The CARES Act (Coronavirus Aid Relief and Economic Security Act) is the third phase of legislative response to the COVID-19 crisis. The Act is $2.2 trillion of government spending, and it is more than 10% of US GDP.
The law provides economic aid to individuals, businesses, and specific industries, in addition to support for hospitals, healthcare workers, and other aspects of the healthcare system.
The implementation of this Act will be extremely difficult because of its broad mandate as it is attempts to encompass a wide spectrum of our nation’s economy. Yet effective implementation is critical to the Act’s impact on our country’s economic well-being.
The CARES Act is broadly divided into the following segments:
-Small business relief
-Specific industries which have been severely affected by the crisis
-Tax provisions
-Health care
-Specific relief for employers
-Real estate center
-Energy sector
-Emergency appropriations and other aspects
Small Business Relief ($349 B)
Enhancement to the SBA section 7(a) loan program Paycheck Protection Program (PPP).
Federally backed loans – Available in an amount that is 2.5 times monthly average payroll cost for a one-year period prior to the loan, not to exceed $10 million. The payroll protection loans may be used for qualified payroll and salary costs, rent, utilities, interest on mortgages, and other debt incurred before February 15, 2020. The loans may be forgiven; and an amount equal to eight weeks of federal mortgage interest rent and utilities that is then reduced based on the levels at which small businesses rehire and re-employ workers as well as restore or retain salary levels. The borrower needs to certify that the loan is needed due to the issues associated with the current economic conditions, and that borrowed funds will be used to retain employees, maintain payroll, or make interest rent and utility payments. The company is not permitted to make duplicate applications for the same purpose under another paycheck protection loan request.
The SBA express loan program level is increased from $350,000 to $1,000,000, and the SBA is authorized to make payments on most outstanding SBA guaranteed loans for six months. Other provisions for the SBA pertain to economic injury disaster loans, etc.
Small business Loan eligibility – The Act’s covered period, beginning February 15, 2020 and ending June 30, 2020, applies to any business organization, 501C3 not-for-profit organization, 501C 19 veterans organization, or certain tribal business concerns.
Organizational size applies to entities with not more than 500 employees, while guidelines established by the SBA by industry and can actually include companies greater than 500 with a range as high as 1500 employees. There are additional exemptions and rules that apply to location employment SBIC loans and franchises, sole proprietorships, and independent contractors are also eligible during the covered period. Documentation to support the self-employed status is required and includes payroll tax filings, Form 1099, and income and expense forms that support the sole proprietorship.
Significant differences with traditional SBA loans – No personal guarantees or collateral is required, nor is the borrower required to affirm that the company cannot obtain credit from other sources.
Determination of Paycheck Protection Loan amount:
- If in business for the past 12 months, then the amount of loan is the lesser of $10 million or 2.5 times the average monthly payroll cost for the one year prior to the loan application.
- If the company was not in business from February 15, 2019 to June 30, 2019, then it is eligible for 2.5 times the average total monthly payments by the applicant for payroll from January 1, 2020 to February 29, 2020. Payroll is defined as the sum of all salary, wage, commission or similar compensation: payment of cash tip; payment for vacation; family medical or sick leave; allowances for separation or dismissal payments; payment for group health care benefits or retirement benefits; sum of payments if any compensation for sole proprietorship or independent contractor is an amount under $100,000.
The loan does not have to be used only for payroll, as noted above, but cannot be used for compensation of employees, independent contractors, or sole proprietorship in excess of $100,000.
Businesses that receive loans under the payroll protection loan program are not precluded from receiving loans or grants from the state.
Determination of the calculation for forgiveness of the loan under the PPP:
A loan recipient is eligible for forgiveness of the indebtedness on a covered loan in an amount equal to eligible costs incurred over an eight week period beginning upon the loan closing date. The base forgiveness amount is then calculated and adjusted based on a formula that effectively adjusts the forgiveness amount by the number of employees retained/rehired and any reduction in salary on a dollar-by-dollar basis greater than 25% for employees making less than $100,000.
Examples to show varied types of forgiveness will be provided in a forthcoming memorandum.
To receive payroll protection loan forgiveness, the borrower is required to document full-time equivalent employees on payroll and their rate of pay; covered cost payments giving rise to the forgiveness; and certification that the documentation is true and correct and the forgiveness figure was used to retain employees and make other eligible payments.
For amounts that are not forgiven, the loan will be deferred for at least six months, but not more than one year, with the interest rate not to exceed 4%. The remaining loan balance will have a maturity of not more than 10 years.
Additional information will be provided at a later date regarding other SBA loans such as express loans, economic injury disaster loans, and the main street business lending program.
Additional information will be provided regarding small business resource partnership programs.
$17B: Six months protection on existing SBA loans previously originated with automatic six-month deferral.
We have included attachments below regarding the CARES Act Sec. 1102 Paycheck Protection Program and Sec. 1106 Loan Forgiveness, as well as what we believe as of March 30, 2020, to be the information the SBA is going to require for payroll protection loan applications.
