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Coronavirus, Aid, Relief, and Economic Security (CARES) Act
Coronavirus, Aid, Relief, and Economic Security (CARES) Act
By: Melissa L. Green
This article briefly summarizes three relevant portions of the CARES Act – 1) the Paycheck Protection Program (“PPP”), 2) Emergency Economic Injury Disaster Loans (“EIDL’s”) and Grants, and 3) Tax Benefits.[1] Additional provisions of the CARES Act, not covered in this article, include grant funds for Entrepreneurial Development,[2] increased unemployment benefits, individual subsidies for Americans,[3] Tax Treatment of Coronavirus-Related Distributions,[4] and many others.
Guidelines from the governmental agencies and banks implementing the programs are expected over the next days and weeks to clarify the availability of benefits and application requirements under these programs. As you read through the following and consider your specific circumstances, contact us, your accountant and bank representatives for the most updated information, and do not delay in making your application for benefits.
Qualified individuals and entities may take out loans under the PPP and EIDL programs, as long as the funds are not used for the same purpose (no double dipping). Further, companies may also be eligible for relief under other recent federal legislation (such as the Families First Coronavirus Response Act), but may not receive credit twice for the same expenses under differing programs. Continued guidance is expected regarding a number of issues including the interest rates and personal guarantee requirements following certain applicable covered periods, as discussed further below.
Payroll Protection Program (“PPP”)
The PPP provides deferred 7(a) Small Business Association (“SBA”) loans to cover the costs of payroll and business related expenses. A portion of the loan is forgivable, and the forgiven amount is not counted as income. The legislation is intended to provide a forgivable loan equal to 8 weeks of eligible business costs, including payroll. The program expands the reach of the 7(a) program to include many not previously qualified to access this resource, such as freelancers, the self-employed, and gig economy workers.
Loan Terms
Who qualifies – businesses with fewer than 500 employees;[5] not for profit entities with less than 500 employees; certain veteran’s organizations; individuals – self-employed, sole proprietor, freelance, and gig economy workers.
Maximum amount – the lesser of 2.5 times the average monthly payroll during the one-year proceeding period or $10 million.
Interest – may not exceed 4%.
Term – loans may have up to a 10 year term.
Personal Guarantee/Collateral – the personal guarantee and collateral requirements associated with typical 7(a) loans are waived during the “covered period.”[6]
Payments – a minimum of the first six months and a maximum of the first year of fees, principal, and interest are to be deferred.[7]
How to Apply – applicants may apply through approved third party lenders; the CARES Act also authorizes the SBA to bring on additional lenders, but this will take time.
Forgiveness
Eligible Costs – the following costs, paid during the 8 week period following loan origination, are eligible for forgiveness up to the total principal of the loan: payroll costs; mortgage interest; rent; and utilities. Pay roll costs include – salaries, wages, cash tips, paid leave, severance, group health care, retirement, state and local payroll taxes, and money paid to independent contractors. The following payroll costs are not eligible – employee or owner compensation over $100,000, taxes imposed or withheld under chapters 21, 22, and 24 of the IRS code, compensation of employees whose principal place of residence is outside of the U.S., qualified sick and family leave for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act.
Interest – Any loan amounts not forgiven are carried forward as an ongoing loan with max terms of 10 years, at a maximum interest rate of 4%, because principal and interest are deferred for the first 6 months to one year of the loan term it appears that the amount forgiven will not accrue interest, but additional information should obtained from the lender regarding interest on the forgiven amount.
Employee Retention – the amount of loan forgiveness will be reduced by a proportional amount when the employer terminates employees and/or decreases employee salaries[8].
Emergency EIDL’s and Grants
The purpose of the Emergency EIDL Grant program is to provide qualified businesses and individuals with prompt access to up to $10,000.00 in aid. In practice, Emergency EIDL’s are typically converted to traditional 7(a) loans (the type available under the PPP) through refinance, but qualified entities and individuals may use either or both resources, as long as the funds are not used for the same purpose.
Loan Terms
Who qualifies – businesses, private not for profits and cooperatives with not more than 500 employees; sole proprietorships (with or without employees) and independent contractors; Employee Stock Ownership Plans (“ESOP”); and certain tribal entities.
Maximum amount – $2 million
Interest – 3.75% for small businesses; 2.75% for not for profit entities
Term – loans may have up to a 30 year term.
Personal Guarantee – the personal guarantee requirement is waived for loans under $200,000.00.
Payments – terms established with lender.
How to Apply – EIDL’s are issued through the SBA.
Grant
Emergency Funds – those applying for EIDL’s may request an advance on the loan of up to $10,000.00, to be paid within 3 days of the loan application. The entire amount advanced is considered a grant, and will be forgiven even if the applicant does not qualify for the loan. However, where an applicant transfers into the 7(a) program (i.e., loans made under the PPP) any amount of loan forgiveness under the PPP will be decreased by any EIDL Grant funds.
Tax Benefits
Below is a summary of just some of the tax benefits contained in the CARES Act. Your tax advisor should be consulted for your specific circumstances, and as discussed above, there are numerous other components to the Act, and research should be ongoing in this area to determine how the act may affect you and your business.
Employee Retention Credit – employers may receive a 50% credit on wages incurred from March 13, 2020 through December 31, 2020, up to $10,000.00 per employee, where business operations were fully or partially suspended and gross receipts declined by more than 50% compared to the same quarter in 2019.
Payroll Tax Delay – businesses and self-employed individuals may defer the employer’s share of social security owed for 2020 over a 2 year period with 50% due by the end of 2021 and 50% due by the end of 2022.
Net Operating Losses – net operating losses for the years 2018, 2019, and 2020 may now be carried back 5 years.
Business Interest Expense – business interest expense deduction cap was increased to 50% (from 30%).
Student Loans – employers may pay up to $5,250.00 per year toward an employee’s student loans and it will not count toward the employee’s income.
Resources
Summaries of the Bill
Small Business Owner’s Guide to the CARES Act
https://www.uschamber.com/co/start/strategy/cares-act-small-business-guide
Legislation
CARES Act
Families First Coronavirus Response Act
https://www.congress.gov/bill/116th-congress/house-bill/6201/text
For further information regarding your particular circumstances, or if you need legal assistance, reach out to your normal contact at the firm, or contact Melissa Green ([email protected]).
Footnotes
[1] This information is not to be construed as legal advice or as a legal opinion on which certain actions should or should not be taken. Each situation is different and any specific questions should be referred to legal counsel. Since the onset of COVID-19, legislation and regulations are subject to raid change. This article is intended to be for informational and discussion purposes only.
[2] Provides grant funds to educate small businesses and their employees regarding the availability of Federal resources, hazards of COVID-19 and the best teleworking practices to prevent the spread of COVID-19; funds are provided to agencies to establish grant programs for the funds, and specific grant programs will be announced by relevant agencies at a later date.
[3] One issue highlighted regarding subsidies is the availability of funds for young adults claimed as dependents on their parent’s income tax returns, in these instances it appears young adults may not claim a subsidy on their own behalf; additional guidance is expected on this issue.
[4] Individuals who elect to receive a “coronavirus-related distribution” from qualified employer plans, may not be subject to the traditional 10% tax penalty, subject to amount restrictions. Coronavirus-related distributions made from both eligible employer sponsored retirement plans and individual retirement accounts (“IRAs”) are exempt from the 10% early distribution penalty tax. Distributions are still subject to regular income tax, but it may be spread over three years.
[5] Exceptions are made for certain multisite businesses subject to minimum employee requirements at each site; “businesses” include – corporations, partnerships, limited liability corporations, joint ventures (with no more than 49% participation by a foreign entity), sole proprietorships, associations, trusts, or cooperatives.
[6] The “covered period” is from February 15 through June 30; there is concern that lenders will attempt to impose stricter collateral or personal guarantee requirements after the covered period. Loan terms should be reviewed carefully as further guidance is sought on the issue.
[7] The exact length of time appears to be at the lender’s discretion.
[8] Salary reductions not in excess of 25% of the total salary or wages will not trigger the employee retention provision; this provision also does not apply to a reduction in salaries for those earning over $100,000.00 per year.
