What Businesses Should Know About Business Loans Available Under the New CARES Act
The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which was enacted on March 27, 2020, provides significant relief to businesses affected by the COVID-19 crisis. The CARES Act creates an important new loan program, provides tax relief to affected businesses, and provides for additional unemployment benefits for individuals who are affected by the pandemic.
New SBA Loan Program
The CARES Act establishes a new business loan program category, called the Paycheck Protection Program (“PPP”), which consists of loans that will be available to businesses that employ up to 500 employees (although there are some exceptions under which some businesses that employ more than 500 employees will be eligible). The PPP loans will be made by private lenders under the auspices of the United States Small Business Administration (“SBA”).
Unlike SBA loans under existing programs, PPP loans may also be made to nonprofit organizations, veterans’ organization and Tribal businesses. In addition, sole proprietors, independent contractors and eligible self-employed individuals may also receive PPP loans.
Loans under the PPP are available to eligible businesses to pay operational costs such as payroll for employees who make less than $100,000 per year, rent, mortgage interest payments, health benefits and utilities. The maximum loan amount is $10 million and the program provides a formula by which the loan amount is tied to payroll costs incurred by the business to determine the size of the loan.
Critically, PPP loans may be forgiven to the extent businesses retain their employees who make less than $100,000 annually. The loan forgiveness amount is equal to the amount spent by the borrower during an eight-week period after the origination date of the loan on payroll costs, interest payment on any mortgage existing prior to February 15, 2020, payment of rent on any lease in force prior to February 15, 2020, and payment on any utility for which service began before February 15, 2020.
Portions of loans not forgiven are payable over a maximum of 10 years at a maximum rate of interest of 4%.
Appendix A to this article provides additional details regarding the PPP loan program.
Changes to Terms and Conditions of SBA’s Economic Injury Disaster Loans and Other SBA Loan Programs
PPP loans are different from the SBA’s Economic Injury Disaster Loans (“EIDLs”), which we discussed in our March 20, 2020 article entitled Small Business Loans Amid the Coronavirus Crisis. The CARES Act makes EIDLs more widely available by waiving several rules that originally governed those loans. For example, the CARES Act waived:
- Rules requiring personal guarantees on advances of $200,000 or less;
- The requirement that the applicant have been in business for one year before the disaster (now, applicants must have been in operation on January 31, 2020);
- The requirement that an applicant be unable to find credit elsewhere; and
- Rules that prohibited lenders from approving applicants based solely on credit scores (thus, a tax return will no longer be required).
The CARES Act also expands the scope of the EIDL program by making these loans available in all states. Before the enactment of the CARES Act, each state’s governor had to make a declaration of emergency that had to be certified by the SBA.
Emergency advances of up to $10,000 are available to small businesses and private nonprofits harmed by COVID-19 within three days after applying for an EIDL. To access the advance, a business or nonprofit must first apply for an EIDL, and then request the advance. The advance does not need to be repaid, and may be used to keep employees on payroll, to pay for sick leave, to meet increased production costs due to supply chain disruptions, or to pay business obligations, including debts, rent and mortgage payments.
Businesses must apply for Economic Injury Disaster Loans directly with the SBA by completing an application on the SBA’s website.
In addition, the CARES Act provides relief to small businesses that had obtained non-disaster SBA loans (e.g., 7(a), 504, and microloans). Under the CARES Act, the SBA will cover all loan payments on these SBA loans, including principal, interest, and fees, for six months. This relief will also be available to new borrowers who take out loans within six months of the enactment of the law.
Payroll Tax Deferment
The CARES Act provides for the potential deferral of payroll tax payments for the remainder of this year. Under the Act, the payment due date of certain payroll taxes and 50% of self-employment taxes for the period between the enactment of the CARES Act and December 31, 2020 are deferred. Half of those taxes will be due on December 31, 2021, and the other half will be due on December 31, 2022.
Payroll taxes that can be deferred include the employer portion of FICA (Social Security) taxes, the employer and employee representative portion of Railroad Retirement taxes (that are attributable to the employer FICA rate), and half of SECA tax liability.
If a business obtains a PPP loan and has any amount of that PPP loan forgiven, then that business will be unable to take advantage of this payroll tax deferral.
Payroll Tax Credit
The CARES Act also provides for a tax credit, which is available to employers, including nonprofits, who carried on a trade or business during 2020, but whose operations have been fully or partially suspended as a result of a government order limiting commerce, travel or group meetings. The credit is also provided to employers who have experienced a greater than 50% reduction in quarterly receipts, measured on a year-over-year basis.
Wages of employees who are furloughed or face reduced hours as a result of their employer’s closure or economic hardship are eligible for the credit. For employers with one hundred or fewer full-time employees, all employee wages are eligible, regardless of whether an employee is furloughed. Employers with greater than 100 employees are eligible to receive the credit if they continue to pay employees that are not providing services.
Eligible employers may receive a refundable tax credit against their share of payroll taxes for applicable employment taxes. For each calendar quarter during the applicable period, the employer can receive a credit in an amount equal to 50% of qualified wages (inclusive of health insurance) up to $10,000 per employee per quarter ending on December 31, 2020. The credit is treated as a refund if it exceeds the employer’s applicable employment taxes for a given quarter.
Employers may be eligible for this tax credit in two circumstances:
- If business operations were partially or fully suspended due to a mandatory government shut-down related to COVID-19; or
- If the business remained open during any quarter in 2020 but gross receipts for that quarter were less than 50% of what they were for the same quarter in 2019. The business will then be entitled to a credit for each quarter, until the business has a quarter where gross receipts exceed 80% of what they were for the same quarter in the previous year.
For purposes of this credit, qualified wages do not include wages paid under the Families First Coronavirus Response Act for sick leave or family medical leave, which are already subject to certain tax credits.
If a business obtains a PPP loan (even one that is not ultimately forgiven), then that business will be unable to take advantage of this payroll tax credit.
Certain CARES Act Provisions Concerning Individuals
The CARES Act contains several provisions that affect individuals. For example, the CARES Act:
- Provides a $1,200 ($2,400 in the case of a joint return) payment to eligible individuals, with an additional $500 tax credit per qualifying child. This payment is subject to a phase-out such that taxpayers with adjusted gross income in excess of $99,000 ($198,000 for married taxpayers filing a joint return) would not receive it.
- Increases the deductibility of certain charitable contributions made in cash during 2020 by taxpayers who itemize deductions, by suspending the 50% of adjusted gross income limitation.
- For distributions to individuals directly affected by coronavirus, waives the 10% withdrawal penalty tax on early distributions from eligible retirement plans (up to $100,000), and permits these distributions to be recontributed to retirement plans over a three-year period.
- Allows certain defined contribution plans and IRAs to suspend required minimum distributions in 2020 with respect to certain eligible participants. This allows participants not to be forced to receive distributions based on current depressed asset valuations.
More Businesses Permitted to File Subchapter V Bankruptcy Cases
As discussed in the article entitled The Small Business Act of 2019 Gives Financially Distressed Small Business a New Lifeline, the Small Business Reorganization Act of 2019 added a new “Subchapter V” to Chapter 11 of the Bankruptcy Code, which contains some new tools to increase a small business debtor’s chances for a successful reorganization. Before the enactment of the CARES Act, only businesses having $2,725,625 or less in non-contingent, liquidated, secured and unsecured debts are entitled to file Subchapter V cases.
Under the CARES Act, that debt threshold has been increased to $7.5 million for one year following the enactment of the Act (although at least 50% of that debt must be business-related). This means that more businesses will be able to take advantage of Subchapter V for one year, if bankruptcy becomes necessary.
Main Street Business Lending Program – Coming Soon
On March 23, 2020, the Federal Reserve stated that it expects to announce soon the establishment of a Main Street Business Lending Program to support lending to eligible small-and-medium sized businesses, complementing efforts by the SBA. At the time of this writing, this program has not yet been established. However, once it is established, it will serve as another potential source of liquidity for businesses.
The Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), includes a loan program to provide qualifying small businesses, including certain private equity portfolio companies and nonprofits, with short-term cash flow during mandated COVID-19-related closures. This loan program is known as the Paycheck Protection Program (the “PPP”). The PPP is based on the architecture of the existing Small Business Administration (the “SBA”) 7(a) loan program and will make forgivable loans of up to $10 million available to qualifying small businesses and nonprofit organizations.
Additional detail will be provided as the SBA drafts implementing regulations, which the Act requires to occur within 30 days of the passage of the CARES Act. In the meantime, please see below for a brief summary of the main provisions of the CARES Act applicable to PPP loans.
Paycheck Protection Program
The SBA will oversee the PPP, under which $350 billion will be made available for loans to small businesses and nonprofit organizations with 500 or fewer employees, with full or partial forgiveness available if the borrower meets certain requirements. PPP loans will be administered by 800 existing SBA and Treasury certified lenders, including banks, credit unions, and other financial institutions.
- Interest rates are capped at 4%
- The SBA will not collect any yearly or guarantee fees and all prepayment penalties are waived
- No personal guarantee will be required, as the SBA will participate 100% in the guarantee of the loan amount through December 31, 2020
- Covered period is February 15, 2020 until June 30, 2020
- No collateral needed
- No fee to the borrower
- Any amount of loan proceeds not forgiven are payable over 10 years starting with the date of the application for loan forgiveness
- Interest payments are completely deferred for one year
The PPP covers a wide list of businesses including for-profit, private nonprofit and public nonprofits in size from single entrepreneurs up to 500 employees.
- For-profit businesses, including self-employed
- Public or private nonprofit organizations
- Greater of:
- 500 employees or fewer including full-time, part-time or other basis
- Employee count does not exceed the standard size of a company in such industry (as provided by the SBA’s existing regulations)
- Businesses engaged in the accommodation and food services industry satisfying the following criteria:
- 500 or fewer employees per location; and
- Assigned an NAICS code beginning with number 72 – Accommodation and Food Services, i.e.,
- Restaurants and other eating facilities
- Drinking places
- Special food services
- Traveler accommodations (hotels, motels, etc.)
- Borrower must make a good faith certification as follows:
- The uncertainty of current economic conditions caused by COVID-19 makes the loan request necessary to support ongoing operations.
- Funds will be used for a permitted purpose only (see below).
- Funds received under the PPP are not used for the same purpose as funds obtained through another SBA program.
There are no fees for applying or receiving a loan under the PPP.
Businesses may use the loans under the PPP for the following expenses:
- Payroll costs, defined as follows:
- Employee salaries, commissions and tips. These amounts may not exceed $100,000 on an annual basis per employee.
- Paid sick leave
- Medical leave
- Family leave
- Continued group health care benefits including premiums
- Retirement payments
- Vacation pay
- Dismissal and separation pay
- Payment of the following, if such expenses were incurred or pursuant to an agreement in force prior to February 15, 2020:
- Interest payment on any mortgage
- Rent on any lease
- Interest on debt obligations
How Much Can You Qualify For?
The CARES Act increases the maximum availability of SBA 7(a) loans, including PPP loans, to $349 billion. The maximum PPP loan available to any business is $10 million or, if less, 2.5 times the average monthly payroll costs of the business over the year prior to the making of the loan (practically, this may become the year prior to the loan application), excluding the prorated portion of any annual compensation above $100,000 for any person.
Note that under the CARES Act, “payroll costs” include vacation, parental, family, medical, and sick leave; allowances for dismissal or separation; payments for group health care benefits, including insurance premiums; and retirement benefits. Calculations vary slightly for seasonal businesses and businesses that were not in operation between February 15 and June 30, 2019.
PPP loans bear interest at a maximum rate of 4% and mature no later than 10 years after determination of the amount to be forgiven (if any). Loan repayments under the PPP and all other SBA 7(a) programs will be deferred for six to 12 months, and the SBA is directed to issue guidance on the terms of this deferral. Unlike other SBA 7(a) loans, PPP loans have no collateral or personal-guarantee requirements. There will be no recourse to owners of borrowers for nonpayment, except to the extent proceeds are used for an unauthorized purpose (see above). For PPP loans, the SBA has waived prepayment penalties and has waived the guaranty fee and annual fee applicable to other SBA 7(a) loans.
How are PPP loans made?
PPP loans will be made by lenders who are currently approved as 7(a) lenders or who are approved by the SBA and the Treasury Department to become PPP lenders. PPP lenders are delegated authority to make and approve PPP loans, with no additional SBA approval required. PPP lenders are only required to consider whether an applicant was in operation on February 15, 2020, and either had employees for whom it paid salaries and payroll taxes or paid independent contractors. Unlike other SBA 7(a) loans, applicants are not required to show that credit is unavailable elsewhere or demonstrate repayment ability. PPP loans are backed by a 100% guaranty from SBA.
Forgiveness of Loans
All borrowers of a loan under the PPP are eligible for forgiveness of such loan in an amount equal to the sum of the following costs incurred and payments made during the eight-week period beginning on the date of the origination of such loan (the “Relevant Period”; note this is forward-looking, not retroactive), subject to the limitations and definitions of such expenses set forth in the CARES Act:
- payroll costs;
- any payment of interest on any covered mortgage obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation);
- any payment on any covered rent obligation; and
- any covered utility payment.
The amounts that can be forgiven are subject to reduction based on the borrower’s reduction in number of employees or reduction in salaries and wages in excess of 25%. However, if not later than June 30, 2020, a borrower re-hires employees that were terminated between February 15, 2020 and April 26, 2020 and reverses reductions in salary and wages made between February 15, 2020 and April 26, 2020, those terminations and reductions will not be factored into determining a reduction in the forgiveness amount.
An eligible borrower must apply for forgiveness at the end of the Relevant Period following the procedures set forth in the CARES Act. Lenders will have 60 days after the date on which a lender receives an application for loan forgiveness to issue a decision on the application. Forgiven amounts otherwise includible in the borrower’s gross income by reason of forgiveness will be excluded from gross income under the CARES Act.
What if I already applied for an Economic Injury Disaster Loan?
To the extent that the disaster loan was used for a purpose other than those permitted for a loan under the PPP. Disaster loans may be refinanced with proceeds of PPP loans, in which case the maximum available PPP loan amount is increased by the amount of disaster loans being refinanced.
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