For businesses that are shut down or operating at a reduced capacity due to the preventative measures ordered by the various local, state and federal governments, these are understandably very uncertain times that raise serious concerns, such as how will I pay rent and other operating expenses, how will I cover payroll, and will I have to let employees go, just to name a few. The Coronavirus Aid, Relief and Economic Security (CARES) Act, a $2 Trillion Stimulus Package signed by President Trump on March 27, 2020, contains several components that may help weather the financial impact brought about by the unprecedented events at hand, including loan programs and other financial relief mechanisms. For businesses, the key take away points from the Stimulus Package are:
Paycheck Protection Loan
- If you are an employer with 500 or less employees, or you otherwise meet the size qualifications for the Small Business Administration, you may apply for a Paycheck Protection Loan administered through the Small Business Administration 7(a) loan program. These loans have terms of ten (10) years, are no fee loans, and can be up to Ten Million Dollars, with your particular eligibility for a given amount being tied to your payroll costs.
- Proceeds of these loans may be used for specific items, including payroll, payment of paid medical leave or sick leave for employees, insurance premiums, rent, mortgage or other debt obligations. The program provides for the forgiveness of the amount of the loan in an amount equal to eight weeks’ worth of your average payroll and other operating costs, provided, however, that you keep your existing employees and maintain them at their pay scale or salary levels. All borrowers under this program will be provided a deferral of principal and interest for up to a year and, as noted earlier, all fees for the loan are waived. As to any amounts that are not forgiven based on the noted formula, the interest rate cannot exceed four (4%) percent.
- Underwriting of these loans In lieu of requiring an ability to repay analysis, banks will have to determine whether a business was operational on Feb. 15, 2020 and had employees for whom it paid salaries and payroll taxes. Eligible borrowers will also have to make a good faith certification that they’ve been impacted by COVID-19 and will use the funds to retain workers and maintain payroll and other debt obligations. Of note, sole-proprietors, independent contractors and other self-employed individuals as eligible for loans.
- For existing borrowers with SBA loans, there was $17 billion allocated to have SBA cover six months of payments for existing SBA loans.
Payroll Tax Delay & Other Tax Provisions
- Employers and self-employed persons have the ability to elect to defer payment of their portion of the social security tax paid in 2020 for their employees, subject to the obligation to repay a minimum of one half of the amount deferred by the end of 2021, with the balance to be repaid by the end of 2022.
- In addition, the legislation allows a business to:
- temporarily increase the amount of interest expense it deducts to an amount equal to fifty (50%) percent of the taxable income of the business, with adjustments, for the years 2019 and 2020.
- increase use of net operating losses, such that losses from the years 2018 through 2020 will be allowed to be carried back for a period of five (5) years and removes the taxable income limitation, resulting in net operating losses being allowed to fully offset income.
- immediately expense qualified property improvements, such that businesses may write off immediately the costs incurred in connection with making improvements to its facilities rather than being required to depreciate the costs of those improvements over the 39-year life of the building.
Emergency Economic Injury Disaster Loans
- The Small Business Association also will administer a program providing Economic Injury Disaster Loans (“EIDLs”) to small business, private non-profits, sole proprietors and independent contractors that were in operation on Jan. 31, 2020.
- EIDLs may be used to pay expenses that the applicant impacted by the COVID 19 disaster could have met had the disaster not occurred, such as payroll and other operating expenses.
- EIDLs may be for a principal amount not to exceed $2 million and bear interest at a rate of 3.75% for businesses and 2.75% for non-profits. Principal and interest on these EIDLs may be deferred for up to four (4) years.
- The Stimulus Package notably includes a $10 billion grant component to be used by lenders to advance $10,000 to small businesses and non-profits that have been impacted by the disaster within three (3) days of making application for the EIDL, which grant is not required to be repaid regardless of whether the entity receiving it ultimately has its application for an EIDL denied.
- EIDLs and Paycheck Payment Program Loans are not exclusive, meaning a business that qualified for both can get approved under both programs, provided the expenses being covered by the loan proceeds under each are not the same.
Exchange Stabilization Fund
- Another notable component of the legislation is a $425 billion fund to provide for short-term loans, loan guarantees and investments in regard to the Federal Reserve’s lending facilities to eligible businesses, states and municipalities that utilize the unsecured commercial paper market. The impact of these measures is to free up lending capacity of the banking sector to larger businesses.
- There is, according to the Federal Reserve, the potential that for each dollar in this fund used the Federal Reserve could extend an additional ten ($10) dollars in additional loan programs for businesses, totaling potentially up to $4 Trillion, which is in addition to relief to certain critical industries, airlines, and air cargo carriers.
Allen & Gooch is providing this legal update for informational purposes only. This article should not be construed as legal advice or a legal opinion as to any specific facts or circumstances. You should consult your own attorney concerning your particular situation and any specific legal questions you may have.