The CARES (Coronavirus Aid, Relief and Economic Security) Act was signed into law on March 27, 2020 in response to the health, economic and employment crises currently being wrought by the coronavirus pandemic. One key feature of the CARES Act for small businesses (under 500 employees) is the “paycheck protection program,” which provides forgiveness-eligible loans for salaries, rent, and other costs of running a small business during the pandemic.
Under Section 1102 of the Act, loans are available through the Small Business Administration (directly or in cooperation with private lenders) to cover salaries, bonuses, health insurance, retirement benefits, payroll taxes, rent, utilities, and interest on other debt obligations from February 15, 2020 to June 30, 2020. The maximum loan amount is 2.5 times the average total monthly “payroll costs” (defined as salaries, sick leave, health insurance costs, retirement benefits, and state/local employment taxes, but excluding compensation for individual employees above $100,000 per year as prorated for the covered period) incurred during the last year before the loan is made, up to $10 million.
No personal guarantee is required for the loan, there are no fees to apply, and the business need not show that credit is unavailable elsewhere. Instead, businesses must certify that the uncertainty of current economic conditions makes the loan necessary to support ongoing operations, and will be used to retain workers and maintain payroll or make mortgage, lease, and utility payments. The SBA has no recourse against shareholders of participating businesses unless the funds are used inappropriately. Rates for these loans are capped at 4% (and are currently set at 1%), with no prepayment penalty. Participating lenders are required to allow loan deferment for six months to one year.
Section 1106 of the Act addresses loan forgiveness. Payroll protection loans are forgiven for all costs incurred for payroll, rent obligations, utilities, and interest payments on mortgages. The amount of the loan forgiveness can be reduced under two scenarios. First, the loan forgiveness will be reduced in proportion to the number of employee reductions, as determined by the percentage of full-time employees on payroll during the covered period (2/15/20 to 6/30/20) compared with the average number of full-time employees from either 2/15/19 to 6/30/19 OR 1/1/20 to 2/29/20 (the lender chooses the applicable comparison period). Second, the loan forgiveness will be reduced in proportion to any salary reductions that are made in excess of 25% of an employee’s salary, if that employee earned less than $100,000 in 2019.
However, if the business re-hires the employees or reverses the salary reductions by June 30, 2020, then the amount of loan forgiveness is NOT reduced. Borrowers seeking loan forgiveness must submit to their lender documentation verifying full-time employees on payroll and their pay rates; documentation on covered costs and payments; the certification discussed in Section 1102 above; and any other documentation the SBA may require.
Section 2301 grants employers credit against their quarterly employment taxes if they are forced to close due to the coronavirus. The credit is good for 50% of “qualified wages” (defined as wages paid by the employer to employees who are not providing services due to coronavirus), up to $10,000 per employee (including health care expenses for that employee).
Section 2302 allows employers to defer payment of payroll taxes for the period ending 1/1/21. Fifty percent of the payroll taxes is due by 12/31/21, and the other 50% is due 12/31/22.
For more information, or for assistance with any legal issues relating to COVID-19, please contact Mark Zausmer.