Small Business Relief Under the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act

The Senate passed H.R. 748, which is titled as the CARES Act, on March 26 by a vote of 96-0.  At the time of writing this, it sounds as if the House of Representatives have passed it as well.  There are many issues discussed in this stimulus bill, but the most prevalent topic for small businesses is found in Section 1102 of the bill.  It is titled “Paycheck Protection Program.”

The number of Americans filing for unemployment benefits jumped to 3.3 million for the week ending March 21 according to the Department of Labor.  To put this figure into perspective, the number of unemployment claims filed for the week ending March 7 was 211,000, which was near a half-century low.  Section 1102 of the CARES Act is meant to provide financing to small employers that retain their workforce during this historic economic slowdown.

Eligibility

Initial eligibility depends on the size of the employer.  The loans would be available under 7(a) of the Small Business Administration for businesses with less than 500 employees.  Sole proprietors, independent contractors, and self-employed individuals are also eligible to receive these loans.  In evaluating the eligibility of a borrower for a covered loan, a lender is to consider whether the borrower was in operation on February 15, 2020 and had employees for whom the borrower paid salaries and payroll taxes.

Loan Amount

The maximum loan amount is the lesser of a calculated amount and $10 million.  The calculated amount results from the average monthly payroll costs for the 1-year period ending on the date the loan was made multiplied by 2.5.  Payroll costs are defined under the bill as:

1. The sum of payments of any compensation with respect to employees that is a-
   1. salary, wage, commission;
   2. payment of cash tip;
   3. payment for vacation, parental, family medical, or sick leave;
   4. allowance for dismissal or separation;
   5. payment required for the provisions of group health care benefits, including insurance premiums;
   6. payments of any retirement benefit; or
   7. payment of State or local tax assessed on the compensation of employees; and

Notable exclusions of payroll costs include compensation of an individual employee in excess of an annual salary of $100,000, taxes imposed or withheld under chapter 21, 22, or 24 of the Internal Revenue Code during the time period of February 15, 2020 through June 30, 2020, qualified sick leave wages for which a credit is allowed, and qualified family leave wages for which a credit is allowed.  Tony Nitti, a senior contributor with Forbes, provides an example to better illustrate calculating loan amounts permitted under this bill.

Rob’s Car Wash applies for a paycheck protection loan on May 1, 2020.  The business has $1.2 million in payroll costs for the period May 1, 2019 through May 1, 2020, for a monthly average of $100,000.  Rob’s car Wash is entitled to a loan the lesser of:

-$250,000 ($100,000 in average payroll costs * 2.5), or

-$10 million.

Loan Uses

Allowable uses for loan proceeds during the covered period (February 15, 2020 – June 30, 2020) include payroll costs as defined above; costs related to continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums; employee compensation; and payment of interest on any mortgage obligation, rent, utilities, and interest on any other debt obligations that were incurred before the covered period.

Loan Forgiveness

Section 1106 of the bill describes the loan forgiveness provisions.  An eligible recipient shall be eligible for forgiveness of indebtedness in an amount equal to the sum of the following costs incurred and payments made during the covered period:

1. Payroll costs.
2. Any payment of interest on any covered mortgage obligation.
3. Any payment on any covered rent obligation.
4. Any covered utility payment.

Mr. Nitti provides another example covering the forgiveness aspects of the bill.

In the first 8 weeks (covered period) after the business borrows the $250,000, the business pays $200,00 in payroll costs, mortgage interest, and utility payments.  Rob’s Car Wash is eligible to have $200,000 of the $250,000 loan forgiven.

The bill also provides that any amount forgiven would be excluded from gross income for purposes of taxation.  Assuming that the workers’ salaries aren’t materially cut, then the amount of forgiveness generally can be limited by dividing the number of employees employed during 2020’s covered period (February 15, 2020 – June 30, 2020) over the number of those employed during last year’s same time period.  In other words, a greater amount of the loan will be forgiven if workers aren’t laid off.  An exception exists if workers are rehired before June 30, 2020.

A recipient seeking loan forgiveness needs to submit to the lender:

1. Documentation verifying the number of full-time employees on payroll and pay rates, including-
   1. Payroll tax filings reported to the IRS;
   2. State income, payroll, and unemployment insurance filings;
   3. Documentation regarding payments on a mortgage, lease, and for utilities; and
   4. Any other documentation the lender deems necessary.

The bill requires lenders to make a decision no later than 60 days after receiving the application for loan forgiveness.  Even if your business’ circumstances make it such that the amount of forgiveness will be slim to none, the interest rate for the loan can’t exceed 4% and payment is deferred for a period between 6 months to a year.  Guidance and regulations will be issued within 30 days of enactment of the bill which will provide greater clarity on some provisions.

The government is forcing employers to shut their doors in order to combat the coronavirus.  This decision hurts small businesses in a tremendous way as they don’t have the cash reserves nor the financing alternatives that larger companies enjoy.  The historic spike in unemployment claims reflects this.  The CARES Act gives a chance for small businesses to survive during this difficult period while providing loan forgiveness options for those able to keep their workforce employed.

Small businesses, including sole proprietors, independent contractors, and self-employed individuals, could consult their accountants and lenders about how the CARES Act may benefit them.  Merle Haggard’s “If We Make It Through December” song is reminiscent of today’s state.  The government may have just given the small businesses a chance to make it through the summer, in which case they will reemerge stronger than ever once the inevitable recovery occurs.

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