On
March 31st the Treasury department released its first set of guidelines
pertaining to the Coronavirus Aid, Relief, and Economic Security Act (“CARES
Act”). This guidance clears up some of the ambiguity pertaining to the new
legislation designed to provide at least some limited relief from the economic
implications of the COVID-19 outbreak. Many businesses can take advantage of
the CARES Act’s Paycheck Protection Program. The Treasury guidance documents
differ in several minor respects from the unadorned statutory language,
the press, and other reports that pre-date the guidance documents may not fully-reflect
the manner in which the Treasury intends to administer the program.
The basics are unchanged. The CARES Act allocates $349 billion for small
businesses to obtain forgivable loans of up to $10 million for use with
payroll, rent, utilities, and mortgage interest expenses. The loans are to
support payroll and associated costs, and these designated fixed costs, for an
eight-week period. The application period ends on June 30, 2020. Qualified
lenders are to begin accepting applications on Friday, April 3.
In order to be eligible for full loan forgiveness, the business must maintain
the number of employees (determined as FTEs, or Full-Time Equivalents) and not
reduce the wages of any employee who earns less than $100,000 by more than 25%
compared with their last full-time quarter of employment. For those companies
who have already made such reductions, the Act allows the business until June
30, 2020, to rehire or restore the wages to pre-reduction levels to still
qualify for forgiveness.
Some key details include:
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On March 31st the Treasury department released its first
set of guidelines pertaining to the Coronavirus Aid, Relief, and Economic
Security Act (“CARES Act”). This guidance clears up some of the ambiguity
pertaining to the new legislation designed to provide at least some
limited relief from the economic implications of the COVID-19 outbreak.
Many businesses can take advantage of the CARES Act’s Paycheck Protection
Program. The Treasury guidance documents differ in several minor respects
from the unadorned statutory language, the press, and other reports
that pre-date the guidance documents may not fully-reflect the manner in
which the Treasury intends to administer the program.
The basics are unchanged. The CARES Act allocates $349 billion for small
businesses to obtain forgivable loans of up to $10 million for use with
payroll, rent, utilities, and mortgage interest expenses. The loans are
to support payroll and associated costs, and these designated fixed
costs, for an eight-week period. The application period ends on June 30,
2020. Qualified lenders are to begin accepting applications on Friday, April
3.
In order to be eligible for full loan forgiveness, the business must
maintain the number of employees (determined as FTEs, or Full-Time
Equivalents) and not reduce the wages of any employee who earns less than
$100,000 by more than 25% compared with their last full-time quarter of
employment. For those companies who have already made such reductions,
the Act allows the business until June 30, 2020, to rehire or restore the
wages to pre-reduction levels to still qualify for forgiveness.
Some key details include:
- Loans are non-recourse, do not require personal
guaranty or collateral, and interest rates shall be fixed at 1%,
which is substantially lower than the Act’s maximum of 4.0%;
- Payments are deferred for six (6) months, but
interest will accrue. Any portion of the loan that is not forgiven
will be payable two years from when the loan was made. There is
no prepayment penalty;
- Essentially all businesses with 500 or fewer
employees are eligible, including nonprofits under 501(c)(3),
veterans organizations, Tribal business concerns, sole
proprietorships, self-employed individuals, and independent
contractors. Some businesses with more than 500 employees may
qualify, such as those in the restaurant and hospitality industry
(NAICS Code 72), and the affiliation rules are relaxed for
franchises that are included in the SBA’s Franchise Directory;
- Under the guidance, the permissible loan amount
is calculated as 2 months of the average monthly payroll costs plus
25% of that amount. By way of example, if the business’ average
payroll is $100,000.00, two times the average payroll is $200,000,
25% of that amount is $50,000, thus the maximum loan amount is
$250,000.00.
- Any individual loan is capped at $10 million;
- Monthly payroll costs include:
- Salary, wage, commissions, or tips (capped at
$100,000.00 on an annualized basis for each employee). By way of an
example if an employee’s wage is $150,000.00 then the employer may
count $100,000.00 towards the average monthly payroll.
- Employee benefits including costs for vacation,
parental, family, medical, or sick leave; an allowance for
separation or dismissal; payments required for the provisions of
group health care benefits including insurance premiums; and
payment of any retirement benefit;
- State and local taxes assessed on compensation
(but not FICA); and
- For a sole proprietor or independent contractor:
wages, commissions, income, or net earnings from self-employment,
capped at $100,000 on an annualized basis for each employee.
- Payroll costs do not include amounts spent by an
employer in complying with the new Mandatory Paid Sick Leave law or
Expanded FMLA child-care eligibility since those amounts are
accounted for separately by way of tax credits to the employer.
There are a number
of certifications required for eligibility. For example, borrowers
must certify that:
- Per the application, current economic uncertainty
makes this loan request necessary to support its ongoing operations;
- Funds will be used to retain workers and maintain
payroll or make mortgage, lease, and utility payments (and provide
appropriate documentation);
- The applicant does not have any other application
pending under this program for the same purpose, and that from
February 15, 2020, until December 31, 2020, the applicant has not
received duplicative amounts under this program.
Loans will be
completely forgiven if they are used for payroll and designated fixed
expenses:
- Loans are forgiven (including accrued interest on
the amount that is forgiven) and excluded from gross income in an
amount that equals the payments towards payroll costs, interest
payments on mortgages, rent, and utility payments. Employers will
have to provide documents demonstrating the funds were properly
used;
- Forgiveness amounts will be reduced based on any
reduction in employee numbers (FTEs) as compared to one of two test
periods, one in early 2020 and one in 2019;
- Forgiveness amounts will be reduced by the amount
any employee earns over 25% less during the eight weeks of the
program than during (on a pro-rata basis) than employee’s last full
quarter of employment; and
- There is relief from forgiveness reduction
penalties for employers who rehire employees or make up for wage
reductions by June 30, 2020.
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