In the Coronavirus Aid, Relief, and Economic Security (CARES) Act, Congress allocated $350 billion to help small businesses keep workers employed during the COVID-19 Pandemic (“Pandemic”) and the associated economic recession. The relief takes various forms depending on the business need, some of which are detailed below:
- Paycheck Protection Program
Under what is known as the Paycheck Protection Program (“Program”) (which is detailed in Section 1102 of the Act), small businesses can obtain 100% federally guaranteed loans if they maintain their payroll during the Pandemic. Importantly, the loans may be forgiven if borrowers maintain their payrolls during the Pandemic or restore their payrolls afterward. The loans will be offered by private lenders, and all existing SBA-certified lenders will be given delegated authority to rapidly process loans under the Program. Additional information will be released by the Trump administration soon, including a list of approved lenders offering loans under the Program. These loans will be highly beneficial to businesses who require capital to cover the cost of retaining employees during the Pandemic.
(a. ) Eligibility. A business is eligible to participate in the Program if it was in operation on February 15, 2020, had employees for whom it paid salaries and payroll taxes and it:
- has fewer than 500 employees (counting full-time, part-time and any other status, subject to the affiliation rules discussed below);
- otherwise meets the SBA’s size standard;
- is a 501(c)(3) with fewer than 500 employees;
- is an individual who operates as a sole proprietor;
- is an individual who operates as an independent contractor;
- is an individual who is self-employed and regularly carries on any trade or business;
- is a tribal business concern that meets the SBA size standard; or
- is a 501(c)(19) Veterans Organization that meets the SBA size standard.
Additionally, a business must review the SBA’s “affiliation rules,” which are used to determine whether an entity is under 500 employees and qualifies as a small business for purposes of SBA lending. Depending on the structure of the business, the business may need to analyze the affiliation rules to determine if the business (or its minority or majority equity holders) control other entities to the extent that those entities would be deemed “affiliates” under the SBA regulations and require the business to add the employees of the affiliate to its total employee count. The affiliation rules are, however, waived under the Program for (i) businesses in the accommodation and food services section (NAICS 72), where the 500 employee rule is applied on a per physical location basis and (ii) businesses that operate as a franchise or receive financial assistance from an approved Small Business Investment Company.
(b. ) Lender Requirements. Although more specific information is in the process of being released to lenders by the administration, Lenders will require a good faith certification that;
- the Pandemic makes the loan request necessary to support ongoing operations;
- the business will use the loan proceeds to retain workers and maintain payroll or make lease and utility payments;
- the business does not have an application pending for a loan for a similar purpose and in a similar amount; and
- From February 15, 2020- December 31, 2020, the business has not received a loan for a similar purpose and in a similar amount.
(c.) Loan Amounts. Depending on the business’s situation, the loan size will be calculated in different ways; the maximum loan size is always $10 million.
- For businesses that were operating between February 15, 2019-June 30, 2019, the maximum loan amount is equal to 2.5 x the business’s average monthly payroll costs during that time period. If the business employs seasonal workers, it can choose March 1, 2019, as the time period start date.
- For businesses that were not operating between February 15, 2019 – June 30, 2019, the maximum loan amount is equal to 2.5 x the average monthly payroll costs between January 1, 2020, and February 29, 2020.
(d.) Amounts Included in “Payroll Costs”:
For employers, the sum of any compensation related to employees that is a:
- Salary, wage or other compensation;
- Payment of cash tip or equivalent;
- Payment for vacation, parental, family, medical or sick leave;
- Severance benefits;
- Payments required for group health care benefits, including insurance premiums;
- Payment of any retirement benefit;
- Payment of state or local tax assessed on the compensation of an employee.
For sole proprietors, independent contractors, and self-employed individuals, payroll costs include the sum of payments of any compensation or income of a sole proprietor or independent contractor that is a wage, commission, income or similar compensation that is not more than $100,000 in one year.
(e.) Amounts Excluded from “Payroll Costs”
- Compensation of an individual employee over a $100,000 annual salary, prorated from February 15, 2020, through June 30, 2020.
- Payroll taxes and income taxes
- Any compensation of an employee whose principal residence is outside of the U.S.
- Qualified sick and family leave for which credit is allowed under Sections 7001 and 7003 of the Families First Coronavirus Response Act.
- Payments to independent contractors (see below)
(f.) Independent Contractors. Independent contractors and sole proprietors became eligible to apply for the Program on April 10, 2020.
- If a contractor is structured as a C-corporation or S-corporation, it must receive income through a payroll service because corporations are separately taxed and distributions from a corporation are not considered self-employment income. Alternatively, if a contractor is structured as a limited liability company, it will likely be eligible because an LLC is a “pass-through” entity that is not separately taxed.
- Under the SBA’s interim final rule issued on April 2, 2020, payments to independent contractors may not be included by a business in “Payroll Costs” because independent contractors can apply for the Program themselves.
(g.) Forgivable Amount. A business is eligible for loan forgiveness equal to the amount spent on the following items during the 8-week period beginning on the date of the first loan disbursement by the lender under the Program; however, at least 75% of the loan amount must be attributable to Payroll Costs:
- Payroll Costs (as defined above);
- Mortgage interest for a mortgage incurred in the ordinary course of business;
- Rent; and
Loan Forgiveness can be reduced, however, if there is a reduction in the number of employees or a reduction greater than 25% in wages paid to employees.
 H.R. 748
Reduction based on the number of employees:
EXAMPLE: if a business had 20 employees during the 2019 period and only maintained 4 employees during the 2020 period, and payroll costs during the 8 weeks were $100,000, the business would multiply that by the payroll costs by 4 ($400,000) and divide it by the number of employees under either of the options above. If the first option were selected, then the business would divide $400,000 / 20 (number of employees in the 2019 period) = $20,000 reduction in loan forgiveness under the Program.
Reduction based on reduction in salaries:
2. Economic Injury Disaster Loans & Emergency Economic Injury Grants
These grants provide an emergency advance of up to $10,000 to small businesses and private non-profits harmed by the Pandemic within three days of applying for an SBA Economic Injury Disaster Loan (EIDL). To access the advance, you must first apply for an EIDL and then request the advance. The advance does not need to be repaid under any circumstance and may be used to keep employees on the payroll, to pay for sick leave, meet increased production costs due to supply chain disruptions or pay business obligations, including debts, rent, and mortgage payments.
EIDL’s are lower interest loans of up to $2 million (with principal and interest deferment available for up to 4 years) that are available to pay for expenses that could have been met if the Pandemic had not occurred, including payroll and other operating expenses.
Eligibility includes small businesses (under 500 employees, subject to the affiliation rules discussed above), independent contractors, private non-profits and tribal small businesses that have been in operation since January 31, 2020. The grants are available until December 31, 2020.
For more information please contact:
Spencer Topham at email@example.com or 801-534-7262