SGRW Coronavirus Aid Article
Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and Other Recent Developments
On March 27, 2020, the President signed the bipartisan Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) into law. The CARES Act is intended to provide immediate, meaningful financial relief for American businesses and non-profits who are facing unprecedented difficulties during the closures and slow-downs resulting from the public health response to slow the spread of the coronavirus (Covid-19). The CARES Act is 880 pages and sets out the terms of a massive $2.2 Trillion financial relief package for individuals, small businesses (less than 500 employees) and large companies and institutions. The following is a summary of the relief available for small businesses. We will separately provide a summary of the relief for individuals.
PART ONE – What Relief Is Available For My Business?
Under the CARES Act, relief for small businesses includes:
- Forgivable Small Business Loans
- FICA Tax Credits For Employee Retention
- Deferred Employer-side FICA Taxes
- Income Tax Relief
The Act is very technical and while a lot of the guidance regarding implementation has yet to be published, planning for your business needs over the coming weeks and months requires starting now to understand what assistance may be available. Please note that the application process is not anticipated to become available until April 15, 2020. We will provide additional information as it becomes available.
FORGIVABLE SMALL BUSINESS LOANS
The “Paycheck Protection Program” provides up to $349 Billion to the Small Business Administration to make guaranteed and forgivable loans to small businesses (§§1102 and 1106). These loans are available until June 30, 2020.
(A) The Loan Program (§1102)
(a) Small businesses with not more than 500 employees. The definition of small business has been expanded to include sole proprietors, independent contractors and other self-employed individuals, as well as corporations,
limited liability companies and partnerships.
(b) Businesses with more than one physical location that employ no more than 500 employees per physical location and that are below a gross annual receipts
(i) Certain salary, wages, commissions or similar compensation;
(ii) Payment of vacation, parental, medical, family or sick leave;
(iii) Allowance for dismissal or separation pay;
(iv) Payment required for the provision of group health care benefits, including insurance premiums;
(v) Payment of retirement benefits;
(vi) Payment of state or local tax assessed on compensation of employees.
(vii) For sole proprietors or independent contractors, the term “payroll costs”
means the sum of payments of any compensation to or income of a sole
proprietor or independent contractor not in excess of $100,000.
(c) The amount of the loan is based on a calculation which, in general, multiplies (i) the average total monthly payments by the borrower for payroll costs incurred during the 1-year period before the date on which the loan is
made by (ii) 2.5.
(d) The allowable uses of the loan proceeds include: payroll costs, such as employee salaries, paid sick leave or medical leave, health insurance premiums, and mortgage, rent, utility payments and interest on any other debt obligations that were incurred before February 15, 2020.
(e) Lenders are directed to make their determinations on borrower eligibility based upon whether a business was operational on February 15, 2020 and had employees for whom it paid salaries and payroll taxes or paid independent contractors – not based on the borrower’s repayment ability.
(f) Borrowers are required to make a Good Faith Certification that (i) the loan is necessary due to uncertainty of current economic conditions caused by COVID-19, (ii) it will use the funds to retain workers and maintain payroll,
lease and utility payments and (iii) it is not receiving duplicative funds for the same use from another SBA program.
(g) Borrower and lender fees are both waived.
(h) No collateral or personal guarantees are required.
(i) Loans are non-recourse as to shareholders, members or partners of the borrower except to the extent the loan proceeds are used for unauthorized purposes.
(j) Maximum interest rate of 4%.
(k) No prepayment fees.
(l) 100% of the loans are guaranteed by the U.S. Government through December 31,2020, at which point guarantee percentages will reduce to 75% for loans exceeding $150,000 and 85% for loans equal to or less than
(m) Allows for complete deferment of loan payments (interest and principal) for at least six (6) months and not more than a year. All borrowers are presumed to have been adversely impacted by Covid-19.
(n) Requires the U.S. Government to provide a lender with a process fee for servicing the loan: 5% for loans not more than $350,000, 3% for loans more than $350,000 and less than $2 Million and 1% for loans more than $2
(B) Loan Forgiveness (§1106)
(1) Borrowers under the program are eligible for loan forgiveness equal to the amount spent by the borrower during the 8-week period following the origination date of the loan on payroll costs, interest payment on any mortgage
incurred prior to February 15, 2020, payment of rent on any lease in force prior to February 15, 2020 and payment of any utility for which service began before February 15, 2020.
(2) Forgiveness of eligible payroll costs:
(a) Eligible payroll costs do not include compensation to any employee who
received wages or salary more than $100,000 in 2019.
(b) Forgiveness on a covered loan is equal to the sum of the following costs
incurred and payments made during the covered period:
(i) Payroll costs plus any payment of interest on any covered mortgage
obligation plus any payment on any covered rent obligation plus any covered
utility payment (the term “covered utility payment” means payment for a
service for the distribution of electricity, gas, water, transportation, telephone,
or internet access for which services began before February 15, 2020).
(ii) Forgiveness will be reduced, but not increased, by multiplying the amount described above by the quotient obtained by:
(a) the average number of full-time equivalent employees per month employed by the borrower during the period January 1, 2020 and ending on February 29,2020.
(b) the average number of full-time equivalent employees per month employed by the borrower during the period beginning on February 15, 2019 and ending on June 30, 2019; or
(c) the average number of full-time equivalent employees per month employed by the borrower during the period January 1, 202 and ending on February 29, 2020.
(iii) Forgiveness will also be reduced by the amount of any reduction in total salary or wages of any employee who did not receive wages or salary of more than $100,000 in 2019 during the covered period that is in excess of 25% of the total salary or wages of the employee during the most recent full quarter during which the employee was employed before the covered period.
(c) Canceled indebtedness resulting from §1106 will not be included in the borrower’s taxable income.
(d) Any loan amount not forgiven at the end of 1 year is carried forward as an ongoing loan with terms of a max 10 years, at maximum interest rate of 4%. The loan guarantee remains in effect.
(3) To obtain forgiveness, a borrower must submit an application for forgiveness to the lender along with documentation verifying among other things:
(a) The number of full-time employees and pay rates for the applicable periods:
(b) Payments on covered mortgage obligation, payments on covered rent obligations and payments on covered utility obligations.
(c) Acceptable documentation includes payroll tax filings with the IRS, state income, payroll and unemployment insurance filings, cancelled checks, payment receipts, transcripts of accounts, etc.
(d) The application must include a certification by an authorized representative that; (i) the documents presented are true and correct, (ii) the requested amount of forgiveness was used to retain employees, make interest payments on covered mortgages, payments on covered rents and utilities, etc. No eligible recipient will receive forgiveness without submitting the application and the required documentation. A lender is required to issue a decision within sixty (60) days after receipt of the application and documentation.
II. FICA TAX CREDITS FOR EMPLOYEE RETENTION
A refundable employment tax credit against employment taxes is available for each quarter in an amount equal to 50% of qualified wages paid by employers to employees in each calendar quarter during the COVID-19 crisis, not to
exceed $10,000 per employee per quarter (§ 2301). The credit is available to employers whose (1) operations were fully or partially suspended due to a COVID-19 related shut-down order or (2) gross receipts declined by more than
50% when compared to the same quarter last year. This credit is based on qualified wages paid to employees for the first $10,000 of compensation, including health benefits, for wages paid or incurred from March 13, 2020 through December 31, 2020. The amount of the credit cannot exceed the wages paid to the employment of all employees during the applicable quarter. Any excess credit amount shall be treated as an overpayment and shall be refunded to the taxpayer.
III. DEFERRED EMPLOYER-SIDE FICA TAXES
A deferral of payment of employment taxes for employers and self-employed individuals is allowed (§2302). This provision allows employers to defer payment of the 6.2% Social Security tax on employee wages over 2 years, with ½ of the amount required to be paid by December 31, 2021 and the other ½ by December 31, 2022. Section 2302 relief cannot be used together with Section 2301 relief – the employer will have to choose between §2301 and §2302 relief. There is also an exception under §2302 for businesses who had indebtedness forgiven under §1106, so each business must carefully consider which program (or programs) work best for them.
IV. INCOME TAX RELIEF FOR BUSINESSES
(A) Modification to NOL Under §172(a)
(1) The limitations on a business’ use of losses has been modified by providing that a net operating loss (“NOL:) arising in a tax year 2018, 2019 or 2020 can be carried back 5 years. Prior law only allowed such an NOL to be carried back 3 years (§2303).
(2) A 20-year carry-forward of NOLS incurred before January 1, 2018 plus the lesser of (i) all NOLS after December 31, 2017 or (ii) 80% of taxable income is also allowed (§2303). The CARES Act temporarily removes the taxable income limitation to allow an NOL to fully offset income and also allows current year NOLS to be carried forward indefinitely.
(3) These changes could allow a business to utilize losses and amend previously filed returns, which may provide cash flow and liquidity in the form of refunds for prior years.
(B) Changes to Limitation on Losses for Businesses Other Than Corporations – Pass-through businesses and sole proprietors are allowed to utilize excess business losses and access cash flow and maintain payroll (§2304).
(C) Changes to corporate alternative minimum tax (“AMT”) – Corporations can recover AMT credits on an accelerated basis and claim a refund currently instead of over several years as provided in the Tax Cuts and Jobs Act of 2017 (§2305).
(D) Changes to limitations on business interest expenses – The amount of interest expense businesses are allowed to deduct on their tax returns has been temporarily increased, by raising the 30% limitation to 50% of taxable income
(with adjustments) for 2019 and 2020 (§2306).
(E) Changes regarding qualified improvement property (generally defined as any improvement made to the interior portion of a nonresidential building any time after the building was placed in service) – Businesses – especially in the hospitality industry – are immediately allowed write off costs associated with improving facilities instead of having to depreciate those improvements over the 39-year life of the building (§2307). This provision also allows businesses to amend a prior year return and is intended to incentivize businesses to continue investing in improvements during the COVID-19 economic recovery period.
(F) Temporary exception from excise tax for alcohol used to produce hand sanitizer – The federal excise tax on any distilled spirits used for or contained in hand sanitizer that is produced and distributed in accordance with FDA
guidelines in 2020 is waived (§2308).
(G) Charitable Contributions in year 2020 – The limitation on deductions for charitable contributions (including food inventory) by corporations is increased to 25% of taxable income (§2205).
V. ECONOMIC INJURY DISASTER LOANS
The CARES Act also appropriates $10 Billion to the existing Economic Injury Disaster Loan Program for companies impacted by COVID-19 (§1110). The Disaster Loan program allows businesses and nonprofits that are located
within the geographic disaster zones identified on the SBA website to apply for loans of up to $2 Million to help overcome a temporary loss of revenue. Significantly, the CARES Act allows a company that already has a Disaster loan to apply for a Paycheck Protection loan if it will not duplicate the applicant’s use of the loan proceeds. There are several differences between the Paycheck Protection loans and the Disaster loan program:
(A) Disaster loans will be available until December 31, 2020 (note, the Payroll Protection loans are available until June 30, 2020).0).
(B) The CARES Act waives the SBA personal guarantee requirement for loans up to $200,000, but still requires that the borrower have an acceptable credit history, have the ability to repay the loan, be physically located in a declared disaster area, and have suffered working capital losses due to the declared disaster (COVID-19), not due to a downturn in the economy or other reasons.
(C) Borrowers apply online for Disaster loans on the SBA website (borrowers apply directly to banks and credit unions for Payroll Protection loans)
(D) Disaster loans are not forgivable, but offer long-term repayments, up to a maximum of 30 years.
(E) Interest rates for Disaster loans are 3.75% for small business or 2.75% for non-profits.
(F) Disaster loans will be disbursed differently than Paycheck Protection loans: a $10,000 emergency advance within 3 days of submitting the application while the application is pending (which the SBA will not require to be repaid), and then on a schedule set by an SBA loan officer who must ensure that the borrower meets all of the loan conditions.
(G) Disaster loans are intended to provide relief for “economic injury,” which means that the borrower cannot pay its “ordinary and necessary operating expenses because of the coronavirus pandemic.” Loans may be used to pay
fixed debts, payroll, accounts payable and other costs, but are not intended to replace lost sales or profits and cannot be used to refinance debt, make payments on loans owed to another federal agency, to pay tax penalties, repair physical damages or to pay dividends to stockholder.
(H) To apply online for a Disaster loan, businesses will need to provide (at a minimum):
(1) A Completed loan application (SBA Form 5);
(2) Tax Information Authorization (IRS Form 4506T) for the business, it’s principals and affiliates;;
(3) Complete copies of its most recent federal income tax return;
(4) Schedule of the business’ liabilities (SBA Form 2202); and
(5) Personal financial statement (SBA Form 413) for each (a) proprietor, (b) general partner, (c) managing member of a limited liability company, (d) owner of 20% or more of the equity of the applicant (including the assets of the owner’s spouse and any minor children), and (e) any person providing a guaranty on the loan.
If you have any questions regarding this Alert, contact the authors, Christine Sorge, Esq. at (301) 634-3129 or firstname.lastname@example.org, Brad Dashoff, Esq. at (301) 634-3112 or email@example.com or Ari Ghosal, Esq. at (301) 634-3111 or firstname.lastname@example.org. Of course, you may also contact the Selzer Gurvitch attorney for whom you usually work.
Disclaimer: The information in this material is not intended to be considered legal advice and should not be acted upon as such. Because of the generality of this material, the information provided may not be applicable in all situations
and should not be acted upon without legal advice based on the specific factual circumstances.