CARES ACT: A General Summary
-By Nedda Ghandi, Esq.
On Friday, March 27, 2020, President Trump signed the “Coronavirus Aid, Relief, and Economic Security Act” (CARES Act) into law. This law marks the single largest economic stimulus package in history and is intended to provide relief to the many businesses and individuals impacted by COVID-19. This article is a general summary with some basic explanations particularly related to the “paycheck protection loans” provided for in the CARES Act. The CARES Act is being implemented and the information contained herein may be subject to certain adjustments or revisions as the CARES Act transitions into law or as amendments are made. Substantial modifications in the law or the implementation may have occurred between the drafting of this article and its publication. As such, the information contained herein should be confirmed with any updated information as the CARES Act evolves.
Title I, entitled Keeping American Workers Paid and Employed Act of the CARES Act, provides certain financial resources to help sustain small businesses with less than 500 employees, including sole proprietorships and nonprofit organizations during these unprecedented times. In addition, a business with more than one physical location that employs not more than 500 employees per physical location that is assigned the North American Industry Classification System code beginning with 72, Accommodation and Food Services is eligible for the available financial resources under Title I. The Small Business Administration will have access to approximately $350 billion in loans during the covered period as defined from February 15, 2020 through June 30, 2020.
PAYCHECK PROTECTION LOANS
The organizations that are eligible can apply for “paycheck protection loans” (“PPL”). PPL are fully guaranteed by the Federal Government through June 30, 2020 and, thereafter, return to an 85% guarantee for loans greater than $150,000. The PPL are generally limited to the lesser of:
• the sum of average monthly “payroll costs” for the one-year period ending on the date the loan was made (an alternative calculation is available for seasonal employers) multiplied by 2.5, and any Emergency Government Disaster Loan (see below) taken out after January 31, 2020 that has been refinanced into a paycheck protection loan, or
• $10 million.
Payroll costs include the sum of the following:
• wages, commissions, salary, or similar compensation to an employee or independent contractor,
• payment of a cash tip or equivalent,
• payment for vacation, parental, family, medical or sick leave,
• allowance for dismissal or separation,
• payment for group health care benefits, including premiums,
• payment of any retirement benefits, and
• payment of state or local tax assessed on the compensation of employees.
Payroll costs exclude the following:
• the compensation of any individual employee in excess of an annual salary limitation of $100,000,
• payroll taxes,
• any compensation of an employee whose principal place of residence is outside the U.S., or
• any qualified sick leave or family medical leave for which a credit is allowed under the new Coronavirus Relief Act passed last week.
A payroll protection loan will have a maximum maturity of 10 years bearing an interest rate not to exceed 4%. At the time of the drafting of this article, the PPL will feature an interest rate of 1% and two-year terms.
So, what does this mean and how much could a small business apply for? The following is an example of calculating the amount that a small business could apply for as a PPL. Company XYZ applies for a paycheck protection loan on June 1, 2020. The Company XYZ had $1.5 million in included payroll costs for the prior year (June 1, 2019 through June 1, 2020), resulting in a $125,000 average per month payroll cost. Assuming that the fully guaranteed federal loan is made prior to December 31, 2020, Company XYZ is eligible to receive a payroll protection loan equal to the lesser of $312,500 (2.5 times $125,000 monthly average in included payroll costs) or $10 million.
The SBA, for purposes of this program, has greatly expanded the number of “SBA Certified Lenders.” The deadline to apply is June 30, 2020. Lenders are doing their best to keep up with the rapidly changing requirements and the deluge of applications.
The loan proceeds may be used to cover the following business expenses: payroll; costs related to group health care benefits; employee salaries, commissions, or similar compensation; mortgage payments; rent (including rent under a lease agreement); utilities, and any other debt service requirements. No personal guarantee is required by the loan applicant. Also, standard fees of Section 7 of the Small Business Act are waived. There is an additional provision for possible deferment of repayment of the loans for a period of at least six months, but not to exceed a year.
Section 1106 of the CARES Act outlines the Loan Forgiveness provisions. The provisions set forth that a portion of the PPL discussed above is eligible to be forgiven on a tax-free basis. The amount to be forgiven is the sum of the following payments made by the borrower during the 8-week covered period beginning on the date of the loan:
• payroll costs (as defined above)
• mortgage interest,
• certain utility payments.
A borrower must submit to its lender an application that includes documentation verifying the number of employees and pay rates, and cancelled checks showing mortgage, rent, or utility payments made during the 8-week covered period in order to seek debt forgiveness. Lenders have expressed concerns regarding how this process would work as there are concerns that if lenders wrongfully determine the forgiveness amounts that lenders may be liable for the wrongful determinations. At the time of the drafting of this article the procedures for implementing the debt forgiveness remains undetermined.
However, as an example and continuing with the hypothetical above, assume that Company XYZ was approved for and borrows $312,500 as mentioned in the above example. Then, during the first 8 weeks following the loan date, the Company XYZ expends $250,000 in payroll costs, and $20,000 in mortgage interest, rent and certain utility payments. Company XYZ is now eligible to have $270,000 of the $312,500 of the payroll protection loan forgiven. More importantly, the debt forgiveness income will not create taxable income for Company XYZ. Plus, any remaining loan payments on the outstanding amount of $42,500 will not become due for at least six months from the loan date as a result of the CARES Act deferment rules.
Employers should be aware that the amount of the loan that may be forgiven is decreased if the borrower either reduces its workforce during the 8-week covered period when compared to other periods in either 2019 or 2020, or reduces the salary or wages paid to an employee who had earned less than $100,000 in annualized salary by more than 25% during the 8-week covered period. This loan forgiveness reduction can be avoided, however, if the borrower rehires or increases the employee’s pay within an allotted time period.
Below is the Forgiveness Reduction Formula for Employee Layoffs:
Loan Forgiveness Amount (for CompanyZ–$270,000) X Average Number of Full-Time Employees/Month
At the Election of the Borrower, (i) Average Number of Full-Time Employees per Month Employed During the Period of 2/15/2019 through 6/30/2019; OR (ii) Average Number of Full Time Employees per Month from 1/1/2020 to 2/29/2020
• The applicable formulas can only reduce the amount forgiven and cannot increase it.
• Employers with seasonal employees will have to use a slightly different formula.
• The reduction formula does not consider if employer rehires the employees or increases salaries prior to June 30, 2020 and adjustments would be needed in such an case.
• The amount forgiven is excluded from Taxable Income under the CARES Act.
ECONOMIC INJURY DISASTER LOANS, EMERGENCY GRANT, AND OTHER PROVISIONS
Section 1110 of the CARES Act, Emergency Government Disaster Loan and Grant expands access to Economic Injury Disaster Loans under Section 7(b)(2) of the Small Business Act to include not only businesses with fewer than 500 employees, sole proprietors with or without employees or as an independent contractor, an employee stock ownership plan (ESOP) as defined in Section 3 of the Small Business Act with not more than 500 employees, or a tribal small business concern with not more than 500 employees.
Economic Injury Disaster Loans in the amount below $200,000 that are made before December 31, 2020 will not require personal guarantees. A disaster loan can be taken out between January 31, 2020 and the dates on which a paycheck protection loan is available for reasons “other than paying payroll costs.” Any loan for payroll purposes will be restricted to the paycheck protection loan as described above.
In addition, section 1110 of the CARES Act creates a new Emergency Grant to allow a business that has applied for a disaster loan to receive an immediate advance up to $10,000. This grant can be used for the following expenses: paid sick leave for employees unable to work due to the direct effect of COVID-19; payroll costs to maintain employees; increased costs to obtain materials unavailable from the grant applicant’s original source because of interrupted supply chains: rent or mortgage payments; or repaying obligations that cannot be met due to revenue decline. This grant is not required to be repaid, even if the borrower’s request for a 7(b)(2) loan of the Small Business Act is denied.
Section 1112 of the CARES Act, Subsidy for Certain Loan Payments provides benefits to those with loans under Section 7(a) of the Small Business Act other than the new paycheck protection loans, in the form of a government subsidy whereby the SBA will pay six months of principal, interest and fees on qualifying loans.
Lastly, the CARES Act provides a payroll tax “holiday” to further assist employers during these trying times. During this “holiday” (which extends from March 27 through Dec. 31) employers may defer their payment of Social Security taxes. Should an employer elect to defer these payments, they must be repaid over the next two years—with half due by Dec. 31, 2021, and the remaining half by Dec. 31, 2022.
In conclusion, the CARES Act is intended to assist small businesses during this unprecedented and tumultuous time. The extent to which the provisions actually provide the relief promised remains to be seen. As the CARES Act is implemented, there will likely be adjustments or revisions to either the law itself, related regulations, or the processes and procedures involved. Again, the information contained herein should be confirmed with any updated information as the CARES Act evolves.
Nedda Ghandi, Esq., is the founding partner of Ghandi Deeter Blackham Law Offices. A Nevada native, Ghandi is a graduate of the University of Nevada, Las Vegas William S. Boyd School of Law and has practiced law in Las Vegas for 9 years. Ghandi has written numerous articles for publications concerning interesting developments in the law, and has been selected as a member of Nevada’s Legal Elite and as a Super Lawyer every year since 2013. Ghandi Deeter Blackham specializes in family law, bankruptcy, guardianship, and probate. Consultations may be scheduled by calling 702.878.1115 or visiting www.ghandilaw.com