COVID-19: Assistance to Small Businesses and Workers Under the CARES Act
The Coronavirus Aid, Relief and Economic Security (CARES) Act, enacted on Friday, March 27, 2020, creates a half-dozen new programs to help distressed businesses and workers deal with COVID-19 and related shutdowns. These programs include forgivable loans, tax credits, and expanded unemployment insurance. While we are still waiting for regulations, we have provided general information about this complex Act below.
Paycheck Protection Program
The Paycheck Protection Program (“PPP”) amends the Small Business Act (“SBA”) and creates a new forgivable loan option designed to help small employers pay their expenses and maintain their workforce during the COVID-19 crisis. For an employer to be eligible for a PPP loan, the employer must have less than 500 employees or meet the SBA size standard for its specific industry. These rules differ for some types of employers. For example, a hospitality or food services employer can qualify for a loan if it employs fewer than 500 workers per physical location. Self-employed individuals and “gig economy” individuals are also eligible, as are certain nonprofits, including 501(c)(3) organizations and 501(c)(19) veteran organizations, and tribal business concerns with under 500 employees.
The amount of the loan for an eligible employer is 2.5 times the employer’s average monthly “payroll costs,” plus the amount owed on any existing coronavirus-related Economic Injury Disaster Loan (EIDL) held by the employer, up to a maximum of $10 million. While the CARES Act states that average monthly payroll is based on “payroll costs incurred during the 1-year period before the date on which the loan is made,” the sample loan application form posted on the SBA’s website indicates that it is based on average monthly payroll for 2019. Hopefully, the regulations will clarify this discrepancy. Either way, there is an exception for seasonal employers, which can elect a different time frame to measure their average monthly payroll costs.
Under PPP, “payroll costs” include the sum of payments for: salary, wage, commission, or similar compensation; cash tips; vacation, parental, family, medical, or sick leave; allowance for dismissal or separation; group health care benefits, including insurance premiums; retirement benefits; and State or local tax assessed on the compensation of employees.
“Payroll costs” do not include: compensation of an individual employee in excess of an annual salary of $100,000; Social Security and Medicare taxes, federal income tax required to be deducted; compensation of an employee whose principal place of residence is outside of the United States; or payments of other coronavirus-related benefits, including sick leave or family leave wages for which a tax credit is allowed under the Families First Coronavirus Response Act (FFCRA).
Loan Application And Issuance
The SBA will make the loans available through existing lenders. Instead of determining repayment ability, the CARES Act requires lenders to: determine if the employer was operational on February 15, 2020; determine if the employer had employees for whom it paid salaries and payroll taxes, or a paid independent contractor; and certify that: (1) the employer needs a loan to support its operations; (2) the employer will use the loan to retain its workers, maintain payroll, or pay other qualifying expenses; (3) the employer does not have another application for the same purpose pending; and (4) the employer has not already received a loan covering the same period.
On March 31, 2020, an update to the SBA’s website stated that lenders may begin processing loan applications as soon as April 3, 2020. In the meantime, prospective borrowers can begin preparing their applications by completing the sample application posted on the SBA’s website, at https://www.sba.gov/document/sba-form–paycheck-protection-program-ppp-sample-application-form, and by collecting the information described in the instructions. The PPP program will be available through June 30, 2020.
Use of Loan Funds
The loans can be used for payroll costs (as defined above); payments of interest (not principal) on mortgage obligations; rent; utilities; and payments of interest on debt obligations incurred before February 15, 2020. However, the loans may not be used to pay the costs of paid leave that employers are required to provide under the FFCRA.
Borrowers are eligible for loan forgiveness in an amount equal to the amount spent by the borrower during the 8-week period after the origination date of the loan on payroll costs (as defined above); payments of interest (not principal) on mortgage obligations; rent and utilities. The amount of loan forgiveness is reduced if there are reductions in the workforce or payroll during the 8-week period.
The amount of loan forgiveness is reduced if there is a reduction in the number of full-time equivalent employees (“FTEs”) during the eight-week period, relative to one of two alternative periods of time, at the election of the borrower (the two periods are February 15, 2019 through June 30, 2019, and January 1, 2020 through February 29, 2020).
The amount of loan forgiveness is reduced by the amount of any reduction in an employee’s total salary or wages during the eight-week period that exceeds 25% of the employee’s total salary or wages during the most recently completed calendar quarter when the employee was employed, before the eight-week period. For purposes of this provision, only employees who did not receive annualized compensation at any time in 2019 in excess of $100,000 are considered.
Information released by the SBA on March 31, 2020 states it is expected that the PPP regulations (which have not yet been issued) will include a requirement that at least 75% of the forgiven amount must have been used for payroll. Because the amount of forgiveness is based on costs incurred or payments made during the eight-week period following loan origination, the amount of loan forgiveness available to an employer with little or no payroll incurred or paid during those eight weeks could be significantly impacted. We will need to see what the regulations actually say once they are issued. The most recent information indicates that the regulations are expected to be released by the end of this week.
Borrowers will be able to apply for forgiveness beginning eight weeks after the date of loan origination. Under the CARES Act, the employer will be required to submit the following documentation, together with the application for forgiveness:
- Documentation verifying the number of full-time equivalent employees on payroll and pay rates for the eight week period following the effective date of the loan, and for the chosen comparison period, including:
- Payroll tax filings reported to the Internal Revenue Service; and
- State income, payroll, and unemployment insurance filings;
- Documentation verifying payments on covered mortgage obligations, payments on covered lease obligations, and covered utility payments, including cancelled checks, payment receipts, transcripts of accounts, or other documents;
- A certification from the borrower that:
- The documentation presented is true and correct; and
- The amount for which forgiveness is requested was used to retain employees, make interest payments on a covered mortgage obligation, make payments on a covered rent obligation, or make covered utility payments; and
- any other documentation the Administrator determines necessary.
Amounts forgiven are not included in taxable income.
The CARES Act provides that any loan amount not forgiven will be carried forward as an ongoing loan, with a maximum term of 10 years, and a maximum 4% interest rate. However, bankers in touch with SBA regulators have advised that these terms are expected to change; the maximum term will be 2 years, and the maximum interest rate will be 0.5%.
Expanded Unemployment Benefits
The CARES Act provides financial support for states and additional support for individuals through an additional federal unemployment benefit, on the top of weekly state unemployment benefits. Specifically, an individual who qualifies for unemployment benefits is entitled to a weekly payment of $600, in addition to the unemployment benefits to which the individual is otherwise entitled under State law. The CARES Act also expands the eligibility requirements so that persons who are self-employed, are seeking part-time employment, do not have sufficient work history, and many others who otherwise would not qualify for regular unemployment or extended benefits, including “gig” workers, and independent contractors, are eligible for the $600 weekly payment. The $600 weekly payment is a flat amount that will be distributed to all individuals receiving unemployment benefits, including full benefits and, in states that provide them, partial unemployment benefits.
Employee Retention Tax Credit
The CARES Act offers tax credits to employers that have seen their operations shuttered or partially shuttered because of COVID-19. The credits can go as high as 50% of qualified wages paid to an employee between March 13, 2020, and the end of the year. These credits max out at $10,000 per employee and apply only to employment taxes, such as FICA, federal unemployment taxes, and Social Security taxes. The credits cannot be taken with other coronavirus-related benefits, such as credits for paid leave under the FFCRA or Paycheck Protection loans.
To qualify for the credits, the employer must experience (a) a full or partial shutdown because of a government order related to COVID-19, or (b) a decline in revenues of 50% or more from the same period last year. Qualifying employers with 100 employees or fewer can take a credit for all qualifying wages. Larger companies with more than 100 employees can also take a credit, but only for wages paid to employees who are not working because of reasons (a) or (b).
Emergency EIDL Grants
Under the CARES Act, a borrower with an existing Economic Injury Disaster Loan (EIDL) related to the coronavirus crisis can apply for a PPP loan, with an option to refinance the EIDL loan into the PPP loan. Existing EIDL borrowers not related to the coronavirus crisis are also eligible to apply for a PPP loan for payroll assistance.
An applicant for an EIDL loan can request an Emergency Grant of up to $10,000 to maintain payroll, provide paid sick leave, and to service other debt obligations. The advance must be distributed within three days. Applicants will not be required to repay advance payments, even if they are subsequently denied an EIDL loan.
The emergency EIDL grant award of up to $10,000 would be subtracted from the amount forgiven under any PPP loan.
While the CARES Act can be of huge help to a business, it is complex and there are important decisions to be made. If you have questions, please contact an SMT attorney through our website at www.www.smlaw.com or by phone at 707-524-1900.
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Spaulding McCullough & Tansil LLP
Employment Law Group