The CARES ACT: Business Impact & Opportunity
Overview
The Coronavirus Aid, Relief, and Economic Security Act (the ‘‘CARES Act’’) provides fiscal relief to business and individual Americans.
This guide summarizes selected sections that concern business relief.
The CARES Act provides business relief in the following provisions, all of which are discussed in detail herein:
Loans to Cover certain Costs: The SBA has been authorized to fund/guarantee low interest loans up to $10MM to eligible business to cover Payroll Costs, Group Healthcare Benefit Care Costs, Payments of Interest on any Mortgage Obligation, Rent, Utilities and Interest on Debt Obligations
No Payments on Loans for 6 Months: There shall be no payment of principal, interest or other fees for 6 months on the loans used to cover certain Costs.
Forgiveness of Principal on Loans: The principal owed on the loans used to cover certain costs may be reduced or eliminated in certain cases.
Training and Assistance: Funds have been provided for training and advice to those Small Businesses that have experienced, as a result of COVID-19, business disruption; staffing challenges; decrease in gross receipts or customers or a closure.
Expansion of the State Trade Expansion Program
Increased grants to minority business centers
Increased Economic Injury Disaster Loans (EIDL)
Advance funded EIDL $10M grant for payroll, sick leave, rent, mortgage and business costs
Subsidized Principal and Interest on certain 7(a)/7(m) Loans
Increased Credit against Employment Taxes
Increased NOL Carryback and applicability
Increased AMT Credit
Increase in deductibility of Business Interest
Financial assistance: loans, loan guarantees and other investments to provide liquidity to certain businesses
Relief from Certain Debt Restructurings
Forbearance in a Federally backed multifamily mortgage loan experiencing a financial hardship
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Paycheck Protection (§1102)
The CARES Act authorizes the Small Business Administration (the “SBA”) to (i) increase the maximum loan amount of Express Loans from $350,000 to $1,000,000[1] and (ii) expand its participation to be 100% for certain loans to entities that are independently owned and operated and that are not dominant in their field of operation (“Small Businesses”).
Loans will be continue to finance the permissible expenses - finance the costs of qualified small business plant acquisition, construction, conversion or expansion, including the acquisition of land, material, supplies, equipment, and working capital and to make loans for any other purpose specified in Chapter 14A of 15 USC.
The CARES Act adds a new section that increases the participation of the SBA to 100% for certain loans (“Covered Loans”) given to cover certain costs incurred during the period beginning 2.15.20 and ending on 6.30.20 (“Eligible Costs”).
Before being deemed eligible, a recipient must make certain representations and certifications as to necessity of the loan, use of loan proceeds, non-existence of duplicative loan applications and non-receipt of duplicate loan proceeds.
Covered Loans may be made either directly but will most likely be made in cooperation with banks or other financial institutions through agreements to participate on an immediate or deferred (guaranteed) basis. All lenders will be required to defer payment of principal, interest and fees for a period of not less than 6 months nor more than a year.[2]
Covered Loans and guarantees shall be unsecured and shall be non-recourse unless the loan proceeds are used for an ineligible purpose.
The SBA shall waive its Guarantee fees and Yearly Fees.
The SBA shall waive the requirement that a Small Business is unable to obtain credit elsewhere.
The Covered Loan shall have a maximum interest rate of 4% and there shall be no prepayment penalties.
The law prior to the Passage of the CARES Act (“Preexisting Law”) limited participation of the SBA to be 75% of the loan balance for loans exceeding $150,00 or 85% for loans under $150,000, subject to reduction of participation upon request of the lender or may be increase of participation to 90% for certain loans.
As noted above, the CARES Act increases SBA participation to be 100%.
In addition to Small Business, any business concern, nonprofit organization, veterans organization or Tribal Business Concern (“Additional Entity/ies”) to receive the loans if the Additional Entities employ less than 501 employees or, if applicable, the employee size standard established by the SBA for the industry engaged in by the Additional Entity. Furthermore, individuals who operate under a sole proprietorship, or as an independent contractor and eligible self-employed individuals shall be eligible to receive loans.
Eligible Costs are limited to allowable uses of loan proceeds under Preexisting Law, and the following new categories:
· Payroll Costs;
· costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;
· employee salaries, commissions, or similar compensations;
· payments of interest on any mortgage obligation (which shall not include any prepayment of or payment of principal on a mortgage obligation)
· rent (including rent under a lease agreement);
· utilities; and
· interest on any other debt obligations that were incurred before 2.15.20.
The amount of the Covered Loan shall be limited to the lesser of amounts (A) or (B):
A[3] The sum of (i) the product obtained by multiplying 2.5 by the average total monthly payments for payroll costs incurred during the 1 year period before the date the loan is made with adjustments for seasonal employers and (ii) the amount of certain preexisting loans obtained by or through the SBA made during the period beginning 1.31.20 and ending on the date that covered loans are made available that may be used to refinance the preexisting loan.
B $10,000,000
The term “Payroll Costs” means the sum of payments of any compensation with respect to employees that is
· salary, wage, commission, or similar compensation;
· payment of cash tip or equivalent;
· payment for vacation, parental, family, medical, or sick leave;
· allowance for dismissal or separation;
· payment required for the provisions of group health care benefits, including insurance premiums;
· payment of any retirement benefit; or
· payment of State or local tax assessed on the compensation of employees; and the sum of payments of any compensation
With respect to a sole proprietor or independent contractor, the term “Payroll Costs” means the sum of payments that is a wage, commission, income, net earnings from self-employment or similar compensation and that is in an amount that is not more than $100,000 in 1 year, as prorated for the covered period. This helps to address needs occasioned by the rise of the Gig Economy.
The term “Payroll Costs” does not include:
· the compensation of an individual employee in excess of an annual salary of $100,000, as prorated for the covered period;
· taxes imposed or withheld under chapters 21, 22, or 24 of the Internal Revenue Code of 1986 during the covered period;
· any compensation of an employee whose principal place of residence is outside of the United States;
· qualified sick leave wages for which a credit is allowed under section 7001 of the Families First Coronavirus Response Act (Public Law 116–127); or qualified family leave wages for which a credit is allowed under section 7003 of the Families First Coronavirus Response Act (Public Law 116–127).
Entrepreneurial Development (§1103)
The SBA shall be authorized to provide financial assistance in the form of grants to Small Business Development Centers or Women’s Business Centers to provide education, training and advice to those Small Businesses that have experienced, as a result of COVID-19, (a) supply chain disruptions, including changes in quantity and lead time, including the number of shipments of components and delays in shipments; quality, including shortages in supply for quality control reasons and technology, including a compromised payment network; (b) staffing challenges; (c) a decrease in gross receipts or customers or (d) a closure.
State Trade Expansion Program (§1104)
The SBA shall extend the duration of grants under the State Trade Expansion Program through and including December 31, 2021.
The SBA shall reimburse any recipient of a grant under the State Trade Expansion Program for financial losses relating to a foreign trade mission or a trade show exhibition that was cancelled solely due to a public health emergency declared due to COVID–19 if the reimbursement does not exceed a recipient’s grant funding.
Waiver of Matching Funds Requirement under the Women’s Business Center Program (§1104)
During the 3-month period beginning on the date of enactment of the CARES Act, the requirement relating to obtaining cash contributions from non-Federal sources under section 29(c)(1) of the Small Business Act (15 U.S.C. 656(c)(1)) is waived for any recipient of assistance under such section 29.
Loan Forgiveness (§1106)
A recipient of a Covered Loan may reduce the principal of the debt borrowed by the amount the borrower is expected to pay in Eligible Expenses for the 8 week period beginning on the date of origination of the Covered Loan. Eligible Expenses mean the sum of (i)Payroll Costs[4] (ii) interest on debt incurred by the borrower in the ordinary course of business that is secured by real or personal property and was incurred prior to February 15, 2020; (iii) rent obligated under a leasing agreement incurred prior to February 15, 2020 and (iv) the payment for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.
The total amount of principal forgiven shall not exceed the amount of the Principal of the Covered Loan.
Subject to de minimis exemptions set forth in regulations prescribed by the SBA or the Secretary of the Treasury, the total amount of principal forgiven shall be reduced (but not increased) by the Reduced Forgiveness Factor. The Reduced Forgiveness Factor is equal to the product of (a) the amount of the Eligible Expenses for the 8 week period beginning on the date of origination of the Covered Loan and (b) the quotient obtained by dividing the average number of full time equivalent employees per month employed by the recipient of the Covered Loan during the 8 week period beginning on the date of origination of the Covered Loan by[5] (i) the average number of full-time equivalent employees per month employed by the eligible recipient during the period beginning on February 15, 2019 and ending on June 30, 2019 or (ii) the average number of full-time equivalent employees per month employed by the eligible recipient during the period beginning on January 1, 2020 and ending on February 29, 2020.[6]
In addition, the amount of loan forgiveness shall be reduced by the amount of any reduction in salary or wages of a Named Employee that is in excess of 25% of the total salary or wages of such employee during the most recent full quarter during which the employee was employed prior to the 8 week period beginning on the date of origination of the Covered Loan. A Named Employee is an employee who did not receive, during any single pay period during 2019, wages or salary at an annualized rate of pay in an amount more than $100,000.
There is, however, an adjustment for rehires. Under a Qualifying Circumstance, as defined below, the amount of principal forgiveness shall be determined without regard to a reduction in the number of full time equivalent employees of an eligible recipient or a reduction in the salary of 1 or more employees of the eligible recipient, as applicable, during the period beginning on February 15, 2020 and ending on the date that is 30 days after the date of enactment of the CARES Act.
A Qualifying Circumstance is a circumstance in which (a) during the period beginning on February 15, 2020 and ending on the date that is 30 days after the date of enactment of the CARES Act, there is a reduction, as compared to February 15, 2020,in the number of full-time equivalent employees of an eligible recipient; and not later than June 30, 2020, the eligible employer has eliminated the reduction in the number of full-time equivalent employees; (b) during the period beginning on February 15, 2020 and ending on the date that is 30 days after the date of enactment of the CARES Act, there is a reduction, as compared to February 15, 2020, in the salary or wages of 1 or more employees of the eligible recipient; and not later than June 30, 2020, the eligible employer has eliminated the reduction in the salary or wages of such employees; or (c) in which the events described in subsection (a) and (b) occur.
With respect to a Covered Loan that has a remaining balance after reduction based on the loan forgiveness amount, the remaining balance shall continue to be guaranteed by the SBA and the Covered Loan shall have a maximum maturity of 10 years from the date on which the borrower applies for loan forgiveness.
For purposes of the Internal Revenue Code of 1986, any amount which would be includible in gross income of the eligible recipient by reason of forgiveness of principal shall be excluded from gross income of the Borrower.
Minority Business Development Agency (§1108)
The SBA may provide financial assistance in the form of grants to minority business centers and minority chambers of commerce to provide education, training, and advising to minority business enterprises. No matching funds shall be required. The grant proceeds shall be used for the education, training, and advising of minority business enterprises and their employees on:
· accessing and applying for resources provided by the Agency and other Federal resources relating to access to capital and business resiliency;
· the hazards and prevention of the transmission
· and communication of COVID–19 and other communicable diseases;
· the potential effects of COVID–19 on the supply chains, distribution, and sale of products of minority business enterprises and the mitigation of those effects;
· the management and practice of telework to reduce possible transmission of COVID–19;
· the management and practice of remote customer service by electronic or other means;
· the risks of and mitigation of cyber threats in remote customer service or telework practices;
· the mitigation of the effects of reduced travel or outside activities on minority business enterprises during COVID–19 or similar occurrences; and
· any other relevant business practices necessary to mitigate the economic effects of COVID–19 or similar occurrences.
During the 3-month period beginning on the date of enactment of the CARES Act, the SBA may waive any matching requirement imposed on a minority business center or specialty center of the SBA if the applicable center is unable to raise funds, or has suffered a loss of revenue, because of the effects of COVID–19.
Emergency EIDL Grants (§1110)
For the period beginning January 31, 2020 and ending on December 31, 2020, the SBA shall waive, for Eligible Entities, (a) rules relating to the personal guarantee on Disaster advances and Disaster loans under section 7(b)(2) of the Small Business Act (15 U.S.C. 636(b)(2)) of not more than $200,000, (b) the requirement that an applicant needs to be in business for the 1-year period before the disaster, except that no waiver may be made for a business that was not in operation on January 31, 2020; and (c) the requirement, that an applicant be unable to obtain credit elsewhere.
Eligible Entities means:
· a business with not more than 500 employees;
· any individual who operates under a sole proprietorship, with or without employees, or as an independent contractor;
· a cooperative with not more than 500 employees;
· an ESOP (as defined in section 3 of the Small Business Act (15 U.S.C. 632)) with not more than 500 employees;
· a tribal small business concern, as described in section 31(b)(2)(C) of the Small Business Act (15 U.S.C. 657a(b)(2)(C)), with not more than 500 employees
· small business concerns
· private nonprofit organizations and
· small agricultural cooperatives.
Eligible Entities may apply for an advance under section 7(b)(2) of the Small Business Act (15 U.S.C. 636(b)(2)) in the amount of $10,000.
The amount advanced may be used for address
· any allowable purpose for a loan made under section 7(b)(2) of the Small Business Act
· providing paid sick leave to employees unable to work due to the direct effect of the COVID–19;
· maintaining payroll to retain employees during business disruptions or substantial slowdowns;
· meeting increased costs to obtain materials unavailable from the applicant’s original source due to interrupted supply chains;
· making rent or mortgage payments; and
· repaying obligations that cannot be met due to revenue losses.
Any Advance granted under this section of the CARES Act shall not have to be repaid even if the Disaster Loan is denied.
If an applicant that receives an advance under this subsection transfers into, or is approved for, the loan program under section 7(a) of the Small Business Act (15 U.S.C. 636(a)), the advance amount shall be reduced from the loan forgiveness amount for a loan for payroll costs.
Subsidy for Certain Loan Payments (§1112)
The SBA shall pay the principal, interest and any associated fees that are owed on an 1112 Qualified Loan in a regular servicing status (a) on a 1112 Qualified Loan made before the date of enactment of the CARES Act and not on deferment, for the 6-month period beginning with the next payment due on the covered loan; or (b) on a 1112 Qualified Loan made before the date of enactment of the CARES Act and on deferment, for the 6-month period beginning with the next payment due on the covered loan after the deferment period; or (c) on a 1112 Qualified Loan made during the period beginning on the date of enactment of the CARES Act and ending on the date that is 6 months after such date of enactment, for the 6-month period beginning with the first payment due on the covered loan.
An 1112 Qualified Loan is loan that is (a) guaranteed by the SBA under section 7(a) of the Small Business Act (15 U.S.C. 636(a))[7] or (b) made by an intermediary to a small business concern using loans or grants received under section 7(m) of the Small Business Act (15 U.S.C. 636(m)).
Employee Retention Credit For Employers Subject to Closure Due to Covid-19 (§2301)
To provide incentive for Employers to retain employees, the CARES Act provides relief against employment taxes.
In the case of an Eligible Employer, there shall be allowed as a credit against applicable employment taxes for each calendar quarter an amount equal to 50 percent of the qualified wages (up to $10,000) with respect to each employee of such employer for such calendar quarter. Excess credit is treated as overpayment.[8]
This credit shall not exceed the applicable employment taxes (reduced by IRC §§ 3111(e) and (f) credits and as reduced by Families First Coronavirus Response Act §§7001 and 7003 credits).
An Eligible Employer is any employer that was carrying on a trade or business in 2020 and with respect to any calendar quarter (a) the operation of the trade or business is fully or partially suspended during the calendar quarter due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to the coronavirus disease 2019 (COVID–19) or (b) such calendar quarter is within the period beginning with the first calendar quarter beginning after December 31, 2019, for which gross receipts (within the meaning of section 448(c) of the Internal Revenue Code of 1986) for the calendar quarter are less than 50 percent of gross receipts for the same calendar quarter in the prior year, and ending with the calendar quarter following the first calendar quarter beginning after a calendar quarter within the period beginning with the first calendar quarter beginning after December 31, 2019, for which gross receipts (within the meaning of section 448(c) of the Internal Revenue Code of 1986) for the calendar quarter are less than 50 percent of gross receipts for the same calendar quarter in the prior year, for which gross receipts of such employer are greater than 80 percent of gross receipts for the same calendar quarter in the prior year.
Delay of Payment of Payment of Employer Payroll Taxes (§2302)
Payment for 50% of certain Employer Payroll taxes is extended to December 31, 2020 and the balance is due to be paid on or before December 31, 2022.
Modification For Losses, AMT Credit (§§2303, 2304 )
In essence, the CARES Act provides the following four relief provisions:
· Five-year net operating loss (NOL) carryback provision;
· Fiscal year NOL carryback fix from the Tax Cuts and Jobs Act (TCJA) of 2017;
· Deferral of 80% income limitation on post-2017 NOLs to 2021;
· Immediate AMT tax credit refunds
Modification of Limitations on Business Interest (§§2306)
The CARES Act increased the deductibility of Business Interest in certain circumstances.
Relief to Certain Businesses (§§4002, 4003, 4004)
The Secretary of the Treasury is authorized to make loans, loan guarantees and other investments to provide liquidity to certain business, States and municipalities related to losses incurred as a result of coronavirus .
The enumerated business that qualify are air carriers, national security businesses or a United States business that has not otherwise received adequate economic relief in the form of loans or loan guarantees provided under the CARES Act. These businesses must limit employee compensation to qualify for the economic assistance.
In addition, the CARES Act provided authority to establish lending programs to assist further assist States. Municipalities, small businesses and mid-sized businesses.
Temporary Relief From Troubled Debt Restructurings (§4013)
Financial Institutions are given the authority to suspend GAAP requirements for loan modifications related to the coronavirus disease 2019 pandemic that would otherwise be categorized as a troubled debt restructuring.
In addition, Financial Institutions may suspend any determination of a loan modified as a result of the effects of the coronavirus disease 2019 (COVID–19) pandemic as being a troubled debt restructuring, including impairment for accounting purposes.
Forbearance Of Residential Mortgage Loan Payments For Multifamily Properties With Federally Backed Loans (§4023)
Upon request by a multifamily borrower[9] with a Federally backed multifamily mortgage loan experiencing a financial hardship due, directly or indirectly, to the COVID–19 emergency, the servicer of such loan shall provide a forbearance of 30 days and 2 additional 30-day periods if requested.
During the forbearance period, the multifamily borrower may not evict any tenants solely for non-payment or rent or other fees or charges and may not require a tenant a vacate on less than 30 days’ notice.
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Endnotes:
[1] Effective on January 1, 2021 the amount of $1,000,000 shall be reduced to $350,000.
[2] With respect to a loan that is sold on the secondary market, if an investor declines to approve a deferral requested by a lender, the SBA shall exercise the authority to purchase the loan so that the impacted borrower may receive a deferral for a period of not less than 6 months, including payment of principal, interest, and fees, and not more than 1 year.
[3]If an otherwise eligible recipient was not in business during the period beginning on February 15, 2019 and ending on June 30, 2019, upon request by such entity, the calculations in the following paragraph shall be the sum of (i) the product obtained by multiplying 2.5 by the average total monthly payments for payroll costs incurred during the period beginning on January 1, 2020 and ending on February 29, 2020; and (ii) the amount of certain preexisting loans obtained by or through the SBA made during the period beginning 1.31.20 and ending on the date that covered loans are made available that may be used to refinance the preexisting loan
[4] An eligible recipient with tipped employees described in section 3(m)(2)(A) of the Fair Labor Standards Act of 1938 (29 U.S.C. 203(m)(2)(A)) may receive forgiveness for additional wages paid to those employees.
[5] Election of (i) or (ii) is at the option of the Borrower.
[6] I n the case of an eligible recipient that is a seasonal employer, as determined by the Administrator, the average number of full-time equivalent employees per month employed by the eligible recipient during the period beginning on February 15, 2019 and ending on June 30, 2019.
[7] An 1112 Qualified Loan includes a loan made under the Community Advantage Pilot Program of the SBA;; or (B) title V of the Small Business Investment Act of 1958 (15 U.S.C. 695 et seq.). An 1112 Qualified Loan does not include a loan made under paragraph (36) of section 7(a) of the Small Business Act (15 U.S.C. 636(a)), as added by section 1102 of the CARES Act.
[8] Special rules apply to Tax-Exempt organizations.
[9] Similar provisions for individual borrowers and tenants are found in §§4022and 4024 of the CARES Act.