COVID-19: Cares Act Business Support

By: Ben Michaelson

March 30, 2020

You may have heard that, on March 27, 2020, the U.S. Government passed the Cares Act. The final act is 880 pages and we have been reading it so that you can get the important information without having to read it (you’re welcome!).

This act includes many economic benefits for businesses and for individuals (tax rebates, retirement early withdrawal penalty and required distributions eliminated, and charitable giving deduction improvements). However, for our purposes here, I am going to focus only on the three biggest immediate benefits to businesses, namely: (1) the Paycheck Protection Program, which is an SBA loan subject to being forgiven without repayment, (2) a tax credit against wages paid during the pandemic, and (3) a delay in the payment of the employer’s share of payroll taxes.

1. The Paycheck Protection Program provides swift access to SBA backed loans to businesses. The loan program is only offered through approved lenders, is backed 100% by the federal government (so no personal guarantees are required), and may be taken without needing to ever be paid back under certain circumstances. Some key provisions to keep in mind as you consider this lending option:

    • The application deadline is June 30, 2020, but lenders have not yet started taking applications (a “little birdie banker” has advised that the SBA has not yet published the rules to its lenders so the lenders cannot yet create the programs, however the “birdie” indicates that they are hoping to have a process in place this week, Secretary Mnuchin had indicated a go live date of this Friday).
    • The business generally must have been in business on February 15, 2020 and have 500 or fewer full-time, part-time or other employees (there are other qualifications if you have more than 500 employees that we should discuss).
    • The business can borrow the lesser of $10 million or 2.5 times the average monthly payments by the applicant for payroll costs (for example, if the average monthly payroll over the prior 12 months was $100k, the maximum loan would be $250k) plus any Economic Injury Disaster Loans already received from the SBA.
    • Payroll costs include the total amount paid for each U.S. based employee for: salaries, tips, retirement benefits, severance payments, and taxes paid on compensation (but the forgiveness amount is capped at the annualized amount of $100,000 for each employee).
    • No collateral and no personal guarantees are required.
    • Term of 10 years (with no prepayment penalty), and a maximum interest rate of 4%.
    • Loan payments will not start until 6 to 12 months after the disbursement of proceeds (but interest will immediately begin to accrue).
    • The loan may be forgiven (e.g., you do not have to pay it back) in an amount equal to total payroll costs (subject to the $100,000 per employee cap), mortgage, rent, and utilities paid during the 8 weeks following the loan date; however, the amount forgiven is reduced pro-rata if the average number of full-time equivalent employees per month during that 8 week period falls below certain periods during the prior 12 months or if there is a reduction in salary or wages more than 25% over a pre-loan period. Note that you may re-hire employees to meet these requirements.
    • You cannot take the PPP loan and get the tax credit that is noted below in Item 2.

2. Businesses are allowed to take a credit against future employment taxes for each calendar quarter equal to 50% of the wages paid to employees during the COVID-19 crisis. The credit is limited to $10,000 of wages paid to each employee and is only available to employers whose (a) operations were fully or partially suspended, due to a COVID-19-related shutdown order, or (b) where gross receipts declined by more than 50 percent when compared to the same quarter in the prior year. If you have greater than 100 full-time employees, the qualified wages are only those paid to employees who are not working due to COVID-19. If you have 100 or fewer full-time employees, all employee wages qualify for the credit if the above criteria are met. However, this credit is not available to businesses receiving a Small Business Interruption Loan under section 1102 of the Act or if a Work Opportunity Tax Credit is allowed for the employee.

3. Delay in payment for the employer share of payroll taxes. Businesses may defer payment of the employers share of payroll taxes for March 27 through December 31 of 2020. The taxes deferred must then be paid over the following two years, half due on December 31, 2021 and the other half by December 31, 2022.

If you would like to discuss any of these options, or be updated when lenders are ready to start taking the PPP loan program applications, let us know.

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