Congress Passes Relief for Your Business from Covid-19 Impacts

The CARES Act authorizes the Small Business Administration (“SBA”) to provide loan guarantees for up to $349 billion in loan commitments under the SBA’s 7(a) program (the SBA’s primary program for providing financial assistance to small businesses), funding a new “paycheck protection” program.

SBA Loan Eligibility

Defines eligibility for loans as a small business meeting the size requirements under the law to be eligible for an SBA loan. The SBA size standards vary by industry and are generally based on the average number of employees or average annual receipts. Under the CARES Act, small businesses would continue to be eligible under these standards. However, the CARES Act expands eligibility for loans authorized by the legislation (a “covered loan”) to all businesses with no more than 500 employees. Additional exceptions further expand the reach of the CARES Act. Includes sole-proprietors, independent contractors, and other self-employed individuals.

SBA Loan Terms

An eligible business may receive one covered loan, which the recipient may use for payroll costs; continuation of group health care benefits during periods of paid sick, medical or family leave, or insurance premiums; salaries or commissions or similar compensation; interest on mortgage obligations; rent; utilities; and interest on other outstanding debt. Generally, the maximum loan amount is the lesser of (1) $10 million, or (2) 2.5 times the average total monthly payments by the applicant for payroll costs—only payroll costs, not the other costs the loan proceeds may cover—incurred during the one-year period before the date of the loan. Waives both borrower and lender fees. The CARES Act does not require collateral or personal guarantees for a covered loan.  Sets a maximum interest rate of four percent.

SBA Loan Forgiveness

The CARES Act allows for covered loan forgiveness under certain conditions. The loan forgiveness amount, is equal to the payroll costs, mortgage interest payments, rent, and utility payments incurred or paid by a recipient during the covered period (8 weeks after loan origination).

The loan forgiveness amount is reduced if the recipient (1) reduces the average number of full-time equivalent employees per month during the covered period below the lesser of (a) the average number of full-time equivalent employees per month from February 15, 2019 to June 20, 2019 or (b) the average number of full-time equivalent employees per month from January 1, 2020 to February 29, 2020, or (2) reduces the salary or wages of any employee in excess of 25 percent 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. Borrowers that re-hire workers previously laid off will not be penalized for having a reduced payroll at the beginning of the period. The law also allows forgiveness for additional wages paid to tipped workers. Any loan amounts not forgiven at the end of one year is carried forward as an ongoing loan with a term up to 10 years and a maximum 4% interest.

Applications

More detail on how to apply and the criteria the SBA will use to determine who will receive loans is expected within the next 15 days, when the Administrator is required to issue guidance and regulations implementing the program.

Emergency EIDL Grants

The CARES Act establishes an Emergency Grant to allow an eligible entity who has applied for an EIDL loan due to Covid-19 to request an advance on that loan, of not more than $10,000 which the SBA must distribute within 3 days. EIDL loans are an existing SBA program that offers loans with up to 30 year terms at 3.75% interest. The Act also establishes that applicants shall not be required to repay advance payments, even if subsequently denied for an EIDL loan. It outlines that these advances may 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.

Facing difficult decisions about closures, employers should be aware that they may be eligible for a refundable payroll tax credit for 50 percent of “qualified wages” paid to employees during the COVID-19 crisis. This credit is available to employers whose (1) operations were fully or partially suspended because of a COVID-19-related shut-down order, or (2) gross receipts have declined by more than 50 percent when compared to the same quarter in 2019, until the business recovers to 80 percent of gross receipts relative to the same quarter. The calculation of “qualified wages” depends on the number of employees (determined by taking the average number of employees in 2019), and is subject to an aggregate $10,000 cap per eligible employee for all calendar quarters, including health benefits.

Employer Payroll Tax Extension

Certain employer payroll taxes for the period of the date of enactment until the end of the year would be deferred by the CARES Act. Fifty percent of those taxes could be deferred until December 31, 2021, and the remaining 50 percent could be deferred until December 31, 2022.