COVID19 RESOURCE HUB

Coronavirus Aid, Relief, and Economic Security Act (CARES Act) as it pertains to Small Businesses: Paycheck Protection Program

The Paycheck Protection Plan is one of the most significant sections of the CARES Act; it is the most critical provision in the new stimulus bill for most small companies. It is modeled after the existing SBA 7 loan program many companies already know. The primary purpose is to incentivize small companies not to lay off workers and to rehire laid-off workers that lost jobs due to COVID-19 disruptions. Borrowers must apply for forgiveness with the lender servicing the loan. Lenders have 60 days to review and decide. If approved, the loan is forgiven at the end of the 8 weeks after the borrower takes the loan. The SBA will reimburse the lender directly for the principal amount of any forgiven debt, plus interest accrued through the date of repayment. The SBA will issue additional implementation guidance and regulations regarding the loan forgiveness process within 15 days after the enactment of the CARES Act. Hence, it is possible that lenders could begin taking loan applications as soon as mid-April.

Eligibility:

• Small businesses with fewer than 500 employees (some exceptions for food industry)
  • To determine the 500 employee threshold, applicants should include full time, part-time and other basis employees.
• 501(c)(3) or 501(c)(19) non-profits with fewer than 500 workers (all other non-profit groups are ineligible to participate)
  • The law does not disqualify nonprofits that are eligible for payments under Title XIX of the Social Security Act (Medicaid), but does require that employees of affiliated nonprofits may be counted toward the 500 employee cap, depending on the degree of control of the parent organization.
• Self-employed, sole proprietors, and freelance and gig economy workers
• Must have been operational on February 15, 2020.
• Had employees and paid salaries and taxes or had independent contractors and filed 1099-MISC for them
  • Self-employed persons, independent contractors, and sole proprietors must submit a Form 1099 and other payroll tax filings to establish eligibility
• Certify that the current uncertain economic times makes the loan request necessary to support ongoing operations
• Certify that the funds will be used to keep workers and make payroll, mortgage payments, lease payments and utility payments
• Certify that the applicant does not already have an application pending for other payroll assistance under the CARES Act

Loan:

• Borrowers can borrow 2.5 times their monthly payroll expenses (based on the average total monthly payroll costs for the prior year), or up to $10 million- whichever is less
• Interest rate no higher than 4% (exact rate will depend on applicant’s situation)
• No personal guarantee or collateral is required for the loan
• Payments of principal, interest, and fees will be deferred for at least 6 months, but not more than 1 year
• No prepayment penalties
• The SBA has no recourse against any borrower for non-payment of the loan, except where the borrower has used the loan proceeds for a non-allowable purpose
• If the full principal of the loan is forgiven, the borrower is not responsible for the interest accrued in the 8-week covered period
• Any amount outstanding after considering the amount forgiven (see forgiveness section below) will be repayable over a term not to exceed 10 years, according to the loan terms agreed upon by the borrower and the lender
• The loans will be unsecured and will not take precedence over existing debt instruments in terms of payment priority

Forgiveness:

Loan forgiveness is available for 8 weeks and may be applied to any time frame between February 15, 2020 and June 30, 2020.

• Payroll costs (not to exceed $100,000 of annualized compensation per employee) at normal levels during the eight weeks following the origination of the loan
• Average monthly payroll costs are calculated based on the one-year period prior to the loan disbursal date except for seasonal employers and employers not in business between February 15, 2019 and July 30, 2019.
  • In the case of seasonal employers, the employer may choose to calculate the average monthly payroll costs based on the 12-week period starting February 15, 2019 or the period starting March 1, 2019 through June 30, 2019.
  • In the case of new employers not in business between February 15, 2019 and July 30, 2019, the average monthly payroll costs is calculated based on the period beginning January 1, 2020 through February 29, 2020.
• Costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums (excludes leave wages already covered by the Families First Coronavirus Response Act)
• Employee salaries, commissions, or similar compensations such as severance payments, retirement benefits, and state and local employment taxes (Forgiveness may also include additional wages paid to tipped workers)
• Payments of interest on any mortgage or other debt obligations incurred prior to February 15, 2020 (does not include payments or prepayments of principal)
• Payment of rent on any lease in force prior to February 15, 2020
• Payment on any utility for which service began before February 15, 2020, including electricity, gas, water, transportation, phone, and internet access for service incurred in the ordinary course of business
• The amount of loan forgiveness may be reduced if the employer reduces the number of employees as compared to the prior year, or if the borrower’s total payroll expenses on workers making less than $100,000 per year decreases by more than 25%. Loan forgiveness will be reduced by the same amount, but a borrower will not be penalized by a reduction in the amount forgiven for termination of an employee made between February 15, 2020 and April 26, 2020, as long as the employee is rehired by June 30, 2020.
• The amount forgiven is not considered taxable income to the borrower
• Based on loan applications, it seems that at least 75% of the loan must be used toward payroll to be eligible for forgiveness. Less than 25% should go for other expenses if you want to have a good chance at forgiveness

Forgiveness Exclusions:

• The loan can be used for other business-related expenses like inventory and federal taxes, but that portion will not be forgiven.
• This loan makes the borrower ineligible for the Employee Retention Tax Credit. See more in the Business Tax Changes section below.

Forgiveness Documentation:

• Documentation verifying the number of full-time equivalent employees on payroll and pay rates for the applicable periods, including payroll tax filings; and state income, payroll, and unemployment insurance filings
• Documentation verifying payments on mortgage obligations, lease obligations and utilities, including cancelled checks, payment receipts, transcripts of accounts, or other documents
• Any other documentation the SBA deems necessary

See more information below on how to apply, and rules if applying for both Paycheck Protection Program and EIDL.

Changes to the SBA’s Economic Injury Disaster Loans (EIDLs)

Another important aspect of the CARES Act for small businesses is that it expands eligibility for the SBA’s Economic Injury Disaster Loans (EIDLs). In early March, the SBA’s disaster loan program was extended to all small businesses affected by COVID-19, but the CARES Act opens this program up further and makes it easier to apply. This means that while a normal bank will be providing you with a loan, the SBA will be guaranteeing that loan to the bank. It will cover the loss should your business be unable to pay back the loan to the bank.

Eligibility:

• Small businesses with fewer than 500 employees
• Available to all 501(c) non-profit organizations with fewer than 500 workers
  • Available to some 501(d) and 501(e) non-profit organizations with fewer than 500 workers
• Individuals operating as sole proprietors or independent contractors
• Must have been operational on January 31, 2020.

Loan:

• Loans are capped at $2 million
• EIDLs can be approved by the SBA based solely on an applicant’s credit score
• Interest rate is 3.75% for small businesses and 2.75% for non-profits
• Repayment terms up to a maximum of 30 years
• EIDLs that are smaller than $200,000 can be approved without a personal guarantee
• Loans are made by SBA-approved lenders that have delegated authority to make the loans without approval from the SBA (no SBA Authorization required for each individual loan). This should help expedite the application and closing process.
• The CARES Act has removed standard EIDL Program requirements that the borrower not be able to secure credit elsewhere
• Deferments through December 31, 2020, will be automatic. Current borrowers of home and business disaster loans do not have to contact SBA to request deferment.

Forgiveness:

Applicant may request an expedited disbursement of up to $10,000 that is to be granted within three days of the request. The advance must be used for authorized costs but will not have to be repaid.

The grant can be used for:

• Paid leave
• Maintaining payroll
• Increased costs due to supply chain disruption
• Mortgage or lease payments
• Repaying obligations that cannot be met due to revenue losses

See more information below on how to apply, and rules if applying for both Paycheck Protection Program and EIDL.

If Applying For Paycheck Protection Program And EIDL

Borrowers may apply for an EIDL grant in addition to a loan under the Paycheck Protection Program, provided the loans are not used for the same purpose. If an EIDL loan was obtained related to COVID-19 between January 31, 2020 and the date at which the Paycheck Protection Program becomes available, borrowers will be able to refinance the EIDL into the Paycheck Protection Program for loan forgiveness purposes. Remaining portions of the EIDL used for purposes other than those laid out in loan forgiveness terms for a Paycheck Protection Program loan, would remain a loan. If a borrower took advantage of an emergency EIDL grant award of up to $10,000, that amount would be subtracted from the amount forgiven under Paycheck Protection Program.

Applying For Paycheck Protection Program

The SBA will issue additional implementation guidance and regulations regarding the loan forgiveness process within 15 days after enactment of the CARES Act. Lenders are stating that they will start processing applications for small businesses and sole proprietorships on April 3. Independent contractors and self-employed individuals will be able to start applying on April 10. You can try calling your local SBA approved lender to see if they have any guidelines available at this time to start the process.

Applying For EIDL

Apply online by filling out the appropriate forms and providing your business’s information. Once you download the forms for your application, check off “economic injury” as your reason for filing. Then follow the instructions and fill in the necessary information. Once you re-upload your application, you can check the status of it at any time by visiting the website.

Be prepared with some financial information and supporting documentation related to your business, like two to three years of tax returns, last year’s financial statements, a year-to-date financial statement, property leases, and a working knowledge of your business and personal credit score. A full list of supporting documentation can be found at the bottom of your application form.

The average for SBA to issue a Disaster Loan decision is 21 days. Within that time frame, a loan specialist will be in contact with you to figure out the amount and parameters of the SBA disaster loan. Once the loan documents are signed, funds are deposited via ACH within 3 to 5 business days.

Stay in touch with your SBA loan representative at your local bank and SBA office.

https://www.sba.gov/funding-programs/disaster-assistance

Existing SBA 7(a) or Microloan Program Loans

For borrowers with existing 7(a) or microloan program loans, the SBA will pay principal, interest, and any associated loan fees for a six-month period starting on the loan’s next payment due date. Payment on loans that are on deferment will begin with the first payment after the deferment period. Please note that this relief will not include loans made under the Paycheck Protection Program.

Business Tax Changes

The CARES Act makes select changes to taxes and tax policies in order to ease the burden on businesses impacted by COVID-19.

Employee Retention Tax Credit (does not apply to a business that participates in the Paycheck Protection Program)– if your business operations were fully or partially suspended due to a COVID-19 shut-down order or gross receipts declined by more than 50% compared to the same quarter in the prior year, then you are eligible to receive a refundable 50% tax credit on wages (including health benefits) up to $10,000 per employee.

For businesses with greater than 100 full-time employees, the tax credit is only available to the extent wages are paid to employees who are unable to work as a result of a government shutdown order. (For businesses with fewer than 100 full-time employees, the tax credit is available for all employees, even if no government shutdown order was in place.)

The credit can be obtained on wages paid or incurred from March 13, 2020 through December 31, 2020.

Non-profits are eligible for the Employee Retention Tax Credit.

Employer Tax Deferral- Businesses and self-employed individuals can delay their payroll tax payments. These payments, the employer share of Social Security tax owed for 2020, can instead be deferred and paid over the next two years. 50% must be paid by the end of 2021 and 50% must be paid by the end of 2022.

Non-profits are eligible for the Employer Tax Deferral.

Employer Student Loan Contributions- Certain employer payments of student loans on behalf of employees are excluded from taxable income. Employers may contribute up to $5,250 annually toward student loans, and the payments would be excluded from an employee’s income.

Qualified Improvement Property-enables businesses, especially in the hospitality industry, to write off immediately costs associated with improving facilities instead of having to depreciate those improvements over the 39-year life of the building. The correction applies retroactively to 2018. QIP is now 15-year property and eligible for 100% bonus depreciation. (Taxpayers that placed QIP in service in 2018 and that filed their 2018 federal income tax return treating the assets as bonus-ineligible 39-year property should consider amending that return to treat such assets as bonus-eligible.) Amending that return can in turn result in an NOL for which the rules have been amended as well- see Net Operating Loss Limitations section below.

Interest Expense Deductions- Businesses will be able to increase their business interest expense deductions on their tax returns. For 2019 and 2020, the amount of interest expense businesses are allowed to deduct on their tax returns is increased to 50% from 30% of taxable income. These changes can in turn result in an NOL for which the rules have been amended as well- see Net Operating Loss Limitations section below.

Corporate Charitable Deduction Limit- temporarily increases the 10% limitation on charitable contribution deductions to 25% of taxable income. Excess contributions may be carried forward to future years, subject to the general charitable contribution carry-forward rules. These changes can in turn result in an NOL for which the rules have been amended as well- see Net Operating Loss Limitations section below.

Net Operating Loss Limitations- Businesses that have net operating loss (NOLs) have some limitations relaxed. If your business had an NOL in a tax year beginning in 2018, 2019, or 2020, that NOL can be now be carried back five years instead. The NOL limit of 80% of taxable income is also suspended, so firms may use NOLs they have to fully offset their taxable income.

Pass-through businesses and sole proprietors will also be able to take advantage of the relaxed NOL limitations. (There are additional rules that apply specifically to real estate investment trusts and life insurance companies.)

Alternative Minimum Tax Credits- Companies that were due to receive corporate alternative minimum tax (AMT) credits at the end of 2021 can instead claim a refund now, to improve cash flow during the COVID-19 emergency.