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COVID-19 Relief for Small Businesses under the CARES Act

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The Coronavirus Aid, Relief, and Economic Security (CARES) Act was enacted into law on March 27, 2020.  This is Phase 3 of the federal government’s stimulus package and provides small businesses, sole proprietors, independent contractors and self-employed persons access to substantive economic relief.  The intent of the legislation is to help employers ride out the next few months of the COVID-19 pandemic and hopefully enable them to retain their workforce.

The PAYCHECK PROTECTION PROGRAM (PPP) will likely be the primary form of relief used by small businesses under the CARES Act and the following is intended to provide a general overview of the program by breaking down its various terms and scope of application.

The PPP provides “eligible small businesses” access to “forgivable” “loans,” capped at $10 million, for up to 2.5 times the business’ “average monthly payroll” costs incurred in the one-year period prior to the loan application, for “specified uses”.  Each of these terms is addressed below in a question and answer format.  The purpose of the PPP is to assist employers in retaining their employees during the course of the pandemic.

Loan Eligibility:

Who is an “Eligible Small Business”?

Employers in operation on February 15, 2020 are eligible for a PPP loan to the extent the employer either (i) has less than 500 employees, or (ii) meets the size standards set by the Small Business Administration (SBA) for the industry in which the business operates.

Loan Terms:

What is the total eligible “Loan” amount?

The total loan amount is up to 2.5 times the business’ average monthly payroll, capped at $10 million.  This payroll amount is based on each employee’s compensation over the 1-year period prior to the application date, calculated as a monthly average.  Eligible payroll costs include salaries, wages, tips, severance and paid vacation, parental, family medical or sick leave for each employee, plus group health benefits (including insurance premiums), retirement benefits and payroll taxes.

(Note, seasonal employers use the monthly average payroll based on the period from March 1, 2019 through June 30, 2019, and businesses not in operation from February 15, 2019 through June 30, 2019 use the monthly average payroll from January 1, 2020 through February 29, 2020.)

Are there limitations on the “Use” of the loan proceeds?

The use of the loan proceeds is restricted to covering the following expenses over a period of 8 weeks after the loan origination date: (A) at least 75% must be used for payroll costs, including group health care benefits and insurance premiums; and (B) a maximum of 25% may be used for (i) rent; (ii) mortgage interest (excluding prepayment of principle); (iii) utilities, and (iv) interest on debt, provided these non-payroll expenses were already being paid by the business prior to February 15, 2020.  The loan proceeds may also be used for other purposes permitted under the CARES Act but these uses would not be eligible for forgiveness.

What are the other terms of the “Loan”?

The loan is intended to be temporary and, while payments are deferred for an initial 6 months, interest will accrue during that deferment period and the loan becomes due and payable after 2 years.  The loan is 100% federally guaranteed, so it is not secured by business assets and no personal guarantee is required.  Interest on any principle amount that is not forgiven (see below) will be at 1.0% per year.  There is no application fee, no pre-payment penalty, and any loan forgiveness will not be taxed as income to the borrower.

Loan Forgiveness:

Is the loan “Forgivable” and if so in what amount?

The loan is only forgivable to the extent the proceeds are used to cover the restricted expenses listed above during the applicable 8-week period, and the amount is subject to reduction to the extent the business does not retain its employees or maintain its payroll.  Specifically, the amount of loan forgiveness will be reduced (i) to the extent wages for employees receiving less than $100k per year were cut by more than 25% from the most recent quarter ending before February 15, 2020; and (ii) by the product of the average number of full-time employees per month employed during the 8 week coverage period divided by the average number employed between either, at the borrower’s election, (a) February 15, 2019 and June 30, 2019, or (b) January 1, 2020 and February 29, 2020.  However, not more than 25% of the loan forgiveness may be attributable to non-payroll costs.

Notably, the loan forgiveness amount will not be reduced if the total number of full-time equivalent employees is not reduced and any reduction in salaries or wages is eliminated by June 30, 2020.  (There may also be no reduction in loan forgiveness, under certain circumstances, where employees or salaries were reduced within 30 days after enactment of the CARES Act.)

Loan Application:

What is the application period?

Small businesses and sole proprietors can apply for loans starting on Friday, April 3, 2020.  Independent contractors and self-employed persons can apply starting on Friday, April 10, 2020.  Applications can be submitted through June 30, 2020, however, these loans are issued on a first-come, first-served basis and the federal funding is currently expected to be exhausted well before this application deadline.

How do businesses apply for the loan?

Businesses can submit an application through participating lenders that have been approved by the Small Business Administration.  Click HEREto search for eligible lenders in your area.

The borrower will need to provide a good faith certification that it has been adversely affected by the pandemic and the loan will be used to retain workers and maintain payroll with no more than 25% used for rent, utilities and mortgage interest.  The lender is required to issue a decision on the loan application to the borrower within 60 days of receipt of the loan documentation.

If you should have any questions regarding any of the above benefits, please feel free to contact either these Rossway Swan Attorneys: J. COLE OLIVER, KEVIN M. BARRYor JASON D. SLATER at (772) 231-4440.  Our firm is always available to assist you, particularly in times like these.

Communications are provided for informational purposes only and do not constitute legal, tax or accounting advice or solicitation for provision of legal services. Due to the ever changing rules, regulations, orders, legislation, guidance, facts and circumstances, any provision of information is based on sources we believe to be reliable and accurate as of the date of the communication.  However, due to rapidly and ever-changing events, information is not guaranteed by Rossway Swan and communications are not purported to be complete and accurate statements or summaries of available data.  Any information or opinion is a general statement that does not consider individual client circumstances, objectives or needs, and is provided as of the date of the communication.  The communication, information and opinions remain subject to change, without prior notification and as the author may deem necessary or appropriate. 

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