On Friday, March 27, 2020, President Trump signed into law the more than $2 trillion coronavirus stimulus bill known as the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The following is a description of certain significant provisions of the CARES Act affecting businesses.

$349 billion has been allocated to a new program to assist small business under Section 7(a) of the Small Business Act known as the “Paycheck Protection Program.” This program will be administered by the Small Business Administration (SBA), and is one of the important cornerstones of the CARES Act.

Loans will be issued to eligible businesses by banks, but the loan will be guaranteed 100% by the SBA. The loans will be offered with the following conditions: (1) maximum of $10,000,000 at 4% for a period not to exceed 10 years; (2) loan payment deferral offered between 6 to 12 months; and (3) no personal guarantee, collateral, fees, or inability to obtain credit elsewhere. One of the most important aspects of the program is that all or a portion of the loan can be forgiven under certain circumstances described below.

The Paycheck Protection Program is available for businesses, non-profits, and other organizations with no more than 500 employees. The loans are also available to eligible sole proprietors, independent contractors, and self-employed partners. The purpose of the loans is to assist small business during a covered period of February 15th to June 30th, 2020 with the following: (1) Payroll Costs (for the covered period) defined as including wages, salaries, commissions, cash tips (not exceeding a rate of $100,000 per year per employee); health insurance premiums; retirement benefits; and payments to sole proprietors, independent contractors not to exceed a rate of $100,000 per year; (2) continuation of health care benefits for employees during paid sick, medical, or family leave; (3) interest payments on a mortgage obligation (not principal) and/or rent; (4) utilities; and (5) interest on any debt prior to the covered period.

The borrower must also certify to the SBA that: (1) uncertainty of current economic conditions is causing difficulty in continuing operations; (2) the funds will be used to retain workers, maintain payroll, or make interest, utility or rent payments; (3) there is no existing loan application pending for a Section 7(a) loan; and (4) no other amounts have been received during 2020 under Section 7(a) for the same purpose. The Act gives more authority to banks regarding eligibility determinations without having to run those determinations through the normal SBA approval channels.

The maximum loan amount available is calculated as follows. If the company has been in business for the one year period prior to the date the loan is made (or originated), the maximum loan amount is the average total monthly Payroll Costs (as defined above) during the 12-month period preceding the loan origination date, multiplied by 2.5. If the company has not been in business between February 15, 2019 and June 30, 2019, the maximum loan amount is the average total monthly Payroll Costs paid between January 1, 2020 and February 29, 2020, multiplied by 2.5.

A recipient of a Payroll Protection Program loan may apply for forgiveness to the extent the proceeds were used for the following only during the 8-week covered period beginning on the date of the loan origination: (1) Payroll Costs (as defined above); (2) interest on a mortgage obligation (originating prior to Feb 15, 2020); (3) payment on a rent obligation (lease agreement prior to Feb 15, 2020); and (4) utility payments (service originating prior to Feb 15, 2020).

The loan forgiveness will be reduced by multiplying the sum of the amounts in the categories above that were incurred during the 8-week covered period after the loan was originated by a percentage (not to exceed 100%) calculated by dividing: (1) the reduction in the average number of full-time equivalent employees (“FTE”) per month during the 8-week covered period; by (2) either of the following chosen by the borrower: (a) average FTE employees per month between February 15, 2019 and June 30, 2019; or (b) average FTE employees per month between January 1, 2020 and February 29, 2020.

The loan forgiveness amount can be further reduced by any salary reduction greater than 25% for any employee making less than $100,000 from the most recent full quarter prior to the 8-week period.

In order to permit loan forgiveness, the lender must receive the following financial information from the borrower: (1) evidence of the number of FTE employees on payroll and pay rates for the periods outlined above under the reduction scenarios (i.e. payroll tax filings); (2) payment verification on mortgage, lease, and utilities (i.e. payment receipts); and (3) certification that the above is correct and the amounts were used for the reasons outlined above.

Undoubtedly, there will be numerous rules, requirements and regulations in the coming weeks which may change or modify some of the above. Banks may also have additional procedural and administrative requirements as well. We strongly urge each and every business that qualifies for this loan/forgiveness program to contact their banker to take advantage of the benefits afforded under the CARES Act in an effort to curb the losses they may incur as a result of the COVID-19 virus pandemic.

Employers subject to full or partial closure due to COVID-19, or whose businesses have suffered as a result of the economic downturn are eligible for a refundable payroll tax credit of up to 50% of qualified wages paid. For eligible employers with greater than 100 full-time employees, qualified wages are wages paid to employees when they are not providing services because the business has been partially or fully shut down due to COVID-19, or because gross receipts have declined by more than 50% relative to the same quarter in the prior year. For eligible employers with 100 or fewer full-time employees, all employee wages qualify for the credit. The credit is provided for the first $10,000 of compensation, including health benefits, paid to an eligible employee in the quarter, for wages paid from March 13 through December 31, 2020. It is limited to employment taxes on wages paid, reduced by other payroll credits including those enacted by the Families First Coronavirus Response Act, which passed earlier this month. Employers that receive Paycheck Protection Loans under the Act are not eligible for the employee retention credit.

Employment taxes due through December 31, 2020 can be paid one-half on December 31, 2021 and one-half on December 31, 2022. Self-employed individuals can defer paying 50% of their self-employment tax with one-half the deferral due December 31, 2021 and the remainder due December 31, 2022. The payroll deferral cannot be utilized if the taxpayer takes a Paycheck Protection Loan.

Businesses can carry back losses from 2018, 2019, and 2020 for up to five years, and net operating losses will temporarily not be subject to a taxable income limit, which may make carryback claims available to recover 2018 taxes.