The CARES Act for Small Businesses

By Gordon W. Prince and P. Kristen Bennett

On March 27, 2020 the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law. The CARES Act contains numerous provisions aimed at helping both individuals and businesses financially survive the COVID-19 pandemic. As a means of providing small businesses with much needed financial assistance during this time, the CARES Act expanded upon the Small Business Association’s (SBA) Section 7(a) loan program. The following is an overview of this expansion.

Who is eligible?

The CARES Act made businesses that typically would not be eligible for such loans, now eligible. These businesses must have been in operation on February 15, 2020. The following businesses can apply:

1. Small businesses
2. 501(c)(3) nonprofit organizations (that have fewer than 500 employees, or the  applicable size standard in number of employees for the North American Industry Classification System (NAICS) industry as provided by SBA, if higher)
3. 501(c)(19) veterans organizations (that have fewer than 500 employees, or the applicable size standard in number of employees for the NAICS industry as provided by SBA, if higher)
4. Certain Tribal businesses (that have fewer than 500 employees, or the applicable size standard in number of employees for the NAICS industry as provided by SBA, if higher)
5. Individuals who operate sole proprietorships
6. Independent contractors
7. Certain eligible self-employed individuals

Maximum amount of the loan:

During the covered period, which runs from the period beginning on February 15, 2020 and ending on June 30, 2020, the maximum loan amount is the lesser of:

The sum of:

1. Average monthly payroll costs x 2.5, plus
2. the outstanding amount of a loan made on or after 1/31/2020 that is going to be refinanced under this loan program

OR

3. $10,000,000

How can the funds be used?

Permissible uses of loans given under this SBA program now include:

1. Payroll costs (discussed below)
2. Costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums
3. Employee salaries, commissions, or similar compensations
4. Payment of interest on mortgage obligations
5. Payment of rent
6. Payment of utilities
7. Payment of interest on other debt obligations incurred prior to Feb. 15, 2020

What are Payroll Costs?

One permitted use of the loan is for payroll costs, which include:

1. Wages, salaries, commissions
2. Cash tips
3. Payment for vacation, parental, family, medical, or sick leave
4. Allowance for dismissal or separation
5. Payment required for the provisions of group health care benefits, including premiums
6. Payment of any retirement benefit
7. Payment of state or local tax assessed on the compensation of employees

What are not Payroll Costs?

The following are expressly excluded from the definition of payroll costs:

1. The compensation of an individual employee in excess of an annual salary of $100,000
2. Compensation to an overseas employee
3. Qualified Emergency Paid Sick Leave authorized by the Families First Coronavirus Response
4. Expanded FMLA Leave authorized by the Families First Coronavirus Response Act

Gawthrop Greenwood attorney Gordon Prince breaks down both the Emergency Paid Sick Leave and Expanded FMLA Leave here.

What portions of the loan are eligible for Loan Forgiveness?

The CARES Act designates certain uses of the loans as eligible for forgiveness, releasing the borrower from the obligation to repay it. But note, the allowed uses of the loan (discussed above) are broader than the uses that qualify for loan forgiveness.

The Eligible Amount of Loan Forgiveness is the sum of the following costs incurred and payments made during the covered period:

1. Payroll costs
2. Payment on a mortgage obligation
3. Payment of rent
4. Payment of utilities (electricity, gas, water, transportation, telephone, or internet)

Limitations on Loan Forgiveness

Overall, the CARES Act loan forgiveness policies are generous, but there are some limitations.

1. Amount of Loan: forgiveness cannot exceed the amount of the loan
2. Number of Employees: when there is a reduction in the number of employees, the amount of loan forgiveness is decreased (but not increased) by the sum of the following calculation:

Eligible Amount of Loan forgiveness × (# of FT employees during the covered period ÷ # of FT employees during test period)

Two test periods, borrower may choose to:

1. 1. 1. 1. 1. 1. Average number of FT employees per month from 2/15/2019 to 6/30/2019, or
               2. Average number of FT employees per month from 1/1/2020 to 2/29/2020

The average number of full-time employees is determined by calculating the average number of full-time equivalent employees for each pay period falling within a month.

3. Salary and Wages: the amount of loan forgiveness is reduced by the amount of any reduction in total salary or wages that is in excess of 25% of total salary or wages of the employee during the most recent full quarter that the employee was employed prior to the covered period.  (Reduction in wages or salary for employees making over $100,000 are not counted towards this calculation)

What is the covered period?

For the part of the bill regarding loan forgiveness, the covered period is the 8-week period beginning on the date of the origination of the covered loan.  (There are different definitions of “covered period” as it pertains to other portions of the bill).

Payment of Any Portion of Loan that is not Forgiven

The following terms apply to the repayment of loan amounts that are not forgiven:

1. Balance due within 10 years of loan forgiveness application
2. Interest not to exceed 4%, the Secretary of Treasury can set the rate
3. Deferment for 6 months to one year, must be “impacted borrower” (basically anyone who receives a loan)
4. Amount remains federally guaranteed
5. Lender cannot require collateral, personal guarantees, etc.

The U.S. Treasury Department is expected to release documents and instructions later on how businesses can apply for the funds. Treasury Secretary Steven Mnuchin said in an interview with Fox Business Network he expected the loans to be available starting Friday.

Gawthrop Greenwood and its team of lawyers will continue to review legislation and updates to this Act as it unfolds, as we are committed to providing the most current guidance to our clients.  If you have any questions, please do not hesitate to call us 610-696-8225.