This summary of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, including the video presentation, has been prepared by Berkeley Law professor and Berkeley Center for Law and Business faculty co-chair Robert Bartlett as of April 7, 2020. The summary and the videos focus on the key provisions for assisting small business owners. Please note that this is a rapidly developing area. To stay current on recent developments, you should register for updates from the Small Business Administration at https://www.sba.gov/updates.
We are also working to match small business owners with graduate students who will help them navigate the CARES Act. If you would be interested in participating in this program, please register your interest here.
If you are an attorney interested in supporting this work, or work for a company that might want to support this work, please register your interest here.
Video Summary Part One:
Video Summary Part Two:
A. Paycheck Protection Program (PPP)
The CARES Act allocated $350 billion to help small businesses keep workers employed amid the pandemic and economic downturn. So long as the proceeds are used for allowable uses (defined below) in the 8-week period after the loan is disbursed, the amount of principal used for the following costs shall be forgiven. Paycheck Protection loans will be guaranteed by the Small Business Administration (SBA) as part of its Section 7(a) loan program. Loans will be originated by the SBA’s network of SBA-licensed lenders, as well as by other lenders who the SBA approves to participate in the program.
4/3/20 UPDATE: The SBA released interim (immediately effective) rules on April 2, 2020, and some banks have begun accepting applications based on these rules. The information below has been updated to reflect these SBA rules.
Eligibility. A borrower must be one of the following: (i) a “small business concern” (based on existing SBA size criteria), (ii) a business concern, nonprofit, veterans organization or Tribal business with fewer than 500 employees, or (iii) a sole proprietorship or self-employed individual having bona fide business expense documents. (Note that an otherwise eligible borrower can be disqualified if it is affiliated with another business under the SBA’s affiliation rules. See Footnote 1). A borrower must have been in operation on February 15, 2020 and must make the certifications required by an SBA Form 2483 which include:
- the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the borrower;
- the funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments;
- the applicant does not have another Section 7(a) loan application pending for the same purpose and duplicative of amounts applied for; and
- during the period beginning on February 15, 2020 and ending on December 31, 2020, the eligible recipient has not received any paycheck protection loans.
The SBA rules additionally prohibit a borrower from obtaining a PPP loan if: (a) the borrower is engaged in an illegal activity, (b) an owner of 20% or more of the borrower is incarcerated, on probation, on parole, subject to indictment or has been convicted of a felony within the last five years, or (c) the borrower has previously defaulted (or is delinquent) on an SBA loan within the last seven years that has caused a loss to the government. Householder employers are also specifically excluded from eligibility for PPP loans.
The SBA rules state that applicants should be prepared to submit documentation to establish eligibility such as “payroll processor records, payroll tax filings, or Form 1099-MISC, or income and expenses from a sole proprietorship.” Additionally, borrowers must submit an SBA Form 2483, and any additional material required by a lender’s specific application. As noted in the next section, the loan amount will depend on a borrower’s average monthly payroll costs for the past year, and at present, it appears that lenders are confirming the dollar amount of average monthly payroll costs by using payroll costs for the 2019 calendar year. Therefore, applicant’s should be prepared to furnish payroll records from January 1, 2019 through the present. (Applicants that were not in business from February 15, 2019 to June 30, 2019 must submit payroll records from January 1, 2020 through February 29, 2020).
Maximum loan amount. The maximum loan amount under the program will be the lesser of (i) 2.5 multiplied by average total monthly payments for “payroll costs” incurred during the 1 year period before the loan application date, plus any amounts outstanding under an SBA disaster loan (described below) originated from January 31, 2020 to April 3, 2020, and (ii) $10 million. Payroll costs have a specific definition that must be followed in calculating “payroll costs” for this purpose, depending on whether the borrower is self-employed. [See Footnote 2].
Maturity for principal that is not forgiven. The SBA rules state that loans will have a 2 year maturity. Based on the CARES Act and the SBA rules, it appears that this maturity will run from the date that the borrower applies for loan forgiveness.
Interest rate for principal that is not forgiven. The SBA rules provide that the loans will have an annual interest of 1%. [See Footnote 3]
Allowable uses. Loan proceeds may be used to make payroll costs for U.S. employees (using the same definition of “payroll costs” in Footnote 2), interest on mortgage obligations, rent, utilities, and interest on other debt incurred before February 15, 2020. If funds are used for unauthorized purposes, the SBA rules state that the SBA may have recourse against shareholders, members, and partners of the borrower.
Deferral of principal and interest payments. The SBA rules provide that principal and interest payments are deferred for 6 months.
Loan forgiveness. A borrower is eligible for loan forgiveness equal to the Forgiveness Amount. The CARES Act states that the Forgiveness Amount is capped at the principal amount of the loan and is equal to the amount the borrower spent on the following items during the 8-week period beginning on the date of the origination of the loan:
- Payroll costs (using the same definition of payroll costs in Footnote 2) +
- Interest on any mortgage obligation incurred in the ordinary course of business +
- Rent on a leasing agreement +
- Payments on utilities (electricity, gas, water, transportation, telephone, or internet) +
- For borrowers with tipped employees, additional wages paid to those employees.
Note that the SBA rules provide that not more than 25% of the forgiven debt may be attributed to non-payroll costs. Thus, for Borrowers with meaningful non-payroll expenses, the Forgiveness Amount will generally be equal to:
(Total Payroll Costs During 8-Weeks)/.75
Loan forgiveness reduction. The Forgiveness Amount is reduced if there is a reduction in the number of employees or a reduction of greater than 25% in wages paid to employees. Specifically:
Reduction based on reduction of number of employees:
- Forgiveness Amount x (Average Number of Full-Time Equivalent (FTE) Employees Per Month for the 8-weeks period)/(Average Number of FTEs per month from 2/15/19 to 6/30/19; or Average Number of FTEs per month from 1/1/20 to 2/29/20).
Reduction based on reduction in salaries:
- Forgiveness Amount – (For employees who did not earn during any pay period in 2019 wages at an annualized rate more than $100,000, the aggregate amount of any reduction in wages that is greater than 25% compared to these employees’ compensation in the most recent full quarter before the 8 week period).
Special provision for rehiring:
- Reductions in employment or wages that occur during the period beginning on February 15, 2020, and ending 30 days after enactment of the CARES Act, (as compared to February 15, 2020) shall not reduce the amount of loan forgiveness if by June 30, 2020 the borrower eliminates the reduction in employees or reduction in wages.
Other Terms. No collateral is required and loans are non-recourse to business owner (no personal guarantee) so long as proceeds are used for authorized purposes. There is no prepayment penalty.
Other Fees. The SBA will reimburse lenders for the costs of providing the loans; therefore, borrowers should not be required to pay any fees for obtaining a PPP loan.
Where and When to Apply. Applications for the Paycheck Protection Program commenced April 3, 2020 for small businesses and sole proprietorships. Applications for the PPP for independent contractors and self-employed individuals are scheduled to commence April 10, 2020. In all cases, PPP applications will be available through June 30, 2020 by both SBA-licensed lenders and additional lenders that apply with the SBA to originate PPP loans.
The Berkeley Center for Law and Business has compiled a spreadsheet of the most active Section 7(a) SBA lenders and whether they are currently taking PPP applications. The spreadsheet can be found here.
This area is rapidly evolving, so check the SBA’s website for current information on the PPP.
B. Emergency Economic Injury Disaster Loans (EIDL) and $10K EIDL Grants
The SBA also offers a direct loan product for businesses in a designated disaster area, which now includes all 50 states due to COVID-19 outbreak. Applications are made directly on the SBA’s website using a streamlined COVID-19 application. From January 1, 2020 to December 31, 2020, a loan applicant can receive a prompt advance of up to $10,000 that does not need to be repaid (even if the disaster loan is ultimately denied). The cash advance can be used for any allowable use (see below). If an applicant also receives a PPP loan, the advance on the EIDL loan will be deducted from the loan forgiveness amount on the PPP loan.
Eligible entity. Eligible applicants include a business or cooperative with not more than 500 employees (including sole proprietorships and self-employed individuals) and private nonprofit organizations. A full list is provided on the SBA’s website application page. For COVID-19 related loans, there no need to satisfy the 1-year operating history requirement that typically applies for SBA economic injury loans, but the business must have been in operation on January 31, 2020. Likewise, there is no need to show that applicant is unable to obtain credit elsewhere.
Allowable uses. Proceeds from an EIDL can be used for any purpose allowed under Section 7(b)(2) of the Small Business Administration Act, including providing paid sick leave to employees unable to work, maintaining payroll to retain employees, meeting increased costs to obtain materials, making rent or mortgage payments, and repaying other obligations.
Maximum loan amount. $2 million
Maximum term. 30 years
Interest rate. 3.75% per year for small businesses and 2.75% for non-profits.
Personal Guarantee Waiver. There is no personal guarantee requirement if the loan is in response to COVID-19 and the total of all such disaster loans from January 1, 2020 to December 30, 2000 is less than $200,000.
C. Other 7(a) Loans Guaranteed by the SBA
The SBA will pay principal and interest on any Section 7(a) loan (aside from PPP loans described above) for six months, so long as the loan originated between March 27, 2020 and September 26, 2020.
Allowable purpose. General working capital.
Eligible entities. No modification was made in the Act, so presumably they remain limited to conventional small business concerns (as defined by SBA) and private non-profits.
Express loans. Express loans are a type of SBA Section 7(a) loan that typically have fast approval times (generally 36 hours). The maximum Express Loan amount has been increased in the CARES Act from $350,000 to $1,000,000 through 1/1/21.
Where to apply. As noted above, Section 7(a) loans are originated by SBA-licensed lenders. A list of the most active Section 7(a) SBA lenders can be found here: https://www.sba.gov/article/2020/mar/02/100-most-active-sba-7a-lenders.
D. Other relevant considerations for small businesses due to recent federal stimulus programs
1. Delay of Payment of Employer Payroll Taxes. Employers are generally responsible for paying a 6.2 percent Social Security tax on employee wages. The CARES Act allows employers and self-employed individuals to defer payment of the employer‘s share of its 2020 Social Security tax obligations that it would otherwise be responsible for paying to the federal government with respect to its employees. The deferred employment tax would be paid over the following two years, with half of the amount required to be paid by December 31, 2021 and the other half by December 31, 2022. Note: This provision does NOT apply to any business that has debt forgiven under the Paycheck Protection Program.
2. Employee Retention Credit. This provision allows eligible employers a refundable tax credit against the employer’s required social security taxes payable between March 12, 2020 and January 1, 2021. Eligible employers are those whose operations were fully or partially suspended due to a COVID-19 government-mandated shut-down order, or employers whose gross receipts declined by greater than 50 percent when compared to the corresponding calendar quarter of the prior year. Eligibility for the credit begins with the first 2020 calendar quarter in which the employer’s gross receipts declined by greater than 50 percent of the corresponding calendar quarter of the prior year, and ends with the calendar quarter following the calendar quarter in which the gross receipts exceed 80 percent of the corresponding calendar quarter of the prior year. For employers with greater than 100 full-time employees, qualified wages are wages paid to employees when they are not providing services due to the COVID-19-related circumstances described above. For eligible employers with 100 or fewer full-time employees, all employee wages qualify for the credit, whether the employer is open for business or subject to a shut-down order. The amount of the tax credit is equal to up to 50% of the first $10,000 of qualified wages paid to an eligible employee, which may include the employer’s contribution to the employees’ health insurance costs but will exclude any amounts for which the employer has already received a tax credit due to sick leave or family leave under the Families First Coronavirus Response Act (discussed next). This amounts to a maximum credit of $5,000 per employee. The credit would be provided for wages paid or incurred from March 13, 2020 through December 31, 2020. Note: This provision does NOT apply to any business that receives a loan under the Paycheck Protection Program.
3. Employer tax credits for family/sick leave. The Families First Coronavirus Response Act (FFCRA) requires employers with fewer than 500 employees (with some exceptions) to provide 80 hours of paid sick leave and expanded paid child care leave when employees’ children’s schools are closed or child care providers are unavailable. [See Footnote 4] However, the FFCRA also provides employers with fewer than 500 employees with refundable payroll tax credits to cover the cost of providing this required leave. Employers receive a 100% tax credit against their payroll tax liability up to the amount of benefits they must pay under the FFCRA. Health insurance costs are also included in the credit. To take immediate advantage of the paid leave credits, businesses can retain and access funds that they would otherwise pay to the IRS in payroll taxes (including withheld federal income taxes, the employee share of Social Security and Medicare taxes, and the employer share of Social Security and Medicare taxes with respect to all employees). If those amounts are not sufficient to cover the cost of paid leave, employers can seek an expedited advance from the IRS by submitting a streamlined claim form to the IRS. Equivalent credits are available to self-employed individuals. For more information, please consult the IRS FAQs regarding these tax benefits.
1 The SBA affiliation rules require a company to count its own employees, along with the employees of a business that is “affiliated” with the business. For example, if two businesses are affiliated and if each business had 300 employees, each business would be deemed to have 600 employees, thus exceeding the 500 employee maximum for eligibility under the PPP. In general, affiliation exists when one business controls or has the power to control another or when a third party (or parties) controls or has the power to control both businesses. Control may arise through ownership, management, or other relationships or interactions between the parties. More information can be found here. The CARES Act exempts some companies from these affiliation rules. In particular, businesses with the NAICS Code beginning with 72 (generally restaurants, food services, and hotels) and that have more than one physical location are eligible to receive PPP loans so long as they employ less than 500 employees at each physical location. Additionally, the CARES Act waives SBA’s affiliation rules for any business in the accommodation and food services industries with 500 or fewer employees as of the date on which the loan is disbursed, any business concern operating as a franchise that has received a franchise identifier code from SBA, and any business that receives financial assistance from a Small Business Investment Corporation (SBIC).
2 An applicant that is not a self-employed business would calculate payroll costs as the total of (a) compensation paid as salaries, wages, commissions, (b) payment of cash tips, (c) payment for vacation, parental, family, medical or sick leave, (d) allowance for dismissals or separations, (e) payment for the health care benefits (including health care premiums), (f) payment for any retirement benefits, and (g) payment of state or local taxes assessed on employee compensation; however, payroll costs excludes the following: the compensation of an individual employee in excess of an annual salary of $100,000, federal tax withholdings from February 15, 2020 to June 30, 2020, any compensation paid to a non-US resident, qualified sick and family leave for which a payroll tax credit is provided under the Families First Coronavirus Response Act (discussed below under “Employer tax credits for family/sick leave”). For an applicant that is a self-employed business, payroll costs equal all payments of any compensation or income of a sole proprietor or independent contract that is a wage, commission, income, net earnings from self-employment or similar compensation up to a limit of an annualized compensation of $100,000, but excludes the following: the compensation of an individual employee in excess of an annual salary of $100,000, federal tax withholdings from February 15, 2020 to June 30, 2020, any compensation paid to a non-US resident, qualified sick and family leave for which a payroll tax credit is provided under the Families First Coronavirus Response Act (discussed below under “Employer tax credits for family/sick leave”).
3 All accrued interest on any principal amount that is forgiven will be paid by the SBA. See Section 1106(c)(3) of the CARES Act (“REMITTANCE.—Not later than 90 days after the date on which the amount of forgiveness under this section is determined, the Administrator shall remit to the lender an amount equal to the amount of forgiveness, plus any interest accrued through the date of payment.”)
4 An employee who is unable to work due to a need to care for a child whose school is closed, or child care provider is unavailable for reasons related to COVID-19, may in some instances receive up to an additional ten weeks of expanded paid family and medical leave. Paid family and medical leave (FMLA) under the FFCRA is capped at $200 per day and $10,000 total per employee. Paid sick leave under the FFCRA is capped at $511 per day and $5,110 total per employee. This amount drops to $200 per day and $2000 total for sick leave taken by an employee in order to care for a family member in quarantine or care for a child whose school has closed.