CARES ACT
A GENERAL SUMMARY –By Nedda Ghandi, Esq.
On Friday, March 27, 2020, President Trump signed the “Coronavirus Aid,
Relief, and Economic Security Act” (CARES Act) into law. This law marks the single largest economic stimulus package in history and is intended to provide relief to the many businesses and individuals impacted by COVID-19. This article is a general summary with some basic explanations particularly related to the “paycheck protection loans” provided for in the CARES Act. The CARES Act is being implemented and the information contained herein may be subject to certain adjustments or revisions as the CARES Act transitions into law or as amendments are made. Substantial modifications in the law or the implementation may have occurred between the drafting of this article and its publication. As such, the information contained herein should be confirmed with any updated information as the CARES Act evolves. Title I, entitled Keeping American Workers Paid and Employed Act of the CARES Act, provides certain financial resources to help sustain small businesses with less than 500 employees, including sole proprietorships and nonprofit organizations during these unprecedented times. In addition, a business with more than one physical location that employs not more than 500 employees per physical location that is assigned the North American Industry Classification System code beginning with 72, Accommodation and Food Services is eligible for the available financial resources under Title I. The Small Business Administration will have access to approximately $350 billion in loans during the covered period as defined from February 15, 2020 through June 30, 2020. PAYCHECK PROTECTION LOANS The organizations that are eligible can apply for “paycheck protection loans” (“PPL”). PPL are fully guaranteed by the Federal Government through June 30, 2020 and, thereafter, return to an 85% guarantee for loans greater than $150,000. The PPL are generally limited to the lesser of: • the sum of average monthly “payroll costs” for the one-year period ending on the date the loan was made (an alternative calculation is available for seasonal employers) multiplied by 2.5, and any Emergency Government Disaster Loan (see below) taken out after January 31, 2020 that has been refinanced into a paycheck protection loan, or • $10 million. Payroll costs include the sum of the following: • wages, commissions, salary, or similar compensation to an employee or independent contractor, • payment of a cash tip or equivalent, • payment for vacation, parental, family, medical or sick leave, • allowance for dismissal or separation, • payment for group health care benefits, including premiums, • payment of any retirement benefits, and • payment of state or local tax assessed on the compensation of employees.
Payroll costs exclude the following: • the compensation of any individual employee in excess of an annual salary limitation of $100,000, • payroll taxes, • any compensation of an employee whose principal place of residence is outside the U.S., or • any qualified sick leave or family medical leave for which a credit is allowed under the new Coronavirus Relief Act passed last week. A payroll protection loan will have a maximum maturity of 10 years bearing an interest rate not to exceed 4%. At the time of the drafting of this article, the PPL will feature an interest rate of 1% and two-year terms. So, what does this mean and how much could a small business apply for? The following is an example of calculating the amount that a small business could apply for as a PPL. Company XYZ applies for a paycheck protection loan on June 1, 2020. The Company XYZ had $1.5 million in included payroll costs for the prior year (June 1, 2019 through June 1, 2020), resulting in a $125,000 average per month payroll cost. Assuming that the fully guaranteed federal loan is made prior to December 31, 2020, Company XYZ is eligible to receive a payroll protection loan equal to the lesser of $312,500 (2.5 times $125,000 monthly average in included payroll costs) or $10 million. The SBA, for purposes of this program, has greatly expanded the number of “SBA Certified Lenders.” The deadline to apply is June 30, 2020. Lenders are doing their best to keep up with the rapidly changing requirements and the deluge of applications. The loan proceeds may be used to cover the following business expenses: payroll; costs related to group health care benefits; employee salaries, commissions, or similar compensation; mortgage payments; rent (including rent under a lease agreement); utilities, and any other debt service requirements. No personal guarantee is required by the loan applicant. Also, standard fees of Section 7 of the Small Business Act are waived. There is an additional provision for possible deferment of repayment of the loans for a period of at least six months, but not to exceed a year. Section 1106 of the CARES Act outlines the Loan Forgiveness provisions. The provisions set forth that a portion of the PPL discussed above is eligible to be forgiven on a tax-free basis. The amount to be forgiven is the sum of the following payments made by the borrower during the 8-week covered period beginning on the date of the loan: • payroll costs (as defined above) • mortgage interest, • rent, • certain utility payments. A borrower must submit to its lender an application that includes documentation verifying the number of employees and pay rates, and cancelled checks showing mortgage, rent, or utility payments made during
