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CARES ACT-SMALL BUSINESS LOANS: The Act Authorizes Deferred Payment Loans With Generous Forgiveness Terms to Assist Businesses Meet Ongoing Payroll and Other Operational Costs

Author: Bruce S. Goodman, Esq.

The President signed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) on March 27, 2020. Title I of the CARES Act, the Keeping American Workers Paid and Employed Act, expands both the Small Business Administration's (SBA Administration) Section 7(a) loan program and its Section 7(b) economic injury disaster loan program (EIDL) to provide small business with loans to meet payroll and pay health care expenses, and pay for other business expenses like mortgages, rent or utilities during the COVID-19 emergency. Significantly, the CARES Act provides that loan repayments are deferred during the pendency of the emergency, and loan recipients are eligible for forgiveness on a sliding scale depending on the number of employees retained and whether employees' salaries are reduced. Employers are also eligible for certain refundable credits against payroll tax liability in 2020.

Title I: Keeping American Workers Paid and Employed Act (KAWPEA)

  • Covered Period: From February 15, 2020 through June 30, 2020, the KAWPEA grants the Administration the authority to provide 100% federally-backed loans up to a maximum amount to eligible businesses to help pay operational costs including payroll and health benefits.
  • Eligibility: (A) Any business or nonprofit organization is eligible for a loan if it employs not more than the greater of (i) 500 employees (includes full-time employees, part-time employees, and those employed on other bases), or (ii) if applicable, the size standard in number of employees established by the Administration for the industry in which the entity operates; (B) Hospitality and food services businesses (as designated by NAICS code 72) with multiple physical locations employing less than 500 employees per location; and (C) sole proprietors, independent contractors, and eligible self-employed individuals (as defined in Section 7002(b) of the Families First Coronavirus Response Act).
  • Loan Amount: The principal amount an eligible applicant may borrow is capped at $10 million, and is the lesser of: (A) 2.5 times average total monthly payroll costs incurred in the one-year period before the loan is made (alternative criteria for seasonal employers and for eligible borrowers not in business between February 15, 2019 and June 30, 2019), plus (B) the outstanding amount of a loan received by the applicant under the SBA's Disaster Loan Program between January 31, 2020 and the date on which such loan is refinanced as part of this program, or (B) $10 million.
  • Interest Rate: The maximum interest rate for a loan is 4%.
  • Loan Requirements: The requirements to obtain a loan are minimal: (A) the loan is needed to continue operations during the COVID-19 emergency, (B) the funds will be used to retain workers, maintain payroll, make mortgage, lease or utility payments, (C) the applicant does not have another application pending under this program for the same purpose; and (D) from February 15, 2020 until December 31, 2020, the applicant has not received duplicative amounts under this program.
  • Use of Loan Proceeds: A loan recipient may use the proceeds for: (A) payroll costs, including compensation to employees such as salaries wages and commissions (excluding individual employee compensation above $100,000 per year and compensation to employees based outside the United States), (B) paid sick leave, (C) severance payments, (D) paying group healthcare benefits including insurance premiums, (E) retirement benefits, (F) state and local payroll taxes, (G) mortgage interest payments (not principal payments), (H) rent, (I) utilities, and (J) interest on debt obligations incurred prior to February 15, 2020.
  • Loan Deferment: Businesses operating on February 15, 2020, that have a pending or approved loan application, qualify for complete payment deferment relief (principal, interest, and fees) for not less than 6 months and not more than 1 year. A lender is required to provide such relief during the covered period.
  • Loan Forgiveness: The principal amount of the loan is eligible for forgiveness up to an amount equal to the total of the following costs incurred and/or payments made during the 8-week period following the loan origination: (A) payroll costs, (B) mortgage interest payments, (C) rent, and (D) utilities. Forgiven loan amounts are not taxable as gross income to the borrower.
  • Reduction Penalties: The amount of loan forgiveness to which a borrower is entitled will be reduced for employee or wage reductions during the 8-week period following the loan origination according to the following formula:
  • Employee Reductions: The maximum available forgiveness under the rules to be promulgated by the Administration multiplied by the average number of full-time employees per month-calculated by the average number of full-time employees each pay period falling within a month-during the covered period, divided by either (at borrower's election), (i) the average number of full-time employees per month employed from February 15, 2019 to June 30, 2019, or (ii) the average number of full-time employees per month employed from January 1, 2020 until February 29, 2020 (alternative criteria apply for seasonal employers).
  • Salary Reductions: The amount of loan forgiveness will be reduced by the amount of any reduction in total salary or wages of any employee earning $100,000 or less on an annualized basis in 2019 during the 8-week period following the loan origination 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.
  • Reduction Relief: A loan recipient can obtain relief from these reduction penalties by rehiring terminated employees or increasing reduced salaries to pre-reduction levels by June 30, 2020.
  • Loan Forgiveness Procedures: To obtain loan forgiveness a borrower must submit to the lender: (A) documentation verifying full-time employees and pay rates, (B) documentation on covered costs and payments, (C) a certification from a business representative that the documentation is true and correct and that requested forgiveness amounts were used to retain employees and make other forgiveness eligible payments, and (D) other documentation the Administration may require.
  • EIDL Grants: Borrowers may also be eligible for an emergency grant under the SBA's Disaster Loan Program. A borrower is eligible to receive up to a $2 million 30-year loan depending upon the economic injury to meet working capital needs such as paying fixed debts, payroll, accounts payable, employee sick leave, or other expenses that cannot be paid because of the disaster. Interest rates on these loans are 3.75% for small business and 2.75% for nonprofit.

    To be eligible, the borrower must be a business with 500 or fewer employees, or a sole proprietorship (with or without employees), an independent contractor, a co-op with 500 or fewer employees, or an ESOP with 500 or fewer employees. An applicant may request an emergency $10,000 advance which does not need to be repaid even if the loan application is denied.

    KAWPEA waives (A) the requirement of a personal guarantee on advances or loans not exceeding $200,000, (B) the requirement that a borrower be in business for the 1-year period before the applicable disaster (so long as the borrower was in business prior to January 31, 2020), (C) the requirement that the applicant be unable to find credit elsewhere. During the covered period, the Administration may approve an applicant for this loan based solely on its credit score and shall not require an applicant to submit a tax return.

Title II: Assistance for American Workers Families and Businesses

  • The CARES Act also provides eligible employers refundable tax credits equal to 50% of the first $10,000 in wages per employee, including the value of health benefits, against payroll taxes for employers that retain employees.
  • To be eligible, the employer (A) must have conducted business during 2020 and (B) have had business operations fully or partially suspended due to orders from a governmental entity limiting commerce, travel, or group meetings, or (C) experience a year-over-year reduction in gross receipts of at least 50% compared to the prior year's calendar quarter, until gross receipts exceed 80% for the calendar quarter year-over-year.
  • For employers with more than 100 full-time employees, only employees who are currently not providing services for the employer due to COVID-19 for which the employer is paying wages are eligible for the credit.
  • The credit is effective for wages paid after March 12, 2020 and before January 1, 2021.
  • The Act postpones the due date to deposit employer payroll taxes attributable to wages paid during 2020. Deferred amounts are payable over the next two years, with half due December 31, 2021, and half due December 31, 2022.