CARES Act Augments Small Business Loan Programs: What You Need to Know to Act Now
Real Estate, Finance and Banking Alert
On Friday, March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) intending to address and alleviate much of the economic stress resulting from the coronavirus (COVID-19) pandemic. The CARES Act includes 880 pages of extraordinary spending in the public health sector to combat the pandemic, as well as various broad economic incentives, including checks to certain Americans, augmented unemployment insurance, $500 billion to the Treasury to support companies and industries damaged by the pandemic, and $349 billion to the Small Business Administration (SBA) to aid small businesses and more importantly their employees.
The CARES Act augments the Business Loans Program Account category (also referred to as the Paycheck Protection Program) of the Small Business Act to allow the SBA to provide 100% federally backed loans up to a maximum amount to eligible businesses to help pay operational costs, such as payroll, mortgage and rent payments, health benefits, insurance premiums, utilities and other operating expenses. The CARES Act allocates $349 billion in guaranteed lending, which will be available to eligible businesses during the covered period (beginning on February 15, 2020, and ending on June 30, 2020).
We highlight below some of the provisions primarily as they relate to the program, but please note that this is intentionally a brief summary. Specific questions should and will require additional diligence and review of the applicable provisions of the CARES Act.
The SBA website can be found here.
- Businesses with up to 500 employees (or a greater number based on the applicable size standard for the industry as provided by SBA’s existing regulations) may be eligible.
- Certain businesses in the hospitality and food services industries with more than one physical location but no more than 500 employees at each physical location may be eligible.
- Although program eligibility is generally subject to SBA regulations on entity affiliations under 13 CFR §§121.103 and 121.301 (SBA Affiliation Rules), the SBA Affiliation Rules are waived in the following circumstances:
- For businesses in the hospitality and food service industries, if the business employs 500 or fewer employees and is assigned to the "accommodation and food services" sector (Sector 72) under the North American Industry Classification System (NAICS);
- For franchise businesses with SBA franchisor identifier codes; and
- For any business that receives financial assistance from a company licensed under Section 301(c) of the Small Business Investment Act.
- Non-profit organizations may be eligible.
- Sole-proprietors, independent contractors, and other self-employed individuals may be eligible.
The maximum loan amount available to each otherwise eligible program participant is the lesser of:
- 2.5 times the (i) average total monthly payroll costs incurred in the one-year period before the loan is made or (ii) for seasonal employers, the average monthly payroll costs for the 12 weeks beginning on February 15, 2019, or from March 1, 2019 to June 30, 2019, plus the outstanding amount of a loan made under the SBA’s Disaster Loan Program between January 31, 2020, and the date on which such loan may be refinanced as part of this new program; or
- For businesses that were not in existence during the period from February 15, 2019, to June 30, 2019, 2.5 times the average total monthly payroll payments from January 1, 2020, to February 29, 2020, plus the outstanding amount of a loan made under the SBA’s Disaster Loan Program between January 31, 2020, and the date on which such loan may be refinanced as part of this new program; or
- $10 million.
Allowable uses of the loan include:
- Payroll costs, which means the sum of any of the following employee compensation costs:
- Salary, wage, commissions, or similar compensation
- Payment of cash tip or equivalent
- Paid leave
- Severance payments
- Payment for group health benefits, including insurance premiums
- Retirement benefits
- State and local payroll taxes
- Payments of interest on mortgage obligations
- Rent/lease agreement payments
- Interest (but not principal) on any other debt obligations incurred before the covered period
- Compensation to sole proprietors or independent contractors (including commission-based compensation) up to $100,000 in one year, prorated for the covered period
Excluded uses of the loan include:
- Individual employee compensation above $100,000 per year, prorated for the covered period
- Certain federal taxes
- Compensation to employees whose principal place of residence is outside of the U.S.
- Sick and family leave wages for which credit is allowed under the Families First Act
Good Faith Certification
In order to obtain a loan under the program, the eligible applicant must include a good-faith certification that:
- The loan is needed due to the COVID-19 emergency in order to continue operations;
- Funds will be used to retain workers and maintain payroll or make mortgage, lease, and utility payments;
- The applicant does not have any other application pending under this program for the same purpose that is duplicative of amounts applied for or received under a covered loan; and
- From February 15, 2020 until December 31, 2020, the applicant has not received a loan for the same purpose with duplicative amounts under this program.
Loan Requirements and Loan Forgiveness
- There are no collateral or personal guarantee requirements under this program, except where the eligible business has used the loan proceeds for a non-allowable purpose.
- The requirement that a business show that it cannot obtain credit elsewhere is waived.
- Indebtedness is forgiven to the extent the loan is used for allowable uses (see above list).
- The amount forgiven is reduced:
- Proportionally to the extent an eligible business terminates its employees or reduces employee salaries; and
- Amounts forgiven will also be reduced by the reduction in pay of any employee (making less than $100,000) beyond 25% of their compensation for the most recent full quarter during which the employee was employed.
- Eligible business that re-hire workers previously laid off due to COVID-19 reductions will not be penalized for having a reduced payroll at the beginning of the period.
- Forgiveness for additional wages paid to tipped workers is allowed.
- The “look back” period will be during the eight-week period after the date of the loan as compared to either (i) the date of the eligible workforce reduction occurring between February 15, 2020 and 30 days after the CARES Act is signed into law, and ending by June 30, 2020, or (ii) the period from January 1, 2020, to February 29, 2020 (the eligible business can elect the period of time used for analysis).
- Any loan forgiveness is excepted from cancellation of indebtedness income.
- Interest rates may not exceed 4%.
- Lenders must defer the initial loan payments for a period of at least six months and up to one year.
- The SBA must provide lenders with deferment guidance within 30 days of enactment.
- The SBA will not collect any yearly or guarantee fees for the loan, and all prepayment penalties are waived.
The SBA is expected to provide clarification regarding various aspects of the program within 30 days from March 27, 2020. However, the CARES Act specifies the following:
- Lenders must be either (i) existing qualified lenders under Section 7(a) pursuant to the Small Business Act, or (ii) additional lenders, being those insured depository institutions, insured credit unions, and other lenders determined to qualify by the SBA and Secretary of the Treasury (program lenders), such additional lenders being determined as follows:
- The program permits the SBA to delegate authority to additional lenders for purposes of making and approving covered loans to eligible borrowers during the covered period.
- Pursuant to the program's delegated authority provisions, the SBA and Secretary of the Treasury shall designate as additional lenders those that have the "necessary qualifications to process, close, disburse and service loans" made with the guarantee of the SBA.
- Specific criteria for additional lenders are not included in the CARES Act, however, "the Department of the Treasury, in consultation with the Administrator, and the Chairman of the Farm Credit Administration shall establish criteria."
- A lender may not participate in the program if doing so would affect its safety and soundness, as determined by the Secretary of the Treasury.
- Eligible business borrowers will verify through documentation to lenders their payments during the period. Program lenders that receive the required documentation will not be subject to an enforcement action or penalties by the SBA relating to loan forgiveness for eligible uses.
- Upon a program lender’s report of an expected loan forgiveness amount for a loan or pool of loans, the SBA will purchase such amount of the loan from the program lender.
- Eligible business borrowers must apply to their program lender for loan forgiveness by submitting required documentation and should receive a decision within 60 days.
- The SBA will guarantee (through deferred participation) 100% of any covered loan made under the program during the covered period.
- Prior to the extension of any loan under the program, the program lender must evaluate the eligibility of each eligible business borrower that applies for a covered loan, considering whether the eligible business borrower:
- Was in operation on February 15, 2020; and
- Had employees for whom the borrower paid salaries and payroll taxes, or paid independent contractors, as reported on Form 1099-MISC.
- Covered loans on a program lender's balance sheet will be risk rated at 0%, meaning there is no requirement to hold capital against these assets. If a covered loan is modified due to COVID-19-related difficulties, the program lender will not be required to report the modification as a troubled debt restructuring until such time as the federal banking agencies determine it is appropriate.
- Program lenders, including banks, will be reimbursed for covered loan processing fees based on the disbursed loan balance: 5% for covered loans up to $350,000, 3% for covered loans greater than $350,000 and less than $2 million, and 1% for all other covered loans.
- Additionally, the SBA will coordinate with the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and state bank regulators "to encourage those entities to not require lenders to increase their reserves" due to receiving payments from the SBA on covered loans.
- Covered loans may be sold on the secondary market. If a covered loan is sold on the secondary market and an investor declines to approve a deferral request by a lender, the SBA will purchase the loan so that the impacted borrower may receive a deferral period of six months to a year (including payment of principal, interest, and fees).
Certain Business Provisions
- Employers are eligible for a refundable payroll tax credit of 50% percent of wages paid to employees during the COVID-19 pandemic, and it is available to employers whose (1) operations were fully or partially suspended due to a COVID-19-related shutdown order, or (2) gross receipts declined by more than 50% when compared to the same quarter in the prior year, up to the point gross receipts exceed 80% of gross receipts for the same calendar quarter of the prior year.
- For employers with greater than 100 full-time employees, qualified wages are wages paid to employees when they are not providing services due to COVID-19-related circumstances. For eligible employers with 100 or fewer full-time employees, all employee wages qualify for the credit, whether the employer is open for business or subject to a shutdown order.
- The credit is provided for the first $10,000 of compensation, including health benefits, paid to an eligible employee.
- The credit is provided for wages paid or incurred from March 13, 2020, through December 31, 2020.
- The employer portion of payroll taxes related to Social Security taxes attributable to wages paid during 2020 will be postponed. Half of the amount deferred will be payable on December 31, 2021, and the remaining 50% will be payable on December 31, 2022.
- Net operating losses for 2018-2020 may be carried back for five years and may also offset 100% of taxable income for any tax year beginning before January 1, 2021. The prior 80% limitation would generally apply to taxable years beginning on or after January 1, 2021. Taxpayers with taxable income in such prior years may file amended returns and immediately qualify for tax refunds.
- For 2018-2020, individuals can use losses from pass-through entities such as limited liability companies and partnerships to offset all non-business income.
- Beginning in 2018, corporations may claim 100% of all corporate alternative minimum tax (AMT) credits, accelerating the ability of companies to recover the AMT credits.
- The limitations on the deductibility of business interest expense are increased from thirty percent (30%) to fifty percent (50%) of adjusted taxable income for the years 2019 and 2020 for entities other than partnerships (although it generally applies to S Corporations; special additional provisions apply to partnerships).
- The depreciable life of "qualified improvement property" is reduced from 39 years to 15 years, therefore increasing depreciation deductions.
- All U.S. residents with an adjusted gross income up to $75,000 ($150,000 for married couples), who are not a dependent upon another taxpayer and have a work eligible Social Security number, are eligible for the full $1,200 ($2,400 married) rebate. In addition, they are eligible for an additional $500 per child. This is true even for those who have no income, as well as those whose income comes entirely from non-taxable means-tested benefit programs, such as Social Security benefits.
- The IRS will use a taxpayer’s 2019 tax return if filed or, in the alternative, their 2018 return to identify and check recipients, including those who file a tax return in order to take advantage of the refundable Earned Income Tax Credit and Child Tax Credit. The rebate amount is reduced by 5% of the taxpayer's income exceeding the $75,000 threshold. The amount is completely phased-out for single filers with incomes exceeding $99,000 for single filers, $146,500 for head of household filers with one child, and $198,000 for joint filers with no children.
Qualified Retirement Accounts
- The CARES Act waives the 10% early withdrawal penalty for distributions up to $100,000 from qualified retirement accounts for coronavirus-related purposes made on or after January 1, 2020.
- A coronavirus-related distribution is one made to an individual (1) who is diagnosed with COVID-19, (2) whose spouse or dependent is diagnosed with COVID-19, or (3) one who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19, or other factors as determined by the Treasury Secretary.
- Income attributable to such distributions would be subject to tax over three years, and the taxpayer may recontribute the funds to an eligible retirement plan within three years without regard to that year’s cap on contributions.
- There is additional flexibility for loans from certain retirement plans for coronavirus-related relief.
- The CARES Act waives the required minimum distribution rules for certain defined contribution plans and IRAs for the calendar year 2020. This provision provides relief to individuals who would otherwise be required to withdraw funds from such retirement accounts during the economic slowdown due to COVID-19.
- The CARES Act includes an allowance of a partial above-the-line deduction for charitable contributions up to $300 of cash contributions, whether deductions are itemized or not.
- The CARES Act increases the limitations on deductions for charitable contributions by individuals who itemize, as well as corporations.
- For individuals, the 60% of adjusted gross income limitation is modified to 100%, effectively suspending the limit for individuals for 2020.
- For corporations, the 10% limitation is increased to 25% of taxable income.
- Borrowers may defer student loan payments, principal, and interest for six months, through September 30, 2020, without penalty to the borrower, for all federally owned loans.
- The CARES Act enables employers to provide a student loan repayment benefit to employees on a tax-free basis, whereby an employer may contribute up to $5,250 annually toward an employee’s student loans, and such payment would be excluded from the employee’s income, applicable to any student loan payments made by an employer on behalf of an employee after the date of enactment and before January 1, 2021.