In response to the COVID-19 global pandemic, the US Senate recently passed the CARES Act, a $2.2 trillion emergency fiscal stimulus package designed to ease the financial damage caused by the coronavirus-related economic slowdown.
At over 300 pages, this is an enormous bill with lots of complex provisions. While we’re still digesting the finer points of this bill, I'd like to unpack what we do know about the CARES Act.
Paycheck Protection Program
Probably the most significant program in the Act for business-owners is the Paycheck Protection Program (PPP). PPP provides $349 billion in federally backed loans to businesses to meet operational costs. So long as the operational costs were in place prior to February 15, 2020 PPP covers expenses like payroll, mortgage interest payments, rent, and utilities.
Who qualifies?
Businesses with fewer than 500 employees.
How much money is available?
A qualifying business can receive up to 2.5x its monthly average payroll costs. For example, if your average monthly payroll expense over the last 12 months is $100,000, you can qualify for a $250,000 forgivable loan. The maximum loan amount is $10 million.
What is required to ensure the loan is forgivable?
This program is designed to ensure that employees continue to stay on your payroll. In order for the loan to be forgivable, you must retain the same number of employees you’ve previously employed, compared to the prior period. You also cannot cut wages by more than 25% for those individuals making less $100,000.
If the loan was used to cover mortgage, rent, or utilities, you must provide documentation verifying such payments.
How do you apply?
You can start by downloading the PPP application here. Loans will be administered through an SBA lending bank. If you have any questions regarding the application you may contact me a kjames@bncj-law.com .
What if I’ve already terminated or furloughed employees?
If you have already terminated or furloughed employees because of the coronavirus slowdown you can bring them back for this purpose. You have a limited time after the date of enactment to rehire, or unfurlough employees, in order to qualify for the PPP.
What if the loan is not forgiven?
If the loan funds are used for something other than covered expenses, those loan funds will not be forgiven and will instead be converted to a repayable loan with terms subject to a 10-year maximum repayment term and a maximum interest rate of 4%.
Is the loan forgiveness dischargeable?
From what we’ve seen, discharge of a PPP loan is non-taxable.
Important PPP Tips:
Make sure you consult an attorney before signing the loan documents. From what we’ve seen, the PPP loans are intended to be non-recourse loans, i.e. no personal guarantee required. Retain an attorney to review the documents before signing to ensure the lending institution does not slip language into the documents making it a recourse loan.
Talk to your CPA. Some businesses may need to establish a tax basis to write losses off in order to reduce income. A PPP loan may affect your ability to do that. Your CPA should be able to tell you a loan amount that makes sense given your specific situation.
This is a good time to get all your advisors together at the same table – or on the same conference call.
June 30th is the deadline for filing a PPP loan application.
Delay of Payment of Employer Payroll Taxes
The Act allows employers and self-employed individuals to defer payment of the employer share of the Social Security tax from the date of the enactment through December 31, 2020, that they otherwise are responsible for paying. The employer must pay the deferred employment tax in 2021 and 2022, with 50% of the amount required to be paid by December 31, 2021 and the other 50% payable by December 31 of the following year.
Emergency Economic Injury Grants
The Act includes $10 billion in funding to provide an advance of $10,000 to small businesses that apply for an SBA economic injury disaster loan (EIDL) within three days of applying for the loan. The EIDL loan application can be found here. The $10,000 grant can be used to pay for paid sick leave to employees, maintain payroll, meet increased production costs due to supply chain disruptions, or pay business obligations, including debts, rent and mortgage payments. The $10,000 grant does not need to be repaid, even if the grantee is subsequently denied an EIDL.
If the grantee is awarded the EIDL loan, the loans carry an interest rate up to 3.75% for companies and 2.75% for nonprofits, as well as principal and interest deferment for up to 4 years. EIDL loan funds can be used for any expenses that could have been met had the disaster not occurred, including payroll and operating expenses.
Direct Payments
The Act provides direct payments in the amount of $1,200 ($2,400 for married couples) to all U.S. residents with adjusted gross income up to $75,000 ($150,000 for married couples), with eligibility for an additional $500 per child. The payments would start phasing out for earners above those income thresholds and would not go to single filers earning more than $99,000; head-of-household filers with one child, more than $146,500; and more than $198,000 for joint filers with no children.
Kevin A. James is a business attorney in Placerville, CA. He helps business owners navigate the complex legal landscape in California with the goal of making his client’s businesses more profitable and simpler to operate. He can be reached at kjames@bncj-law.com or (530) 295-6400.
Learn more: Watch Kevin James's webinar on Responding to COVID-19: Navigating Employment and Contractual Issues to Minimize Disruption to Your Business.
Discover: What you need to know about the commercial real estate during COVID-19 by reading Key Considerations for Commercial Landlord & Tenants During COVID-19.