What is the Coronavirus Aid, Relief and Economic Security (“CARES”) Act?

By Hillary S. Zilz, Elliott Blanchard and Sam L. Butt.

The CARES Act is the federal government’s $2 trillion response to the Covid-19 pandemic. The CARES Act provides for a variety of aid programs to help businesses and individuals affected by the Covid-19 virus. Of most immediate interest to our clients and friends will be the new Paycheck Protection Program established by the CARES Act.

What is the Paycheck Protection Program?

The CARES Act amends the Small Business Act (SBA) to create a new type of federally-guaranteed business loan to be administered by the SBA. Covering the period from February 15, 2020, to June 30, 2020, the law allows the Small Business Administration to provide 100% federally-backed loans to help pay operational costs like payroll, rent, health benefits, insurance premiums, utilities, etc. for eligible businesses. Amounts provided are potentially forgivable, and the prior SBA eligibility requirements have been relaxed significantly. In addition, lenders will have no recourse against any individual, shareholder, member or partner of an eligible recipient for non-payment, unless the individual uses the loan proceeds for unauthorized purposes. No personal guarantee nor collateral is required for the loan. To the extent the loan is not forgiven, the term of the loan cannot exceed 10 years and the interest rate can be no more than 4%.

Who is Eligible?

Small businesses and nonprofit organizations with fewer than 500 employees are eligible. In addition, certain businesses in the hospitality and dining industries are eligible if they have no more than 500 employees at each physical location. The loan program is also available to sole proprietors, independent contractors, and self-employed individuals, subject to additional requirements. Further, to be eligible, the borrower must have been operating on February 15, 2020, and have had employees or independent contractors whom the borrower paid.

How Much Can I Borrow?

The loan amount (capped at $10 million) is generally equal to (i) 2.5 times (ii) your average monthly payroll costs during prior year period. Seasonal employers' average monthly payroll costs are measured over certain 12-week periods, and new businesses (not in existence from February 15, 2019 to June 30, 2019) may request a loan amount equal to 2.5 times their average monthly payroll costs incurred from January 1, 2020 to February 29, 2020. In addition, any outstanding loans made after January 31, 2020, under the SBA’s Disaster Loan Program may be refinanced as part of the new program.

How are Payroll Costs Calculated?

Your average monthly payroll costs include: salary, wages, tips, sick/family leave/PTO, severance payments; group health benefits, including insurance premiums; retirement benefits; state and local payroll taxes; and compensation to sole proprietors or independent contractors, including commission-based compensation, up to $100,000 in one year, prorated for the covered period.

Payroll costs exclude: 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.; and sick and family leave wages for which a credit is allowed under the Families First Act.

How Can I Use the Loan?

The loan may be used to cover payroll costs; continuation of group health care benefits during periods of paid sick, medical or family lease, or insurance premiums; salaries or commissions or other similar compensation; interest on mortgage obligations; rent; utilities; and interest on other outstanding debt.

How Does Forgiveness Work?

The Paycheck Protection Program is structured as a loan that may convert to a grant if conditions are met. The program is aimed at helping businesses maintain payroll during the significant business interruption caused by COVID-19.

Every dollar that your company spends on payroll costs (as defined above), utilities, rent or interest on mortgage debt, during the 8-week period starting on your loan date will be added together and may be forgiven up to the total amount your company borrowed through the program. Any amounts forgiven will not be included in your company’s gross income for federal taxation purposes. Certain documentation must be submitted for forgiveness, and the loan forgiveness cannot exceed the principal amount of the loan.

As the name Payroll Protection Program suggests, if a business reduces its employees or employee compensation between February 15, 2020, and June 30, 2020, the amount of loan forgiveness will be reduced proportionally. For a reduction in the number of employees, the amount forgiven is reduced by multiplying the maximum amount available for forgiveness by the average number of full-time equivalent employees (FTEEs) per month during the covered period divided by either the average number of FTEEs per month employed from February 15, 2019 to June 30, 2019, or January 1, 2020, to February 29, 2020. When you have reduced compensation, the amount forgiven is reduced by the amount of any reduction in employees’ total compensation during the covered period that is beyond 25% of their historical salary/wages based on their most recent full quarter of employment before the covered period. For purposes of salary reduction, an “employee” is an employee who did not receive during any single pay period during 2019 a salary or wages at an annualized rate of pay over $100,000. There is relief from these forgiveness reduction penalties for employers who rehire employees or make up for wage reductions by June 30, 2020.

Additional Assistance

The CARES Act also includes a new grant program to provide fast relief for applicants to the SBA’s separate Disaster loan program. Businesses applying may request up to $10,000 to cover immediate payroll, rent, mortgage and related expenses. The $10,000 does not have to be repaid.

Next Steps

The SBA and lender banks are figuring out how to administer the PPP, but applications are expected to be available by next week. In the interim, you should start to compile documents that will likely be required, such as:

Most recent IRS Form 941: Employer’s Quarterly Federal Income Tax Return;
A breakdown of your January 2019 through February 2020 payroll expenses, including health insurance premiums paid by the business and retirement contributions by the company; and
Complete 2019 financials (profit/loss and balance sheet).