Businesses feeling the substantial financial strain imposed by COVID-19 and the associated closure obligations are now receiving a lifeline from the Federal Government through its most recent stimulus bill: The CARES Act. This Two Trillion Dollar bill has been passed by the Senate as of March 25, 2020 and passed by the House on March 27, 2020, it now goes to the President for signature.

The CARES Act provides three different programs that are especially beneficial to businesses:

I. Paycheck Protection Program Loans: Read about the new regulations: here

UPDATE APRIL 3: the SBA has now said the loans can be processed beginning April 3rd, find a sample application here.  Additional guidance has been updated to answer more questions here.

Our preliminary analysis indicates that the Paycheck Protection Program loan option is most likely the most advantageous recovery tool for businesses with under 500 employees.

These are Federally guaranteed loans of up to 10 million dollars for small businesses from traditional lending institutions. Additional Lenders such as community banks will be authorized to offer these loans. There is a formula that ties the loan amount to payroll costs of the business to determine the size of the loan.

The loan amount granted will be the lesser of 10 million dollars or a business’s average monthly total payroll costs for the previous year multiplied by 2.5. Please note that there is a slightly different formula applied to seasonal employers (contact us if you have any questions regarding seasonal employees).

“Payroll costs” have been defined to include salaries, wages, tips, paid sick leave, health insurance premiums, retirement benefits, state and local taxes assessed on compensation of employees, but it does not include compensation to any individual employee or independent contractor in excess of $100,000.00

Eligible businesses include:

• Businesses with not more than 500 employees (unless a greater threshold is defined by the SBA size standards);
• Certain accommodation and food sector businesses that employ not more than 500 employees at a physical location;
• Sole proprietors;
• Independent contractors; and
• Other self-employed individuals.

The loan can be used for:

• Payroll costs including retirement benefits;
• Costs related to the continuation of group healthcare benefits;
• Paid sick leave;
• Employee salaries and commissions;
• Payments of interest on a mortgage obligation;
• Rent;
• Utilities; and
• Interest on any other debt obligations that began before February 15, 2020.

Businesses borrowing must make a good faith certification that the loan is necessary due to the uncertainty of current economic conditions caused by COVID-19; they will use the funds to retain workers and maintain payroll, lease, and utility payments; and are not receiving duplicative funds for the same uses from another SBA program.

The loans may be forgiven as described below, however, the amount forgiven will be reduced proportionally by any reduction in employees retained through the covered period compared to the prior year and also reduced by the reduction in pay of any employee beyond 25 percent of their prior year compensation.

The “covered period” for the purpose of employee retention or salary reduction is the period from February 15, 2020 and ending June 30, 2020.

To encourage employers to rehire any employees who have already been laid off due to the COVID-19 crisis, borrowers that re-hire workers previously laid off will not be penalized for having a reduced payroll at the beginning of the period.

Loan forgiveness will be equal to the amount spent by the borrower during an 8-week period after the origination date of the loan on payroll costs, interest payment on any mortgage in place 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 prior to February 15, 2020.

The forgiveness amount may not exceed the principal loan amount and eligible payroll costs do not include employee compensation above $100k in wages.

(UPDATES: APRIL 2, 2020) Please note that as of now, 75% of the loan proceeds to be forgiven must have been used for Payroll costs. Any loan amount not forgiven at the end of one year will be carried forward for a term of two years, and at 1% interest, the 100% loan guarantee will remain intact.

Please Note that there is a limitation on a borrower from receiving this assistance and an economic injury disaster loan (EIDL) through SBA for the same purpose. A previously acquired EIDL grant award of up to $10,000 would also be subtracted from the amount forgiven under the Paycheck Protection Program.

II. Tax Credits:

Eligible employers are allowed, as a credit against their employment taxes for each calendar quarter, an amount equal to 50% of the qualified wages with respect to each employee of such employer for such calendar quarter. The amount of qualified wages with respect to an employee that may be taken into account for all calendar quarters cannot exceed $10,000 including health benefits paid or incurred to provide and maintain a group health plan that are excluded from the gross income of employees.

The credit is based on qualified wages paid to the employee.

• For employers with greater than 100 full time employees, qualified wages are paid to employees when they are not working due to COVID-19 related shut-down.
• For employers with 100 or fewer employees, all employee wages qualify for the credit, whether the employer is open for business or subject to shut-down.

Eligible Employers

Eligible employers means any employer that was carrying on a trade or business during each calendar year 2020, and:

1. With respect to any calendar quarter the operation of the trade or business is fully or partially suspended during the calendar quarter due to orders from a governmental authority limiting commerce or travel; or
   
2. An employer whose gross receipts declined 50% when compared to the same first calendar quarter during the prior year in 2019 and after ending the first calendar quarter of 2020 whose gross receipts are greater than 80% of for the same calendar quarter in the year prior.

Exclusions

1. If an eligible employer received a covered loan from the Small Business Act of Section 1102, the employer will not be eligible for the credits. (No double dipping);
2. Only applies for wages paid after March 12, 2020 and before January 1, 2021;
3. Governmental employers including agencies do not qualify for the credit.

III. Small Business Administration (“SBA”), Economic Injury Disaster Loan.

The SBA is providing loans up to Two Million Dollars based upon the type and size of your business as well as the business’s current financial status. The loan terms are up to 30 years and have an interest rate of 3.75%. You can use the funds to cover fixed debts, payroll and accounts payable.

After you apply, you can apply for an emergency grant up to $10,000 which the SBA must distribute within 3 days after determining that you are eligible for the Economic Injury Disaster Loan(“EIDL”). Whether or not you are later denied an EIDL loan you will not be required to repay advance payments.  The advance can be used for: providing paid sick leave to employees, maintaining payroll, meeting increased costs to obtain materials, making rent or mortgage payments, and repaying obligations that cannot be met due to revenue losses.

There is no obligation to accept the loan but if the loan is accepted there is a 6-month deferral for repayments. You can apply online at https://covid19relief.sba.gov/or via a paper application and send for filing via mail.

COPYRIGHT 2020 Towne, Ryan & Partners, P.C.

This alert is provided for information purposes only and does not constitute legal advice and is not intended to form an attorney client relationship.  Please contact Towne, Ryan & Partners, P.C. for additional information.