On Friday, the President signed the Coronavirus Aid, Relief and Economic Security Act (“CARES” Act) into law. The CARES Act contains provisions regarding stimulus checks, expanded unemployment insurance benefits, expanded FMLA and EPSL benefits from the FFCRA (see my article from last week), mortgage and student loan relief. For more information on those topics, I recommend starting with the following article: https://www.forbes.com/sites/advisor/2020/03/27/your-guide-to-the-federal-stimulus-package/#16b6c4402711 but do not hesitate to reach out to me with any questions.
My focus is on the employment-related provisions of the Act and the SBA loans in particular. The CARES Act creates a new Paycheck Protection Program, expands the currently existing Economic Injury Disaster Loan program, and creates an Employee Retention Tax Credit.
Paycheck Protection Program (“PPP”)
The PPP is a new program provided by the CARES Act. It provides for loans of up to $10,000,000 to certain small businesses, and the loans can be forgiven without tax consequence. Small businesses (under 500 employees) can qualify for a loan if they have gross annual receipts less than a certain threshold for their industry as determined by existing SBA regulations (for example, $6 million for Dentists and $12 million for Physicians) and satisfy a fairly low standard of creditworthiness (the company was operational on February 15, 2020 and certifies that the loan is necessary due to the uncertainty of economic conditions as a result of COVID-19). Sole proprietorships and self-employed businesses can qualify if they carry on a trade or business and would be entitled to paid leave under the Emergency Paid Sick Leave (“EPSL”) provisions of the Families First Coronavirus Response Act (“FFCRA”) (see my article from last week, but this is almost everyone). These loans are provided by banks, but guaranteed by the SBA. To apply for these loans, contact an SBA lender (about 1,800 banks are qualified as SBA lenders).
The maximum amount of the loan is tied to 2.5 times the average monthly “payroll costs” of the business over the past 12 months, plus the amount of any SBA disaster loans received after January 31, 2020, including any debt incurred as a result of COVID-19 under the EIDL program (see below regarding the EIDL program). The maximum interest rate on the loan is 4% per year and these loans are nonrecourse to the borrower and its owners. Payments are deferred for six to twelve months and then are paid over a term of ten years, to the extent not forgiven.
“Payroll costs” means, for employees, and subject to a $100,000 per employee limit:
- Salaries, wages and commissions;
- Cash tips;
- Payments for vacation, parental, family, medical or sick leave;
- Allowance for dismissal or separation;
- Payments for group healthcare benefits, including insurance premiums;
- Payments of retirement benefits;
- Payments of state or local taxes assessed on the compensation of employees.
Payroll costs exclude income and employment taxes, compensation to employees working outside of the United States, sick leave wages under the EPSL and family leave wages under the expanded FMLA.
The PPP loans will be forgiven in an amount equal to the amount spent by the borrower over an eight week period, beginning on the date of origination of the loan, on the following expenses:
- Payroll costs, but not above $100,000 for any employee;
- Interest payments on any mortgage incurred before February 15, 2020;
- Rent payments on leases in place before February 15, 2020; and
- Utility payments on services in place before February 15, 2020.
Any funds that are not used for the above purposes, or that are used to pay more than $100,000 to any employee, compensate individuals residing outside the United States or to compensate employees for wages already covered under the FFCRA (see my article from last week), would be subject to recourse by the SBA in the event of non-payment of the loan. In addition, the SBA loan agreement will state that the borrower must retain 90% of its employees from March 24, 2020 through September 30, 2020 “to the extent practicable”.
The amounts forgiven will not be taxed as cancellation of indebtedness income. The forgiveness will be reduced proportionately by any reduction in the number of employees retained after the loan compared to the prior year. The reduction in loan forgiveness also applies to reducing any employee's pay by 25% or more compared to the prior year, in that any reduction of employee compensation greater than 25% compared to the most recent full quarter during which the employee was employed before the covered period will operate as a dollar-for-dollar reduction of the loan forgiveness. These reductions will not apply for employees terminated between February 15, 2020 and April 26, 2020, so long as the employee is rehired by June 30, 2020. Borrowers must apply for loan forgiveness and required documentation, presumably after the eight week period after receiving the loan, and they will receive a decision within 60 days. Any amounts not forgiven will be subject to a ten year repayment period.
Here are some key considerations for employers under the PPP:
- As with all legislation, the CARES Act creates more questions than answers. Even after regulations and other official interpretations are released, there will still be significant confusion.
- There is a significant but limited amount of funds available under the PPP. I suspect that there will be a race to access those funds.
- Any amount of a PPP loan that is forgiven amounts to free money. If you can qualify for the loan, then I encourage you to strongly consider going through the loan process.
- Some strategy will be involved in seeking a PPP loan. Do you seek the maximum amount available, the maximum amount that you believe will be 100% forgiven, or some amount in the middle? Any amounts not forgiven have a 10 year repayment period at a maximum 4% interest with little to no recourse to the employer or its owners, which is better than virtually any other loan opportunity available.
- Consider setting up a separate bank account to receive PPP loans and to pay the qualified PPP expenses so that you can more easily track compliance with the requirements of the loan (i.e. proper use of the funds and what amounts qualify for forgiveness).
- Deciding whether to terminate employees before the Families First Coronavirus Response Act comes into effect on April 2, 2020 becomes more complicated because the look-back period for determining forgiveness of PPP loans begins March 24, 2020. If you terminate employees, then you may not be eligible for as much forgiveness of a PPP loan. This will have to be determined on a case-by-case basis.
Economic Injury Disaster Loan (“EIDL”) Program
The EIDL program, governed under Section 7(b) of the Small Business Act, has been expanded by the CARES Act. The EIDL now effectively covers all small businesses in America (since all states have been declared disaster areas) and waives many of the traditional requirements of the EIDL, including no longer having to prove that the borrower cannot obtain credit elsewhere. These loans are typically processed directly by the SBA, with a maximum amount of $2,000,000, an interest rate of 3.75% and a maximum term of 30 years. There is also an SBA Express Bridge Loan for those with a current SBA relationship that can provide quick funding of up to $25,000 with less paperwork, as a term loan or as an advance against an EIDL loan. You can apply for an EIDL loan here: https://www.sba.gov/funding-programs/disaster-assistance and contact your current SBA lender to seek an Express Bridge Loan.
One key with the EIDL and the PPP is that there can be no double dipping, meaning that the loans cannot be obtained or used for the same purpose, but it is still possible to obtain loans under both programs.
Employee Retention Tax Credit (“ERTC”)
This tax credit applies for employers that closed due to COVID-19. To be deemed to have “closed”, the employer had to be open for business in 2020, have the business fully or partially suspended due to orders from a government authority limiting commerce, travel or group meetings due to COVID-19 (i.e., almost everyone), or for employers with less than 100 employees, have a “significant decline” in gross receipts. The “significant decline” requirement is calculated on a quarterly basis and it applies in any quarter in which the employer's gross receipts declined by 50% or more from the same calendar quarter in the prior year, and then eligibility ends in a quarter in which gross receipts exceed 80% of the year-prior calendar quarter gross receipts.
This is a refundable tax credit against employment taxes, with a maximum refund of 50% of “qualified wages” per employee up to a $10,000 limit per employee (so a maximum credit per employee of $5,000). Although this is a refund of employment taxes, the refund is tied to wages paid between March 12, 2020 and December 31, 2020, which makes it confusing. This credit is reduced by credits taken under the FFCRA and in certain other circumstances. The ERTC automatically applies to your business if you are a qualified employer, so you have to opt-out if you do not want it to apply to you.
Note that recipients of a loan under the PPL are ineligible for the ERTC.
Finally, the CARES Act also provides a deferral of the employer portion of Social Security taxes (for employers and self-employed) for the period beginning March 27, 2020 through December 31, 2020, with such taxes being repaid in two equal portions on December 31, 2021 and December 31, 2022.
Please do not hesitate to contact me to discuss your situation in detail and work on a plan to maximize this opportunity for your benefit.