COVID-19: Small Business Relief Under the CARES Act

President Trump Signs CARES Act Providing Relief to Small Business and Unemployment Assistance

By: Aaron Cruz

April 2, 2020

On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, a $2 trillion stimulus package that provides economic relief to businesses and individuals.  This article summarizes the CARES Act’s provisions regarding assistance to small private businesses and additional funding for states to provide unemployment assistance.

Paycheck Protection Program Loan

The CARES Act includes a Paycheck Protection Program (“PPP”) loan to small businesses with 500 or less employees.  This program is an expansion of the Small Business Administration’s (“SBA”) existing loan program under Section 7(a) of the Small Business Act.  Businesses and other eligible entities will be able to apply for PPP loans of up to $10 million if they were harmed by COVID-19 between February 15, 2020 and June 30, 2020.  Loans are available through June 30, 2020, and principal and interest payments may be deferred up to 1 year.

PPP loans may be used for the following expenses:

    • Payroll costs (e.g., employee salaries, commissions, or similar compensations; payment for vacation, parental, medical, family or sick leave; payment of retirement benefits);
    • Costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;
    • Payments of interest on any mortgage obligation (which shall not include any prepayment of or payment of principal on a mortgage obligation);
    • Rent (including rent under a lease agreement);
    • Utilities; and
    • Interest on any other debt obligations that were incurred before the covered period.

Importantly, employee compensation over $100,000 and qualified emergency leave wages under the Families First Coronavirus Response Act are excluded from payroll costs.

Businesses are eligible for a PPP loan if they:

    • Were in operation on February 15, 2020; and
    • Had employees for whom the borrower paid salaries and payroll taxes; or
    • Paid independent contractors, as reported on a Form 1099–MISC.

A business applying for a PPP loan also is required to make a good faith certification:

    • That the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the business;
    • That funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments;
    • That the business does not have an application pending for a loan under this subsection for the same purpose and duplicative of amounts applied for or received under a loan; and
    • That during the period beginning on February 15, 2020 and ending on December 31, 2020, the business has not received amounts under this subsection for the same purpose and duplicative of amounts applied for or received under a loan.

PPP Loan Forgiveness

Businesses receiving a PPP loan are eligible for loan forgiveness equal to the amount expended by the businesses during the 8-week period after the origination of the loan on payroll, mortgage interest, rent, and utility payments.  The amount of the loan forgiveness depends on whether the businesses maintain the same number of employees and salary or wage levels for those employees during that 8-week period.

Businesses may discharge employees during the 8-week period, but the amount of the loan forgiveness may be reduced based on the reduction in employees.  If the employee headcount is not maintained during the 8-week covered period, loan forgiveness reductions are calculated by multiplying the loan forgiveness amount by the average number of full-time equivalent employees per month for the 8-week period beginning on the date of the origination of the loan divided by the average number of full-time equivalent employees per month during the period from February 15, 2019 to June 30, 2019, or, at the business’s election, the average number of full-time equivalent employee per month during January and February 2020.

For example, consider a business with a loan forgiveness amount of $2 million that employed an average of 250 employees per month for the 8-week period beginning on the origination date of the loan.  Also consider that the business employed an average of 350 employees per month from February 15, 2019 to June 30, 2019 (assuming the business elects to use this period).  In this scenario, the business’s loan forgiveness amount would be reduced to $1,428,571.43 (250 divided by 350, then multiplied by $2 million).

The loan forgiveness amount also will be reduced by the amount of any reduction in salary or wages that is 25 percent or more for employees earning less than $100,000 annually compared to their compensation during the most recent full quarter prior to the 8-week period.

Importantly, reductions in employment or salary or wages that occur during the period beginning on February 15, 2020, and ending April 26, 2020 will not reduce the amount of loan forgiveness if by June 30, 2020, the business eliminates the reduction in employees or reduction in salary or wages.  This means that a business that reduces a certain number of employees during this period and then rehires the same number of employees prior to June 30, 2020, will avoid a reduction.  Similarly, a business that reduces employees’ salaries or wages during this period and then eliminates this reduction prior to June 30, 2020, will avoid a loan forgiveness reduction.

Businesses are required to apply for loan forgiveness.  Applications are submitted to the lender servicing the loan and must include:

    • Documentation verifying the number of full-time equivalent employees on the payroll and the pay rates for the applicable pay periods;
    • Documentation, including cancelled checks, payment receipts, transcripts of accounts, or other documents verifying payments on covered mortgage obligations, payments on covered lease obligations, and covered utility payments;
    • A certification from a representative of the business authorized to make such certifications that the documentation presented is true and correct, and the amount for which forgiveness is requested was used to retain employees, make interest payments on a covered mortgage obligation, make payments on a covered rent obligation, or make covered utility payments; and
    • Any other documentation the SBA deems necessary.

Lenders shall issue a decision on loan forgiveness applications within 60 days.  The amount of PPP loan forgiveness will be capped at the principal amount of the loan.  Once received, the loan amount forgiven should be excluded from gross income.

With respect to PPP loans not forgiven or that have a remaining balance after giving effect to any loan forgiveness, the balance continues to be fully guaranteed by the SBA.  Any PPP loan amounts not forgiven or that have a remaining balance after forgiveness are carried forward as an ongoing loan with max terms of 10 years, at a maximum interest rate of 4%.  Principal and interest will continue to be deferred, for a total of 6 months to 1 year after disbursement of the loan.  The SBA encourages lenders to provide payments and extend maturity dates of loans where appropriate.  The SBA will pay the principal, interest and any associated fees owed on a loan:

    • With respect to a loan made before the date of enactment of this Act and not on deferment, for the 6-month period beginning with the next payment due on the loan;
    • With respect to a loan made before the date of enactment of this Act and on deferment, for the 6-month period beginning with the next payment due on the loan after the deferment period; and
    • With respect to a loan made during the period beginning on the date of enactment of this Act and ending on the date that is 6 months after such date of enactment, for the 6-month period beginning with the first payment due on the loan.

SBA Emergency Economic Injury Disaster Loan

The law also temporarily expands eligibility for SBA Economic Injury Disaster Loans (EIDLs).  EIDLs are now available throughout the U.S. (previously only in declared disaster areas) and for businesses with 500 or less employees.  EIDLs are loans of up to $2 million that carry interest rates up to 3.75% for companies and up to 2.75% for nonprofits, as well as principal and interest deferment for up to 4 years.  This provides immediate relief to small businesses with non-disaster SBA loans, and covers all loan payments for existing SBA borrowers, including principal, interest, and fees, for 6 months.  This also provides relief to new borrowers who take out loans within 6 months of the President signing the bill into law.  The amount of relief provided is based on average total monthly payments for payroll for the 12-week period beginning February 15, 2019, or at the election of the eligible recipient, March 1, 2019, and ending June 30, 2019.  EIDLs made between January 31, 2020 and February 15, 2020 may also be refinanced into a PPP loan.

Importantly, EIDLs and PPP loans cannot be used for the same purpose, but businesses may choose to apply for and use either type of loan first.  For example, if an EIDL is used to cover a business’s payroll for certain workers in April, that business cannot use PPP for its payroll for those same workers in April, although it could use the PPP for payroll in March or for different workers in April.

Emergency EIDL Grants

The law also provides small businesses with emergency EIDL grants for businesses that apply for EIDLs.  Businesses with 500 or less employees that apply for an EIDL between January 31, 2020 and December 31, 2020, may request that the SBA provide an EIDL grant within 3 days, of up to $10,000.  This grant may be used for the following:

    • Providing paid sick leave to employees unable to work due to the direct effect of the COVID–19;
    • Maintaining payroll to retain employees during business disruptions or substantial slowdowns;
    • Meeting increased costs to obtain materials unavailable from the applicant’s original source due to interrupted supply chains;
    • Making rent or mortgage payments; and
    • Repaying obligations that cannot be met due to revenue losses.

Businesses are not required to repay EIDL grants, even if subsequently denied an EIDL.  If a business does receive an EIDL and later refinances it into a PPP loan, the advance amount of the EIDL grant will be reduced from any PPP loan forgiveness amount.

Additional Unemployment Assistance

The new law also provides additional unemployment assistance.  An individual is entitled to unemployment assistance for the weeks of unemployment, partial unemployment or inability to work (or telework) for the following reasons:

    • The individual has been diagnosed with COVID–19 or is experiencing symptoms of COVID–19 and seeking a medical diagnosis;
    • A member of the individual’s household has been diagnosed with COVID–19;
    • The individual is providing care for a family member or a member of the individual’s household who has been diagnosed with COVID–19;
    • A child or other person in the household for which the individual has primary caregiving responsibility is unable to attend school or another facility that is closed as a direct result of the COVID-19 public health emergency and such school or facility care is required for the individual to work;
    • The individual is unable to reach the place of employment because of a quarantine imposed as a direct result of the COVID-19 public health emergency;
    • The individual is unable to reach the place of employment because the individual has been advised by a health care provider to self-quarantine due to concerns related to COVID–19;
    • The individual was scheduled to commence employment and does not have a job or is unable to reach the job as a direct result of the COVID-19 public health emergency;
    • The individual has become the breadwinner or major support for a household because the head of the household has died as a direct result of COVID–19;
    • The individual has to quit his or her job as a direct result of COVID–19;
    • The individual’s place of employment is closed as a direct result of the COVID–19 public health emergency; or
    • The individual meets any additional criteria established by the DOL for unemployment assistance.

Covered individuals will receive benefits for weeks of unemployment, partial unemployment, or inability to work caused by COVID-19 beginning on or after January 27, 2020 and ending on December 31, 2020.  Covered individuals will receive the weekly benefit amount authorized under the unemployment compensation law of the state where the individual was employed.  The exact amount an individual can receive through unemployment depends on the individual’s previous earnings and what s/he receive from the state.  Covered individuals also will be entitled to an additional $600 that will be added to every unemployment compensation check.   Individuals who have exhausted their weeks of unemployment available under state law also are entitled to an additional 13 weeks of federally funded unemployment benefits.

Additional funding is provided to states to assist them in meeting the demand for unemployment assistance.  States providing unemployment assistance under this law would receive 100 percent reimbursement.  The law also provides employers with an employee retention tax credit against employment taxes for each calendar quarter of 50 percent of qualified wages of each employee of such employers for such calendar quarter.  The amount of qualified wages cannot exceed $10,000.

The information contained in this post is general in nature and offered for informational purposes only. It is not offered and should not be construed as legal advice. Any specific questions about this information should be directed to an attorney.

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