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The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which was enacted on March 27, 2020, provides significant relief to businesses affected by the COVID-19 crisis. The CARES Act creates an important new loan program, provides tax relief to affected businesses, and provides for additional unemployment benefits for individuals who are affected by the pandemic.

New SBA Loan Program

The CARES Act establishes a new business loan program category, called the Paycheck Protection Program (“PPP”), which consists of loans that will be available to businesses that employ up to 500 employees (although there are some exceptions under which some businesses that employ more than 500 employees will be eligible). The PPP loans will be made by private lenders under the auspices of the United States Small Business Administration (“SBA”).

Unlike SBA loans under existing programs, PPP loans may also be made to nonprofit organizations, veterans’ organization and Tribal businesses. In addition, sole proprietors, independent contractors and eligible self-employed individuals may also receive PPP loans.

Loans under the PPP are available to eligible businesses to pay operational costs such as payroll for employees who make less than $100,000 per year, rent, mortgage interest payments, health benefits and utilities. The maximum loan amount is $10 million and the program provides a formula by which the loan amount is tied to payroll costs incurred by the business to determine the size of the loan.

Critically, PPP loans may be forgiven to the extent businesses retain their employees who make less than $100,000 annually. The loan forgiveness amount is equal to the amount spent by the borrower during an eight-week period after the origination date of the loan on payroll costs, interest payment on any mortgage existing prior to February 15, 2020, payment of rent on any lease in force prior to February 15, 2020, and payment on any utility for which service began before February 15, 2020.

Portions of loans not forgiven are payable over a maximum of 10 years at a maximum rate of interest of 4%.

Appendix A to this article provides additional details regarding the PPP loan program.

Changes to Terms and Conditions of SBA’s Economic Injury Disaster Loans and Other SBA Loan Programs

PPP loans are different from the SBA’s Economic Injury Disaster Loans (“EIDLs”), which we discussed in our March 20, 2020 article entitled Small Business Loans Amid the Coronavirus Crisis. The CARES Act makes EIDLs more widely available by waiving several rules that originally governed those loans. For example, the CARES Act waived:

• Rules requiring personal guarantees on advances of $200,000 or less;
• The requirement that the applicant have been in business for one year before the disaster (now, applicants must have been in operation on January 31, 2020);
• The requirement that an applicant be unable to find credit elsewhere; and
• Rules that prohibited lenders from approving applicants based solely on credit scores (thus, a tax return will no longer be required).

The CARES Act also expands the scope of the EIDL program by making these loans available in all states. Before the enactment of the CARES Act, each state’s governor had to make a declaration of emergency that had to be certified by the SBA.

Emergency advances of up to $10,000 are available to small businesses and private nonprofits harmed by COVID-19 within three days after applying for an EIDL. To access the advance, a business or nonprofit must first apply for an EIDL, and then request the advance. The advance does not need to be repaid, and may be used to keep employees on payroll, to pay for sick leave, to meet increased production costs due to supply chain disruptions, or to pay business obligations, including debts, rent and mortgage payments.

Businesses must apply for Economic Injury Disaster Loans directly with the SBA by completing an application on the SBA’s website.

In addition, the CARES Act provides relief to small businesses that had obtained non-disaster SBA loans (e.g., 7(a), 504, and microloans). Under the CARES Act, the SBA will cover all loan payments on these SBA loans, including principal, interest, and fees, for six months. This relief will also be available to new borrowers who take out loans within six months of the enactment of the law.

Payroll Tax Deferment

The CARES Act provides for the potential deferral of payroll tax payments for the remainder of this year. Under the Act, the payment due date of certain payroll taxes and 50% of self-employment taxes for the period between the enactment of the CARES Act and December 31, 2020 are deferred. Half of those taxes will be due on December 31, 2021, and the other half will be due on December 31, 2022.

Payroll taxes that can be deferred include the employer portion of FICA (Social Security) taxes, the employer and employee representative portion of Railroad Retirement taxes (that are attributable to the employer FICA rate), and half of SECA tax liability.

If a business obtains a PPP loan and has any amount of that PPP loan forgiven, then that business will be unable to take advantage of this payroll tax deferral.

Payroll Tax Credit

The CARES Act also provides for a tax credit, which is available to employers, including nonprofits, who carried on a trade or business during 2020, but whose operations have been fully or partially suspended as a result of a government order limiting commerce, travel or group meetings. The credit is also provided to employers who have experienced a greater than 50% reduction in quarterly receipts, measured on a year-over-year basis.

Wages of employees who are furloughed or face reduced hours as a result of their employer’s closure or economic hardship are eligible for the credit. For employers with one hundred or fewer full-time employees, all employee wages are eligible, regardless of whether an employee is furloughed. Employers with greater than 100 employees are eligible to receive the credit if they continue to pay employees that are not providing services.

Eligible employers may receive a refundable tax credit against their share of payroll taxes for applicable employment taxes. For each calendar quarter during the applicable period, the employer can receive a credit in an amount equal to 50% of qualified wages (inclusive of health insurance) up to $10,000 per employee per quarter ending on December 31, 2020. The credit is treated as a refund if it exceeds the employer’s applicable employment taxes for a given quarter.

Employers may be eligible for this tax credit in two circumstances:

• If business operations were partially or fully suspended due to a mandatory government shut-down related to COVID-19; or
• If the business remained open during any quarter in 2020 but gross receipts for that quarter were less than 50% of what they were for the same quarter in 2019. The business will then be entitled to a credit for each quarter, until the business has a quarter where gross receipts exceed 80% of what they were for the same quarter in the previous year.

For purposes of this credit, qualified wages do not include wages paid under the Families First Coronavirus Response Act for sick leave or family medical leave, which are already subject to certain tax credits.

If a business obtains a PPP loan (even one that is not ultimately forgiven), then that business will be unable to take advantage of this payroll tax credit.

Certain CARES Act Provisions Concerning Individuals

The CARES Act contains several provisions that affect individuals. For example, the CARES Act:

• Provides a $1,200 ($2,400 in the case of a joint return) payment to eligible individuals, with an additional $500 tax credit per qualifying child. This payment is subject to a phase-out such that taxpayers with adjusted gross income in excess of $99,000 ($198,000 for married taxpayers filing a joint return) would not receive it.
• Increases the deductibility of certain charitable contributions made in cash during 2020 by taxpayers who itemize deductions, by suspending the 50% of adjusted gross income limitation.
• For distributions to individuals directly affected by coronavirus, waives the 10% withdrawal penalty tax on early distributions from eligible retirement plans (up to $100,000), and permits these distributions to be recontributed to retirement plans over a three-year period.
• Allows certain defined contribution plans and IRAs to suspend required minimum distributions in 2020 with respect to certain eligible participants. This allows participants not to be forced to receive distributions based on current depressed asset valuations.

More Businesses Permitted to File Subchapter V Bankruptcy Cases

As discussed in the article entitled The Small Business Act of 2019 Gives Financially Distressed Small Business a New Lifeline, the Small Business Reorganization Act of 2019 added a new “Subchapter V” to Chapter 11 of the Bankruptcy Code, which contains some new tools to increase a small business debtor’s chances for a successful reorganization. Before the enactment of the CARES Act, only businesses having $2,725,625 or less in non-contingent, liquidated, secured and unsecured debts are entitled to file Subchapter V cases.

Under the CARES Act, that debt threshold has been increased to $7.5 million for one year following the enactment of the Act (although at least 50% of that debt must be business-related). This means that more businesses will be able to take advantage of Subchapter V for one year, if bankruptcy becomes necessary.

Main Street Business Lending Program – Coming Soon

On March 23, 2020, the Federal Reserve stated that it expects to announce soon the establishment of a Main Street Business Lending Program to support lending to eligible small-and-medium sized businesses, complementing efforts by the SBA. At the time of this writing, this program has not yet been established. However, once it is established, it will serve as another potential source of liquidity for businesses.

For more information on the topic discussed, contact:

• Jason M. Rimland  |  rimland@thsh.com  |  212-702-3142