act on your business or your individual financial well-being, please contact a Mallor Grodner attorney.