Small Business Lawyer’s Guide to CARES Act Funding

By Ritchie Taylor and Bradley S. Wooldridge 

The Coronavirus pandemic has caused an unprecedented halt to our otherwise healthy economy. Senate Republicans and Democrats, along with Secretary Mnuchin and the Trump administration, have been working since late last week on what they have referred to as the Phase III of the COVID-19 legislation, which is largely a stimulus bill to provide much needed liquidity to both large and small businesses, as well as individuals, to assist in bridging the financial gap anticipated by this economic halt.

The Senate passed the stimulus bill, H.R. 748, the “Coronavirus Aid, Relief, and Economic Security Act” or the “CARES Act” on the evening of March 25, the House passed the bill on March 27 and it was signed by President Trump into law the same day.

The CARES Act has several favorable provisions intended to assist small businesses during this economic crisis, and which every business should consider taking advantage of, including the following programs:

Paycheck Protection Program:

The CARES Act allocates $350 billion for a forgivable loan program for eligible small businesses. The program will be operated through the SBA’s 7(a) program with expanded eligibility and relaxing of 7(a) requirements, including no personal guarantees or required collateral. Eligible borrowers include any business concern with 500 or fewer employees, as well as exceptions for businesses in the hospitality and franchise industry. The maximum loan amount is the lesser of (i) the average total monthly payments for payroll costs (salaries, leave, insurance, state/local tax, payments to certain contractors— excluding annual compensation per employee of more than $100k) multiplied by 2.5, or (ii) $10 million.

The borrower is eligible for tax-free forgiveness of the loan in an amount equal to the funds used for qualifying expenses including payroll costs, mortgage interest, rent or utilities incurred during the 8-week period following the date of the loan origination, subject to certain limitations intended to ensure employee retention and compensation. Such limitations include a reduction of eligible forgiveness based on (i) a reduction in the number of employees during the 8-week period after origination as compared to prior employment numbers and (ii) reduction in compensation on a per employee basis during the same 8-week period of more than 25% as compared to the last full quarter in which such employee was employed. To the extent prospective borrowers have already furloughed or terminated employees, the program provides the ability to obtain loan forgiveness if the impacted business rehires the employees and meets certain timing constraints. Borrowers can combine the Paycheck Protection Program with SBA disaster assistance loans to maximize the available loan capacity.

Any FDIC insured lender will have the ability to offer Paycheck Protection Loans even if they do not have an existing SBA program. Working with the financial institution who knows the business must be weighted against working with an experienced SBA lending institution who already has processes in place.

The Treasury Secretary, among others, has noted the fact that it will take 3 weeks from enactment to get funds in the hands of business owners. Considering time is of the essence for many enterprises, we hope the SBA and Treasury can move expeditiously. That being said, Congress has given the SBA and Treasury 30 days from enactment to finalize the regulations. Several unanswered questions remain open to being addressed in the regulations, including, such matters as to whether controlled group rules will be applied to affiliated borrowers, if each entity under common ownership will be able to receive its own loan, and how contractors will be incorporated into the base payroll for purposes of determining loan size. Considering the fact the SBA affiliation rules for franchising were temporarily suspended by the statute, it would only be reasonable for the SBA and Treasury to take a more liberal view in applying such rules to multi-unit operations conducted in separate entities, but market participants will have to await the ultimate regulations to have this question answered.

Retention Credit for employers Due to COVID-19 Hardships: 

The CARES Act provides a refundable payroll tax credit for 50% of wages paid by employers to employees during the COVID-19 crisis. The credit is available to employers whose (i) operations were suspended due to a COVID-19 shut-down order, or (ii) gross receipts declined by more than 50 percent when compared to the same quarter in the prior year. Only certain qualified wages are eligible and the credit is limited to the first $10,000 of compensation paid or incurred from March 13, 2020 to December 31, 2020. A business taking a loan under the Paycheck Protection Program is not eligible for the payroll tax credit, but may be eligible for a traditional SBA disaster recovery loan.

Delay of Employer Portion of Payroll Taxes:

The CARES Act permits employers to defer payment of the employer share of the Social Security tax they otherwise are responsible for paying to the federal government with respect to their employees. The provision requires that the deferred employment tax be paid half on December 31, 2021 and the balance in December 31, 2022.

Modifications for NOLs, Losses and Interest: 

The CARES Act relaxes the limitations on a Corporation’s NOLs by permitting NOL carrybacks of 5 years for NOLs arising in 2018, 2019 or 2020. The provision also temporarily removes the taxable income limitation to allow an NOL to fully offset income. Further, with respect to pass-through businesses and sole proprietors, the excess business loss limitations are relaxed. The provision temporarily increases the amount of interest expense businesses are allowed to deduct on their tax returns, by increasing the 30% limitation to 50% of taxable income (with adjustments) for 2019 and 2020. These changes should allow businesses of all forms to utilize losses and provide cash flow and liquidity.

Technical Amendment to 2017 Act for Qualified Improvement Property: 

The CARES Act also includes a long overdue fix to the 2017 Tax Cuts and Jobs Act that will permit businesses, particularly hospitality businesses, to fully expense the cost of upfits instead of having to depreciate those costs over the 39 years. The fix is made retroactive to the 2017 Tax Cuts and Jobs Act.

In addition to the above programs or modification included in the Act, the CARES Act also includes significant direct payments to individuals, as well as an expansion of the unemployment insurance program, adding $600 to the maximum weekly benefit and extending the time an employee can receive it. Further, the CARES Act provides significant Federal funding to health care supply needs and other Federal, state and local programs to assist in the health and economic crisis caused by the Coronavirus.