On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) to provide financial assistance to individuals and businesses. The CARES Act includes approximately $2 trillion in assistance to individuals and businesses. It provides federal funding across several categories, including: (i) direct lending for mid-sized businesses (500 to 10,000 employees) administered by the Federal Reserve; and (ii) assistance for small businesses (fewer than 500 employees) in forgivable loans through the Small Business Administration (SBA). There is also some much needed tax relief. The CARES Act is dense (that's for sure). We have summarized some of the key provisions.
Federal Reserve Lending Programs for Mid-Sized Businesses (500 to 10,000 employees)
The CARES Act authorizes the Federal Reserve to provide financing to banks and other lenders that make unforgiveable direct loans to businesses. Loans will be subject to supervision, audits, and investigation by a special inspector general, and will have conditions. The basics are: APR will be 2% or less and for the 6 years after the loan is made, or a longer period if deemed necessary by the Treasury, no principal or interest shall be due and payable, if conditions are met.
There are definitely strings attached. The conditions include: restricting stock buybacks, dividends and capital contributions; limiting executive compensation; prohibiting loan forgiveness; prohibitions on outsourcing and offshoring jobs for the term of the loan plus two years; funds received must be used to retain at least 90% of the recipient's workforce, with full compensation and benefits, through September 30, 2020; the employer cannot abrogate any existing collective bargaining agreements; and employers must remain neutral in any union organizing effort for the term of the loan. However, these requirements may be waived by the Secretary of the Treasury if necessary to protect government interests, subject to testimony before Congress regarding the rationale for the waiver.
Small Business Paycheck Protection Program for Small Businesses (fewer than 500 employees)
The CARES Act expands the ability to obtain loans under Section 7(a) of the Small Business Act through a new Paycheck Protection Program.
Under the program, small businesses and nonprofits with fewer than 500 employees; self-employed; sole proprietors; independent contractors; and businesses in the accommodation and food services sector with fewer than 500 employees per location, are eligible for small business loans to cover payroll; health care costs; mortgage interest payments, rent and utility payments; and interest on pre-existing debt obligations.
The program also permits borrowers to refinance economic injury disaster loans made between January 31, 2020, and the date on which loans are made available under the program. The amount of the loan cannot exceed the sum of 2.5 times the average monthly payroll cost during the year prior to the loan and the amount of economic injury disaster loans being refinanced under the program; it must be capped at $10 million and have a maximum interest rate of 4%. Loans are available to eligible borrowers under the program through June 30, 2020, fees are waived, payments are deferred by at least six months (but not more than one year), and the SBA's "credit elsewhere" test (the ability to obtain funding from other sources without undue hardship) is waived.
Loans under the program are fully guaranteed by the federal government, which is an increase to the existing guarantee percentages under the current SBA loan program. Collateral and personal guarantees are not required. To be eligible, a borrower must be in operation on February 15, 2020, and have paid employee salaries and payroll taxes. A business is not eligible to receive these loans if it receives an economic injury disaster loan for the same purpose.
Loans under the program are eligible for forgiveness for amounts spent on certain payroll and other costs up to the aggregate amount of payroll payments, interest payments on mortgage obligations, rent payments and utility payments made during the eight-week period following loan origination as long as the amount does not exceed the original principal. Such payroll costs do not include sick leave wages or family leave wages, for which a tax credit is allowed under the Families First Coronavirus Response Act (FFCRA). The amount forgiven is lowered by reductions in full-time employment and in situations where total salaries and wages fall by more than 25% from the applicable prior period, but this can be mitigated by rehiring employees. Amounts not forgiven continue to be guaranteed and will have a maximum maturity date of 10 years from the date the borrower applied for loan forgiveness.
Payroll Tax Credit and Deferral of Employer Payroll Taxes
The CARES Act provides a refundable payroll tax credit to eligible employers for 50% of "qualified wages" paid to employees. The Act also permits all employers and self-employed individuals to defer payment of the employer portion of payroll taxes owed on wages paid.
An employer is eligible for the payroll tax credit if, during any calendar quarter of 2020, it has operations fully or partially suspended due to a governmental order related to COVID-19, or it has a decline in gross receipts of more than 50% compared to the same quarter of the prior year. For employers with 100 or fewer full-time employees, "qualified wages" covers wages paid to all employees during any applicable quarter in which there was a COVID-19 impact as described above. For employers with more than 100 full-time employees, "qualified wages" only covers wages paid to those employees not providing services due to a COVID-19 impact as described above. Qualified wages applies to the first $10,000 of compensation paid to an employee. This credit is not available to employers who receive a Paycheck Protection Program loan.
Importantly, employers subject to the FFCRA may receive an advance (including any refundable portions) of FFCRA payroll credits to help cover the expense of providing the required paid leave under the FFCRA. The U.S. Department of Labor is expected to issue further guidance through forms, form instructions, and regulations.
All employers and self-employed individuals may defer payment of the employer share of payroll taxes owed on wages paid for the period ending December 31, 2020. Such deferred taxes are due in two installments: 50% by December 31, 2021, and 50% by December 31, 2022. This provision does not apply to any taxpayer who receives loan forgiveness with respect to a Paycheck Protection Program loan.
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