Guidance on the CARES Act & the Paycheck Protection Program
Dear Friends and Colleagues,
The current Pandemic has placed us all in an unprecedented situation that we are all navigating together for the first time. However, we at Mateer & Harbert wish to assure you that we are still operating at full capacity and can continue to provide the high quality personal legal services and resources you are accustomed to receiving from our firm. Our doors remain open and we are strongly committed to the health and safety of our staff and attorneys. We are carefully following CDC guidelines, as well as any other Federal, State or local instructions. While the shelter in place order is in effect, we are utilizing the latest in technology and are able to consult with you via email, phone, and video conferencing to continue to assist you with your legal needs.
In response to this Pandemic, on March 27, 2020 the President signed into law a 2.2 Trillion dollar stimulus bill called the CARES Act. There are several programs and changes brought about by the CARES Act that may be of interest to you. Below you will find a summary of pertinent provisions of the Act. We have also attached more detailed information on the various programs that are available, as well a comparison chart of 3 popular programs. If you have any questions while reviewing the attached documents please do not hesitate to contact us, and you may reach out directly to one of our partners, Joe Percopo, LL.M. ([email protected]), who has been reviewing this new legislation to discuss.
Paycheck Protection Program and Forgiveness Summary
The Paycheck Protection Program (“PPP”) is a new addition to the SBA loan options for qualifying businesses and qualifying expenses. The application for the PPP loan can be located HERE. While additional guidance for the program is expected, currently the interim final rules (which are effective immediately) are located here and SBA FAQs regularly updated on the program are located here. The application requires the borrower to make certain certifications pertaining to the business, need for the loan, and employee retention. The application submission deadline is June 30, 2020, and applications are being processed on a “First Come, First Serve” basis until the funds allocated to the program have been exhausted.
This program provides a loan for qualifying businesses which generally consist of companies with no greater than 500 employees, as well as self-employed and independent contractors. The amount of the available loan is generally equal to the lesser of (a) $10,000,000 or (b) 2.5 times the average monthly payroll costs (excluding amounts in excess of $100,000 annualized for individual employees). Lenders must make first disbursement within 10 days of SBA loan approval. The loan proceeds may be used for payroll, group health benefits, interest on mortgages, rent, utilities, and interest on debt incurred before February 15, 2020. Loan forgiveness is available to borrowers in an amount equal to the payroll, group health benefits, interest on mortgages, rent, and utility payments incurred during the 8 week period following the first disbursement loan by the lender. However, such forgiveness amount is subject to reduction if more than 25% of the loan is used on non-payroll costs, there is a reduction in workforce compared to the prior year, or more than a 25% decrease in compensation payments to employees compared to the most recent prior quarter.
The PPP loan does not require personal guarantees, collateral from the borrower, an inability to obtain credit elsewhere, or any application fees. The amounts not forgiven will have a term of 2 years with an interest rate of 1%. Repayment may be deferred for 6 months but interest will continue to accrue.
Economic Injury Disaster Loan Program Summary
The Economic Injury Disaster Loan (“EIDL”) Program is a modification of a preexisting SBA loan program in response to COVID-19 brought about by the enactment of the CARES Act. The application is currently available directly through the SBA and eligible business owners may apply here for up to a $10,000 advance grant which does not need to be repaid, provided it is spent on allowable uses. Such grant is payable within 3 days of a successful application submission to the SBA. The application submission deadline is December 31, 2020.
The program provides a loan for qualifying businesses generally consisting of companies with no greater than 500 employees, as well as self-employed and independent contractors, who have suffered substantial economic injury. The maximum amount that may be borrowed under this program is $2,000,000. The loan proceeds may be used for paid sick leave, payroll, group health benefits, increased material costs, mortgages, rent, and any other obligation that cannot be paid in response to lost revenues. This program does not provide loan forgiveness, except for the advanced grant with a $10,000 maximum.
The EIDL Program allows borrowers to apply based on credit score only and without certifying an inability to obtain credit elsewhere. However, the EIDL Program does require business asset collateral for loans in excess of $25,000 and a personal guarantee for loans in excess of $200,000. The loan shall be subject to a term up to 30 years determined on a case-by-case basis with an interest rate of 2.75% for non-profit borrowers and 3.75% for all other borrowers. Repayment may be deferred for 1 year but interest will continue to accrue.
Florida Disaster Loan Summary
The Florida Small Business Emergency Bridge Loan Program seeks to provide interim financial assistance to eligible small businesses that have suffered economic injury as a result of COVID-19. A Florida Disaster Loan is a 1-year, interest-free loan in an amount up to $50,000 (or $100,000 if warranted by need), for an eligible business with 2 to 100 employees. The proceeds of the loan may only be used to maintain or restart the business for economic injury directly related to COVID-19, and the loan must be repaid with the proceeds of longer term recovery resources. Qualified small businesses may complete an application online here through May 8, 2020.
Summaries of other CARES Act provisions below. For program specifics, click here.
Main Street Lending Program
On April 9, 2020, the Federal Reserve released information on the Main Street New Loan Facility and the Main Street Expanded Loan Facility, intended to facilitate lending to small and medium-sized businesses through the purchase up to $600 billion in loans. The New Loan Facility is intended for businesses that do not have existing loans, while the Expanded Loan Facility can be used by lenders to increase the size of existing loans. Under the Main Street Lending Program, a Federal Reserve Bank will commit to fund a single common special purpose vehicle (SPV), and the Treasury will provide a $75 billion equity investment to the SPV by using funds from the CARES Act. The SPV will purchase 95% of participations in Eligible Loans by U.S. Banks to Eligible Borrowers and the Eligible Lender will retain a 5% share. Eligible Lenders are U.S. insured depository institutions, U.S. bank holding companies, and U.S. savings and loan holding companies. Eligible Borrowers are businesses with up to 10,000 employees or $2.5 billion in annual revenue, created or organized in the United States under the laws of the United States with significant operations and a majority of its employees in the United States.
The New Loan Facility and the Expanded Loan Facility have similar eligibility requirements. However, for the Expanded Loan Facility, the required loan characteristics only apply to the expanded portion of the Eligible Loan. Under both Facilities, an Eligible Loan must have 4-year maturity, amortization of principal and interest deferred for one year, an adjustable rate of SOFR + 250-400 basis points, and prepayment must be permitted without penalty. The main difference between the New Loan Facility and the Expanded Loan Facility is the size of the Eligible Loan. For the New Loan Facility, the minimum loan size is $1 million, and the maximum loan size is the lesser of (i) $25 million or (ii) an amount that, when added to the borrower’s existing outstanding and committed but undrawn debt, does not exceed four times the borrower’s 2019 EBITDA. For the Expanded Loan Facility, the maximum loan size is the lesser of (i) $150 million, (ii) 30% of the Eligible Borrower’s existing outstanding but undrawn bank debt, or (iii) an amount that, when added to the borrower’s existing outstanding and committed but undrawn debt, does not exceed six times the borrower’s 2019 EBITDA.
For each Eligible Loan, an Eligible Borrower must attest that financing is required due to exigent circumstances from the COVID-19 pandemic, that the proceeds of the Eligible Loan will be used to make a reasonable effort to maintain payroll and retain employees, and that the Eligible Borrower will follow compensation, stock repurchase, and capital distribution restrictions under section 4003 of the CARES Act. The SPV will cease purchasing participations in Eligible Loans on September 30, 2020, unless extended. However, the Reserve Bank will continue to fund the SPV until the underlying assets mature or are sold.[/expand]
Student Loans Employer Exclusions Summary
If an employer makes any payments to an employee or lender for principal or interest on an employee’s qualified education loan during the year 2020, after the enactment of the CARES Act, then the employer may claim a deduction of the amount paid up to $5,250. Such payment is not considered wages so it is not subject to employment taxes. Therefore, neither the employer nor employee would pay any of the traditional combined 15.3% employment tax. More importantly to the employee, because the payment is not considered wages it would not be included in the employee’s gross income for income tax purposes.[/expand]
Employee Retention Credit for Employers Summary
Section 2301 of the CARES Act establishes a tax credit for employers in an effort to encourage retention of employees. This credit is a refundable employment tax credit of 50% of the qualified wages paid by businesses impacted by COVID-19. An employer is eligible if the business or operations have been fully or partially suspended due to government orders or directly by the virus or if the business has experienced a significant decline in gross receipts. Certain employers may receive a payroll tax credit of as much as $5,000 per employee for wages and health benefits paid between March 12, 2020 and January 1, 2021. However, the amount of qualified wages for each employee cannot exceed $10,000 per quarter and cannot exceed the employment taxes on wages paid to the employees during the quarter. If the credit amount exceeds the employer’s liability, the excess must be refunded.
For employers with over 100 full-time employees on average, the credit only applies to employees who are retained but are not working. For employers with less than 100 full-time employees on average, the credit applies to all employees. Employers who receive a small business interruption loan under the Payroll Protection Program (PPP) are not eligible for this credit.
Based on recent guidance from the IRS issued this week, employers can be immediately reimbursed for the employee retention credit by reducing their required deposits of payroll taxes that have been withheld from employees’ wages by the amount of the credit. Beyond the employee retention credit, the CARES Act also provides for advanced repayment of the qualified family leave credit and the qualified paid sick leave credit available under the Families First Coronavirus Response Act (FFCRA). Employers can receive an advance payment of these credits by the IRS by submitting a new form, Form 7200, if the employer’s employment tax deposits are greater than the credit.[/expand]
Delay of Employer Payroll Taxes Summary
Generally, employers must pay a 6.2% Social Security tax on employee wages. Section 2302 of the CARES Act allows employers to defer payment of these payroll taxes in an effort to help businesses retain their cash flow. Based on this section, 50% of these taxes will now be due on December 31, 2021, and the remaining 50% will be due on December 31, 2022. This section also applies to self-employment taxes. However, employers that have loans forgiven under the Payroll Protection Program of the Act do not qualify for this deferment. [/expand]
Net Operating Losses Summary
Under Section 2303 of the CARES Act, Net Operating Losses from the 2018, 2019, and 2020 tax years can be carried back five years. This section also temporarily suspends the 80% of taxable income limitation until 2021, allowing for Net Operating Losses to offset 100% of taxable income for the 2108, 2019, and 2020 tax years. After 2021, however, the 80% limitation will be back in effect. Further, Section 2303 provides for a special exception to the standard filing deadline for carryback claims. Within 120 days of the enactment of the CARES Act, taxpayers can submit an application for a tentative refund for carryback of Net Operating Losses arising from tax years beginning before January 2018 and ending after December 31, 2017.
Section 2303 also contains new special Net Operating Loss carryback rules for real estate investment trusts (REITs) and life insurance companies. This section also includes a limitation preventing Net Operating Loss carrybacks from being used to offset amounts from deferred foreign income under Section 965 of the Internal Revenue Code.
Along the same lines, Section 2304 modifies the Net Operating Loss rules that apply to taxpayers other than corporations. Under Section 2304, the excess business loss limitation is temporarily eliminated for tax years beginning before January 1, 2020.[/expand]
Business Interest Deduction Summary
Under Section 2306 of the CARES Act, in an effort to preserve the ability of taxpayers to carry forward disallowed interest deductions, corporations may deduct up to 50% of taxable income, as opposed to 30% for the 2019 and 2020 tax years. Further, taxable income from 2019 may be used to apply the limitation for the 2020 tax year.[/expand]
Typically, the process under Chapter 11 of the Bankruptcy Code is too expensive and complex for small businesses to successfully reorganize. However, under the Small Business Reorganization Act of 2019 (SBRA) that went into effect February 22, 2020, small business debtors can now reorganize under Subchapter V of Chapter 11. The benefit of Subchapter V that a plan of reorganization will generally be confirmed, as long as the business agrees that all disposable income for three to five years will be used to make payments under the plan.
Section 1113 amends the SBRA by making relief available to more small businesses. The intent of Section 1113 is to make it easier, faster, and cheaper for small business to reorganize under Subchapter V, if necessary, by relaxing the requirements to conform a bankruptcy plan. Under the SBRA, before Section 1113 of the CARES Act went into effect, businesses only qualified to file a case under Subchapter V if the debts of the business were less than $2,725,625. Under Section 1113, the debt limit to qualify increased from $2,725,625 to $7,500,000. This only applies to businesses that file after the CARES Act went into effect, and after one year, this increased debt threshold will return to $2,725,625.
Section 1113 of the Act (as well as portions of Section 19001) also eases the burdens on eligibility under Chapter 7 and Chapter 13 of the United States Bankruptcy Code. The Act amends the definition of “current monthly income” to exclude payment by the debtor pursuant to other sections of the Act from being treated as income in determining the debtor’s eligibility for Chapter 7 bankruptcy. Further, payments made by the debtor pursuant to the Act are excluded from the calculation of disposable income in determining whether a Chapter 13 plan of reorganization may be confirmed. Lastly, plans already confirmed under Chapter 13 can be modified to incorporate material financial hardship related to COVID-19 with the benefit of potentially extending payments under the plan for up to seven years. Similar to the Chapter 11 amendments, the amendments to Chapter 7 and Chapter 13 are also effective for one year after implementation of the Act.[/expand]
Our thoughts and prayers are with you during these trying times.
Mateer & Harbert, P.A.
Attorneys at Law