This summary of the Coronavirus Aid, Relief, and Economic Security (CARES) Act has been prepared by Berkeley Law professor and Berkeley Center for Law and Business faculty co-chair Robert Bartlett as of June 9, 2020. (For links to older overview videos, which are current through April 6, 2020, see here and here). The summary below focuses 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 here.
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A. Paycheck Protection Program (PPP)
The CARES Act (as amended) allocates nearly $670 billion for loans to help small businesses keep workers employed amid the pandemic and economic downturn. So long as loan proceeds are used for allowable uses (defined below) in the 24-week period after the loan is disbursed, the amount of principal (and accrued interest) used for the allowable uses will be forgiven. (Note: as originally enacted, businesses were required to spend loan proceeds within 8-weeks from loan disbursement to qualify for loan forgiveness; this requirement was expanded to 24 weeks as part of the Paycheck Protection Program Flexibility Act (PPPFA) enacted on June 5, 2020.) Loans are guaranteed by the Small Business Administration (SBA) as part of its Section 7(a) loan program. Loans are 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.
Please note that the terms of the PPP are subject to rules promulgated by the SBA and the Treasury Department, which have been in a constant state of flux since early April. The description below is subject to the rules currently in effect, which are referenced periodically below and can be located here.
As of June 7, 2020, the SBA has disbursed approximately $511 billion of PPP loans.
Eligibility. In general, 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 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 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.
Required documentation. 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 2019 calendar year; therefore, applicants should be prepared to furnish payroll records for 2019. (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 the applicant’s 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]. The SBA has provided specific instructions for calculating loan amounts by borrower type (e.g., C-Corp, self-employed individuals, eligible nonprofits, etc.), which can be found here.
Maturity for principal that is not forgiven. Loans originated prior to June 6, 2020, have a 2-year maturity. Loans issued after this date will have a maturity of 5 years. (The minimum maturity date was increased to 5 years as part of the PPPFA enacted on June 5, 2020).
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. Under the PPPFA, principal and interest payments for amounts that are not forgiven will be deferred until the date that a final determination of loan forgiveness is made (or, if the borrower does not apply for loan forgiveness, 10 months after the end of the borrower’s loan forgiveness period, discussed next).
Loan forgiveness. A borrower is eligible for loan forgiveness equal to the Forgiveness Amount. The CARES Act (as modified by the PPPFA) states that the Forgiveness Amount is capped at the principal amount of the loan and is equal to the amount the borrower spends on the following items during the 24-week period after the loan is disbursed (or through December 31, 2020, if a loan is made after November 5, 2020) (the “forgiveness period”):
- 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.
An important qualification to these expenditure rules is that no more than 40% 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 Forgiveness Period)/.6
According to a joint statement made by Treasury Secretary Steven T. Mnuchin and SBA Administrator Jovita Carranza, if a borrower uses less than 60 percent of the loan amount for payroll costs during the forgiveness period, “the borrower will continue to be eligible for partial loan forgiveness, subject to at least 60 percent of the loan forgiveness amount having been used for payroll costs.”
(Under the original terms of the CARES Act, borrowers had to make these expenditures in the 8-week period after loan disbursement; this period was increased to 24 weeks as part of the PPPFA enacted on June 5, 2020).
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/salary paid to any employee. Specifically:
Reduction based on the reduction of numbers of Full-Time Equivalent (FTE) Employees:
- Forgiveness Amount x (Average Number of FTE Employees Per Month for the 24-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). [See Footnote 4]
Reduction based on reduction in wages or salaries:
- Forgiveness Amount, less (For any employee who did not earn during any pay period in 2019 wages at an annualized rate of more than $100,000, the aggregate amount of any reduction in wages or salary that is greater than 25% compared to the employee’s compensation rate between January 1, 2020, and March 31, 2020). [See Footnote 5]
Special provision for rehiring:
- Reductions in employment or wages/salary that occur between February 15, 2020, and April 26, 2020 (as compared to February 15, 2020) shall not reduce the amount of loan forgiveness if by December 30, 2020, the borrower eliminates the reduction in employees or reduction in wages.
Special provision for unavailable employees:
- Reductions in average FTE will have no effect on loan forgiveness if a borrower either (A) in good faith can show an “inability to rehire individuals who were employees of the eligible recipient on February 15, 2020” or other “similarly qualified employees for unfilled positions on or before December 31, 2020” or (B) can document an inability to return to the same level of business activity as such business was operating at before February 15, 2020, due to compliance with public health or worker safety requirements related to COVID-19.
Other Terms. No collateral is required and loans are non-recourse to the 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 on April 3, 2020, for small businesses and sole proprietorships and on April 20, 2020, for independent contractors and self-employed individuals.
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 the 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). (Note: most advances have been for substantially less than $10,000 due to demand). 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 the 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.
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 6] 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 has 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 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. The original loan forgiveness application indicates that the calculation of average FTE for both the 24-week loan forgiveness period and the pre-loan reference period will be based on the average number of hours paid per week to an employee, divided by 40 (rounded to the nearest tenth). For seasonable employers, the average number of FTE employees for the pre-loan reference period can be based on any of the following periods: between February 15, 2019, and June 30, 2019; between January 1, 2020, and February 29, 2020; or any consecutive twelve-week period between May 1, 2019, and September 15, 2019.
5. The original loan forgiveness application indicates that this assessment will be made separately for each individual employee. For example, assume that the average hourly wage rate for an employee was $15/hour in the period January 1, 2020, to March 31, 2020. During the 24-week loan forgiveness period, however, the average hourly wage rate for this employee is reduced to $10/hour. Seventy-five percent of $15/hour is $11.25/hour, which is more than the employee’s current $10/hour wage rate. Thus, there would be a reduction in the Loan Forgiveness Amount for this employee. The amount of the reduction for this employee (absent a restoration of wages to $15/hour by December 31, 2020, discussed next) would be ($11.25-$10.00) X Average Number of Hours Worked Per Week from January 1, 2020, to March 31, 2020, X 24. Note that this formula focuses on a reduction to the hourly wage rate (and not the hourly wages actually paid). As a result, this formula means that employees who work fewer hours but otherwise experience no decline in their hourly wage rates would cause a reduction in the Loan Forgiveness Amount because of a reduction in their average FTEs, but they would not additionally cause a reduction in the Loan Forgiveness Amount because of a decline in their wage rate. In other words, so long as employees retain 75% of their wage rate or nominal salary, any reduction in their hours worked will reduce the Loan Forgiveness Amount only through the reduction in average FTEs during the 24-month forgiveness period.
6. 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.