April 4, 2020
This briefing is not intended to and does not constitute legal or medical advice. Questions concerning how the law applies to your specific factual circumstance should be directed to one of our attorneys at the firm.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law. The law provides assistance through a $2.2 trillion emergency economic relief package that will provide to American citizens, and various businesses and government entities, who have been adversely impacted by COVID-19 through loans, grants, and the creation of various tax incentives. The CARES Act provides assistance to small businesses in the following ways:
Paycheck Protection Program
Under the CARES Act, the Small Business Association (“SBA”) is authorized to extend the current SBA 7(a) loan program by providing an additional 350 billion of aid to small businesses in effort to assist in job retention and cover certain expenses under a program called the Paycheck Protection Program (the “PPP”). The PPP provides eligible small businesses a loan up to $10 million with deferred payment structure, and qualifying loan forgiveness.
The PPP is for small businesses already in operation on February 15, 2020, with less than 500 employees who are affected by COVID-19. Unlike other SBA loans like the SBA Federal Disaster Loan, a business need not certify that it was unable to obtain credit elsewhere. In order to qualify, a business must certify in good faith, that (1) the current economic conditions have caused the borrower to seek support under the CARES Act; (2) the funds will be used for approved purposes; (3) that the applicant neither has received nor applied for an SBA loan for the same purposes; and (4) during the period beginning on February 15, 2020 and ending on December 31, 2020, that the eligible recipient has not received an SBA loan for the same purpose and duplicative of amounts applied for or received under a covered loan.
Terms of Loan
An eligible business may receive the lesser amount of (1) $10 million; or (2) 2.5 times average monthly payroll (calculated by the payroll incurred for the one-year period before the date in which the loan is made). Loan funds may be used for payroll, insurance premiums, retirement benefits, mortgage interest payments (not mortgage principal), rent, utilities, and interest on previously incurred debt. Payroll obligations to employees making over $100,000 annually do not qualify. The term on these loans is a maximum of ten (10) years and the interest rate may not exceed 4%. No personal guarantee or collateral is required for the Paycheck Protection Loans. The Paycheck Protection Loans are nonrecourse against any owner of a borrower for nonpayment, except to the extent the owner uses the loan proceeds for an unauthorized purpose.
The CARES Act directs the SBA to require lenders to provide complete payment deferment relief for all borrowers with Paycheck Protection Loans for a period of not less than 6 months, including payment of principal, interest, and fees, and not more than 1 year.
Businesses participating in the PPP may receive loan forgiveness for a Paycheck Protection Loan in an amount equal to 8 weeks of the sum of: payroll costs and payment of rent, utilities and mortgage interest where the obligation was incurred prior to February 15, 2020. However, the amount of the loan eligible for forgiveness will be reduced by: (i) the amount any employee’s pay is reduced in excess of 25%; (ii) and any reduction in workforce. However, should any pay reduction or reduction in workforce be eliminated by 6/30/20 it will not affect a borrower’s forgiveness amount.
The application for the PPP can be found at the Treasury Department’s website here. The Treasury Department states a business, “can apply through any existing SBA lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. Other regulated lenders will be available to make these loans once they are approved and enrolled in the program.” For more information see the Treasury Department’s PPP Information Sheet here.
SBA Federal Disaster Loans
In addition to the PPP, the CARES Act extends additional funding available to the SBA to issue Economic Injury Disaster Loans (“EIDL”) for qualifying small businesses that are currently experiencing a temporary loss of revenue related to COVID-19.
In order to qualify, a business must be a qualified small business; have been in operation for over one year; and must demonstrate an ability to repay the EIDL loan, based principally the company’s credit score. Whether your business is deemed a qualified “small business” depends on your NAICS code which can be confirmed at the SBA’s website here.
Terms of EIDL Loan
Qualifying small businesses may qualify for EIDL for an amount up to $2 million working capital loan at a rate of 3.75% for businesses and 2.75% for non-profits with up to a 30-year term. Payments on EIDL loans arising from COVID-19-related circumstances are deferred for one year. Up to $200,000 can be approved without a personal guarantee. Unlike other SBA loans, borrowers do not have to prove they could not get credit elsewhere. For loans of $25,000 or less, no collateral is required; for loans of more than $25,000, general security interest in business assets will be used for collateral instead of real estate.
Businesses eligible for EIDL can receive a $10,000 emergency grant within three days of application. There is no obligation to repay the grant. For a business to receive the $10,000 emergency grant, it is not necessary that the businesses be approved for an EIDL loan.
EIDL and PPP
It is important to note that the PPP prohibits businesses from taking out two loans for the same purpose. If a business receives a loan under the PPP and a grant under the EIDL, the $10,000 grant will be subtracted from the PPP Loan forgiveness amount. A business can apply for funds under both the EIDL and PPP but the funds cannot be used for the same purpose.
Application for the EIDL and grant can be found here.
The CARES Act provides additional relief to small businesses by modifying tax requirements. Such modifications include: a provision allowing employers to pay a portion of their 2020 payroll tax liability over two years; a one year tax credit for the employer’s share of Social Security payroll taxes (6.2%) for businesses negatively impacted by the COVID-19 pandemic who continue to pay their employees; an increased limit for business interest deductions from 30% to 50% for 2019 and 2020 (businesses may choose to use 2019 adjusted taxable income); and relaxed limitations on net operating losses imposed by the TCJA. For more information regarding tax modifications, please contact our firm. Our firm will continue to provide updates on one or more of these programs as more information becomes available.
Conroy Baran remains committed in these trying times to assisting our business clients with their day-to-day corporate needs, as well as their mergers, acquisitions, sales, reorganizations (including Chapter 11), succession planning, corporate and securities needs, and can accommodate safe client contact through video conferencing and screen sharing, as well as the usual talk, text, and email.
Kyle Conroy: 816-388-9686
Robert Baran: 816-616-5009
Larry Pittman: 816-210-9680
Christopher Stewart: 816-522-1582
Andrew Potter: 719-359-2701
Bob Reynolds: 417-496-2467