CARES Act

Small Business Benefits 

The Coronavirus Aid, Relief and Economic Security (CARES) Act includes substantial benefits for small businesses and non-profits through the Small Business Administration (SBA).

The goal is to keep businesses impacted by the COVID-19 outbreak solvent while mitigating layoffs of employees.

Most notable is the introduction of a new partly forgivable loan for up to $10 million, known as the Paycheck Protection Program (PPP).

Funds are provided in the form of loans that will be fully forgiven when used for payroll costs, interest on mortgages, rent and utilities. Due to likely high subscription, at least 75% of the amount that will ultimately be forgiven must be used for payroll. Loan payments will also be deferred for six months. No collateral or personal guarantees are required. Neither the government nor lenders will charge small businesses any fees.

Borrowers who received a loan through the EIDL program from Jan. 31, 2020, through April 3, 2020, are eligible to apply for a PPP loan. See below for more details, and as always, reach out to your Moneta team at any time to discuss your specific situation.

paycheck protection program (PPP) – A new, Partly forgivable loan

At a high level, this is an unsecured, unguaranteed, low-interest loan to fund working capital during the downturn. The specific goal of this program is to avoid layoffs and furloughs. The maximum loan amount is the lesser of 2.5 times your average monthly payroll costs over the preceding 12 months ended February 15, 2020 or $10 million. 

Who is eligible?

In general, any business (including sole proprietors) or non-profit organization that:

  • Was in operation on February 15, 2020, and
  • Has fewer than 500 employees, or
  • Has an NAICS code beginning with 72 and has fewer than 500 employees per physical location (generally hotels and hospitality businesses)
How does the process work?
  1. As a business owner, you apply for the loan through an SBA-approved bank.
  2. The bank makes the loan.
  3. The bank then applies for the SBA guarantee on the loan amount to protect itself.
How much can you borrow?

The maximum loan amount is the lesser of:

  • $10 million, or
  • 2.5x average monthly payroll expenses for the preceding 12 months

Note: If the business is a seasonal employer, the amount will be 2.5x the average monthly payroll expense for March, April, May and June of 2019. If the business has been in operation for less than 12 months, the amount will be 2.5x the average monthly payroll expense for January and February of 2020. Any salary/compensation amounts for purposes of this calculation are limited to $100,000/employee.

How can you use the loan?

Permitted uses of funds include:

  • Payroll costs
  • Costs related to the continuation of group health care benefits
  • Payments of interest (not principal) on debt that was in place before February 15, 2020
  • Rent
  • Utilities
What is the definition of "Payroll Costs?"

Payroll is defined as:

  • Salary, wages, commissions and similar compensation
  • Payment for PTO or FML
  • Payment for group health care benefits (including premiums)
  • Payment of retirement benefits
  • State or local payroll taxes

Payroll costs don’t include:

  • Compensation in excess of $100k annual salary. This applies only to cash compensation. This does not apply to non-cash benefits such as defined-benefit or defined-contribution plans, health care benefits and payment of state/local taxes assessed on compensation of employees.
  • Federal payroll taxes
  • FML payments that were allowed to have credit from the Coronavirus Relief Act
What is the interest rate and loan term?

For any amounts not forgiven, the maximum term is two years, the maximum interest rate is 1% percent, zero loan fees, zero prepayment fee.

UPDATE: Loans issued after June 5 have a maturity of five years.

What are the basic provisions?

The loans require no collateral or personal guarantee. There is no requirement that borrowers be unable to get financing elsewhere.

Income Tax Considerations

The CARES Act says that loan forgiveness is not counted as taxable income. The clarification from the IRS is reminding people that you cannot claim deductions on the expenses the loan covered. The American Institute of Certified Public Accountants (AICPA) believes that this is contrary to Congress’ intent, so we may see more clarification on this topic in the future. Please stay in touch with your tax accountant for more details.

When must I start repaying?

While the CARES Act authorizes payment of principal and interest to be deferred for up to one year, the SBA and the Treasury have determined a six-month deferral is appropriate given the 1% interest rate and loan forgiveness provisions of the CARES Act. Borrowers may pre-pay the loan at any time without penalty.

Is there opportunity for loan forgiveness?

A portion of the loan principal and interest used for eligible expenses will be forgiven on a tax-free basis. The amount that may be forgiven is equal to the amount spent by the borrower during an 8- week period after the origination date of the loan on eligible payroll costs, mortgage interest payments, rent, and utilities. Due to likely high subscription, at least 75% of the forgiven amount must have been used for payroll.

The amount of loan forgiveness will be reduced if the borrower lays off employees or significantly reduces salaries. The formula determining the amount of reduction is generally summarized below:

  • If the borrower has fewer full-time equivalent employees (“FTEs”) on average, per pay period, between February 15, 2020 and June 30, 2020 compared to the same period in 2019, the loan forgiveness amount is decreased by the percentage of reduction in FTEs.
    • Note: The borrower can also choose to have their number of FTEs for the period between February 15, 2020 and June 30, 2020 compared to the period between January 1, 2020 and February 29, 2020. That percentage change can instead be used to determine the amount of the reduction, if any.
  • If any employee’s salary has been reduced by 25% or more, the dollar amount of the decrease in excess of 25% will be deducted from the loan forgiveness amount.
    • Note: This will not apply to any employee who earned more than $100,000 on an annualized basis for at least one pay period in 2019.
  • If the borrower has made layoffs or salary reductions but restores the FTE count and salary to the prior levels (per the formulas above) by June 30, 2020, there will be no reduction in the amount of loan forgiveness.

In the Frequently Asked Questions section for the PPP Loan, it now emphasizes that the Borrower must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.

The Paycheck Protection Program Flexibility Act of 2020 (H.R. 7010) modifies provisions related to the forgiveness of loans made to small businesses under the program implemented in response to COVID-19. Signed into law on June 5, the legislation: 

  • established a minimum maturity of five years for a paycheck protection loan with a remaining balance after forgiveness;
  • extended the expense forgiveness period from 8 weeks to 24 weeks during which a loan recipient may use such funds for certain expenses while remaining eligible for forgiveness; and 
  • raised the non-payroll portion of a forgivable covered loan amount from 25% to 40%.
H.R. 7010 also extended the period in which an employer may rehire or eliminate a reduction in employment, salary, or wages that would otherwise reduce the forgivable amount of a paycheck protection loan, though the forgivable amount must be determined without regard to a reduction in the number of employees if the recipient is either:
  1. unable to rehire former employees and unable to hire similarly qualified employees; or
  2. unable to return to the same level of business activity due to compliance with federal requirements or guidance related to COVID-19.
The bill revised the deferral period for paycheck protection loans, allowing recipients to defer payments until they receive compensation for forgiven amounts. Recipients who do not apply for forgiveness get 10 months from the program’s expiration to begin making payments.
 
The bill also eliminated a provision that makes a paycheck protection loan recipient who has such indebtedness forgiven ineligible to defer payroll tax payments.
How do you apply for loan forgiveness?

The Small Business Administration (SBA) released a loan forgiveness application for the Paycheck Protection Program (PPP), which was created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The application and its instructions provide step-by-step guidance on calculating a borrower’s PPP loan forgiveness amount.

Among other things, the application (1) allows borrowers to use an “alternative payroll covered period” to compute payroll costs; (2) permits the inclusion of eligible nonpayroll costs incurred during the covered period and paid on or before the next regular billing date (even if that date is after the covered period); and (3) adds a new exemption from the loan forgiveness reduction for a good-faith, written offer to rehire an employee during the covered period that was rejected by that employee.

The SBA plans to issue guidance soon to assist borrowers and lenders through the forgiveness process.

A copy of the application is available at www.sba.gov/document/sba-form–paycheck-protectionprogram-loan-forgiveness-application .

Are there any caveats to getting the loan?

Borrowers must make the following good faith certifications that:

  • The uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient.
  • Funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments and utility payments.
  • The eligible recipient does not have an application pending for a loan under this subsection for the same purpose and duplicative of amounts applied for or received under a covered loan.
  • During the period beginning on February 15, 2020 and ending on December 31, 2020, the eligible recipient has not received amounts under this subsection for the same purpose and duplicative of amounts applied for or received under a covered loan.

In the Frequently Asked Questions section for the PPP Loan, it now emphasizes that the Borrower must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.

What documentation is required?
  • Income statement for the prior 12 months specifically breaking out payroll expense on a monthly basis
  • Payroll tax filings reported to the IRS (Forms 1099-MISC) for the self employed. Independent contractors do not count as employees of a business applicant for purposes of the PPP given that independent contractors may themselves apply for their own PPP loan.
  • Proof of existence before February 15, 2020 (such as articles of incorporation)
  • Other documents as required by the SBA (to be determined)
What are the bank's required criteria for granting the loan?

Assuming they underwrite the loan within the SBA’s guarantee requirements, there is virtually no risk to the bank. So, underwriting is essentially limited to, “Were you in business on February 15, 2020 and did you have employees?”

When can I apply?

Banks can begin taking applications from small businesses and sole proprietorships on April 3, 2020 and continue until June 30, 2020.

Starting April 10, 2020, independent contractors and self-employed individuals can apply.

We encourage you to apply as quickly as you can because there is a funding cap.

UPDATE: A law signed by President Trump on July 4 extended the deadline to apply for a PPP loan through August 8, 2020. Previously, the deadline was June 30.

How do I apply?

The loans will be made and administered directly by SBA-approved banks. Borrowers should contact their bank to apply. Those needing a reference to an SBA-approved bank should contact their Moneta team. 

You can search a list of SBA-approved banks here: https://bit.ly/2RXHXMT

You can obtain an application form here: https://bit.ly/3aEH5nu

expansion of the economic injury disaster loans (EIDL) Program

Who is eligible?

These loans are for eligible businesses with fewer than 500 employees or any individual operating as a sole proprietor or an independent contractor during the covered period (January 31, 2020 to December 31, 2020). Nonprofits are also eligible. The SBA will waive the requirement that an applicant must prove that it cannot acquire from other sources in addition to waiving the requirement that the applicant be in business for one year before the disaster.

 

How does the process work?

Application is to be made directly to the SBA.

How much can you borrow?

Eligible businesses may apply for loans up to $2 million. The SBA will waive personal guarantees on loans below $200,000.

Also, an Emergency Grant Payment Distribution has been established that will allow an eligible entity that has applied for an EIDL due to COVID-19 to request an advance on that loan up to $10,000, which the SBA must distribute within three days.

The SBA implemented a $1,000 cap per employee on the advance, up to a maximum of $10,000. So, a business with five employees, for example, would be eligible to receive only $5,000 up front, as opposed to the originally stated $10,000. 

This advance is not required to be repaid, even if the applicant is subsequently denied the EIDL. The advance payment may be used for providing sick leave, maintaining payroll, meeting increased costs to obtain materials, maintaining rent or mortgage payments and repaying obligations that cannot be met due to revenue losses.

What are the basic provisions?

The SBA will approve EIDL based solely on an applicant’s credit score or use an appropriate alternative method for determining repayment ability.

comparing loans: PPP Vs. EIDL

Borrowers who received a loan through the EIDL program from Jan. 31, 2020, through April 3, 2020, are eligible to apply for a PPP loan. If the EIDL loan was not used for payroll costs, it does not affect eligibility for PPP. If the EIDL loan was used for payroll costs, the PPP loan must be used to refinance the EIDL loan.

If the applicant transfers an EIDL into a loan made under the PPP, the EIDL advance payment grant award would be subtracted from the amount forgiven under the PPP.

See the chart below as a quick-reference comparison of the two loan types and to help determine how best to use each of them for your needs.

sba debt relief program

This provision covers SBA 504 loans, microloans and 7(a) loans – except the Payroll Protection Program loans outlined above. Entities with an existing SBA loan, or who take out a new SBA loan by September 28, 2020, qualify for debt relief. Under it, the SBA will cover all loan payments on these SBA loans, including principal, interest and fees for six months.

business tax and other provisions 

The CARES Act includes a wide variety of business tax provisions. In some cases, it enhances or modifies existing provisions; in other areas, it creates new tax provisions. Here is an overview of some of the business tax items included in the new legislation:

payroll tax deferral

employee retention credit

J

NOL carry-back

pension funding relief

9

AMT credits accelerated

interest limitations raised

charitable contribution limits raised

additional bonus depreciation

loss limitation rules eliminated

As you evaluate what’s best for your business during this transitional time, we are here for you. The above guide does not cover every aspect of this legislation, so please reach out directly to your Moneta team for more information.

Last updated June 8, 2020

Subscribe for more information

You may also contact your Moneta advisor with questions or concerns.

    These materials were prepared for informational purposes only based on materials deemed reliable, but the accuracy of which has not been verified. Given the dynamic nature of the subject matter and the environment in which these materials were prepared, they are subject to change as additional legislation and government analysis come forth. This is not an offer to sell or buy securities. You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision. Past performance is not indicative of future returns. These materials do not take into consideration your personal circumstances, financial or otherwise.