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In addition, affiliation rules are waived for a business that:
- Has 500 or fewer employees per physical location, and is assigned a NAICS code beginning with 72 (Accommodation & Food Services, including hotels);
- Operates as a franchise that is assigned a franchise identifier code by the SBA; or
- Receives financial assistance from a Small Business Investment Company.
Loan Amount
PPP loans are capped at the lesser of $10 million or 2.5X the business’s average monthly payroll costs during the prior 12 month period (January 1, 2020, and February 29, 2020, if the business was not operating during that time).
Loan Terms
Loan payments will be deferred for 6 months, but will accrue interest. For loan amounts that are not forgiven, the loan term will be 2 years with an interest rate of 0.5%. No collateral or personal guaranty is required, and borrowers do not need to demonstrate that they cannot obtain credit elsewhere.
Use of Proceeds
Loan proceeds may be used for:
- Payroll costs, including:
- Salary, wage, commission, or similar compensation and payment of cash tip or equivalent
- Payment for vacation, parental, family, medical, or sick leave
- Costs related to the provision of group health care benefits (including insurance premiums)
- Allowance for dismissal of separation
- Retirement benefit payments
- State or local tax payments assessed on employee compensation
- Costs related to continuation of group health care benefits (including insurance premiums)
- Costs related to paid sick, medical, or family leave
- Individual employee compensation up to $100,000 per year, prorated for the covered period
- Mortgage interest
- Rent
- Utilities
- Interest on other debt obligations incurred before the covered period
Proceeds may not be used for any other purpose if the business is seeking forgiveness, including for:
- Individual employee compensation over $100,000 per year, prorated for the covered period
- Taxes imposed or withheld under chapters 21, 22, and 24 of the IRC
- Compensation of employees who reside outside the U.S.
- Sick and family leave for which a credit is allowed pursuant to sections 7001 and 7003 of the Phase II stimulus package.
Coordination with Other Relief
The borrower of a PPP loan is eligible to participate in other SBA programs, but there must be no duplication in the uses of funds.
The employee retention tax credit, discussed below, is not available to a borrower under the a PPP.
Loan Forgiveness
Title I, Section 1106 of the CARES Act provides for forgiveness of PPP loans to be administered through the lender. The forgiveness amount can be up to the sum of the following amounts paid out of loan proceeds during the eight-week covered period:
- Payroll costs
- Mortgage interest
- Rent
- Utility payments
SBA has advised that due to likely high rates of participation in this program, at least 75% of the forgiven amount must have been used for payroll. We will monitor any further evolution of the guidance from SBA. It is unknown what the process to obtain loan forgiveness will be, however, it is clear that documentation evidencing the use of proceeds will be required.
The amount forgiven will be reduced:
- Proportionately, if the average number of full-time equivalent employees per month during the eight-week covered period is lower than the average number of such employees during the period from February 15, 2019, to June 30, 2019; or January 1, 2020, to February 29, 2020, at the borrower’s election or, for a seasonal employer, the period from February 15, 2019, to June 30, 2019.
- By the amount of any reduction in total salary or wages of an employee that exceeds 25% of the employee’s total salary or wages during the most recent full quarter for any employee who did not receive wages or salary at an annualized rate of more than $100,000 during 2019.
How to Apply
Borrowers will obtain PPP loans from existing SBA 7(a) lenders, and the Department of the Treasury is authorized to approve additional lenders. The CARES Act requires the SBA to provide implementing regulations within 15 days of enactment, meaning these regulations are expected by April 11, 2020. The SBA application form is available here.
For businesses with existing SBA loans including 7(a), 504, and microloans, and businesses that take out new loans under these programs within six months of the enactment date of the CARES Act, Title I, Section 1112 of the CARES Act provides that payments of principal, interest, and fees will be covered by SBA for six months.
Eligibility
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Borrowers with 7(a), 504, or microloans. PPP and EIDL loans are not eligible.
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Payment Relief
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SBA will cover all loan payments for six months, including principal, interest, and associated fees, beginning on the next payment due date. Loans that are currently deferred will be subsidized for the six month period beginning after deferment.
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New Loans
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The payment relief will also apply to new loans made within six months following the enactment of the CARES Act.
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D. Business Counseling
Title I, Section 1106 of the CARES Act provides additional funding for local Small Business Development Centers and Women’s Business Centers to provide counseling and training to small businesses for COVID-19 related concerns, and facilitates the creation of an online resource consolidating resources and information for small businesses.
II. Relief for Larger Businesses
A. Loans and Guarantees for Severely Distressed Sectors
Title IV of the CARES Act appropriates $500 billion to the U.S. Treasury’s Exchange Stabilization Fund to provide liquidity to support lending programs to certain identified distressed industry sectors and to states and local municipalities and U.S. businesses that have suffered losses related to COVID-19, but have not otherwise received adequate economic relief in the form of loan or guarantees otherwise available under the CARES Act, including under the Paycheck Protection Program. Given that most other programs available target eligible small businesses, Title IV is expected to be the mechanism that provides support to midsized and large businesses.
Of the $500 billion appropriated, funds will be available as follows:
- $46 billion for direct loans through the Treasury Department to the aviation industry and to businesses critical to the maintenance of national security.
- $454 billion (and any other amounts remaining from direct lending) for loans and guarantees to support Federal Reserve programs and facilities to be established to provide liquidity to businesses, nonprofits and state and local governments that meet eligibility requirements.
Of critical importance to many businesses will be the specific directive that the Secretary of the Treasury implement a program or facility that provides financing to banks and other lenders to make direct loans to eligible midsized businesses, including non-profits if practicable, with between 500-10,000 employees, which direct loans having an annualized interest rate not higher than 2% per annum, with no principal or interest payments during the initial 6 months of the loan term (referred to as the “Program for Midsized Businesses”).
Eligibility
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States, municipalities, or eligible businesses seeking relief due to losses incurred as result of COVID-19.
“Eligible business” is defined as:
- An air carrier; or
- A U.S. business that has not otherwise received adequate economic relief in the form of loans or loan guarantees provided under the CARES Act.
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Purpose/Use
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To provide liquidity to eligible businesses, states and municipalities related to losses incurred due to COVID-19.
No other specific use limitation.
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Loan Terms
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Loan amounts: No limitation on individual loan amounts.
Interest rate: Generally rates to be set at the discretion of the treasury secretary, subject to some variation as detailed below.
Term:
- Loans to air carriers/national security businesses: terms of up to five years
- Other loans through/by the Federal Reserve: no term parameters provided under the Act
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Loan Forgiveness
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No loan forgiveness is included as part of this program.
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Other Restrictions/Requirements
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All loans authorized by Article IV of the CARES Act are subject to various restrictions, which vary among borrowers.
Borrowers under the Program for Midsized Businesses are required to make extensive certifications detailed below.
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Eligibility
To be eligible for a loan authorized under Title IV, the borrower must be a state, municipality, or an eligible business. An “eligible business” is defined as an air carrier (including commercial air carriers, cargo carrier, businesses certified and approved to perform inspection, replacement and repair), and ticket agents or a U.S. business that has not otherwise received adequate economic relief in the form of loans or loan guarantees provided under the CARES Act.
As with all loans from the Federal Reserve, credit may only be extended to businesses created or organized in the U.S., or under the laws of the U.S., and that have significant operations in and majority of employees based in the U.S. Additionally, no loan or loan guarantee is available to any business that is 20% owned or controlled by the president, vice president, the head of an executive department or a member of Congress and/or family members of the same.
Loan Terms and Rates
The U.S. treasury secretary is afforded broad discretion to make loans and guarantees, including determining the rate for the obligations. In general, any loans made pursuant to Title IV shall be at a rate determined by the treasury secretary taking into account the risk and the current average yield on outstanding marketable obligations of the U.S. of comparable maturity, although with respect to air carrier loans there may be some flexibility given the sufficiency of security provided.
It is notable however, that with respect to provisions of the Act seeking to provide relief to midsized businesses, it is suggested that rate of direct loans from banks and lenders would have an annualized rate no greater 2%, with payments of principal and interest suspended for the initial six months.
Loan Duration:
With respect to direct loans or loan guarantees to air carriers and national security related businesses loan duration should be as short as practicable, and shall not to exceed five years.
In contrast, the Act does not detail any parameters for loan duration with respect to any other loans or guarantees by and through the Federal Reserve with respect to the $454 billion appropriation targeting midsized businesses, including loans under the Program for Midsized Businesses.
Other Notable Program Restrictions/Requirements:
1. Applicable to all Title IV Loans:
- All borrowers must agree that until the end of the 12-month period following repayment of a direct loan, it may not:
- Repurchase its own equity securities or that of its parent (if listed on the national security exchange)
- Pay dividends or make other capital distributions on its common stock, except that under the Program for Midsized Businesses such payments and distributions may only be prohibited while the loan is outstanding. Further guidance from the U.S. Treasury is needed to clarify.
- Substantial restrictions applicable to executive compensation of borrowers, with restrictions to remain in place for one year following the repayment of obligations
2. Applicable to Loans to Air Carriers and National Security-Related Businesses:
- Alternative financing is not reasonably available
- Intended obligations must be prudently incurred
- Loan or loan guarantee must be sufficiently secured or is made at a rate that reflects the relative risk, and, to the extent practicable, is not less than an interest rate based on market conditions for comparable obligations prior to the COVID-19 outbreak
- Until September 30, 2020, borrower to maintain its employment levels as of March 24, 2020, to the extent practicable, and in any case shall not reduce employment levels by more than 10%
3. Applicable to Other Loans by and Through the Federal Reserve (including Program for Midsized Businesses)
- Requirements under section 13(3) of the Federal Reserve Act (12 U.S.C. 343(3)), including requirements relating to loan collateralization, taxpayer protection, and borrower solvency, shall be applicable to these loans.
- Borrowers applying for direct loans through the Program for Midsized Businesses must provide a series of certification, including:
- That the uncertainty of economic conditions makes the loan necessary to support ongoing operations.
- Funds will be used to retain 90% of its workforce, at full compensation and benefits, until September 30, 2020.
- Its intention to restore not less than 90% of its workforce that existed as of February 1, 2020, and to restore all compensation and benefits to the workers of the recipient no later than four months after the termination date of the public health emergency declared on January 31, 2020 in response to COVID-19.
- It will not outsource or offshore jobs for the terms of the loan and for two years after repayment
- It will not abrogate existing collective bargaining agreements for the terms of the loan and for two years after repayment
- It remains neutral in any union organizing efforts for the term of the loan
Prohibition on Loan Forgiveness
No loan forgiveness is available for loans advance under Title IV of the CARES Act.
How to apply:
On March 30, 2020 the Treasury Department released guideline documents governing the application procedures and minimum requirements for direct loans and loan guarantees from the $46 billion portion of the Title IV appropriation to air carriers and business critical to the maintenance of national security, which guidance document can be found here.
However, as this juncture very little guidance is available and no specific mechanism is in place for the administration of the remaining $454 billion appropriation, and the Act did not provide a deadline for the release of guidelines for the same. We plan to monitor developments closely.
III. Taxpayer Relief Provisions
the CARES Act includes a number of taxpayer relief provisions. Below we focus on the provisions with the most immediate impact for businesses: the refundable employee retention payroll tax credit and the payroll tax payment date deferral. In later publications, we will analyze other CARES Act tax measures, including the rollback of the prohibition on net operating loss carrybacks, an increase to the charitable deduction ceiling, and a modification of the business interest limitation.
A. Section 2301 – Employee Retention Credit for Employers Subject to Closure Due to COVID-19
The CARES Act enacted refundable payroll tax credit for eligible employers that continue to pay their employees despite being forced to close or facing economic hardship stemming from the coronavirus pandemic—but only if the employer does not receive a Paycheck Protection Loan.
Amount of the ERC
The Employee Retention Credit for Employers Subject to Closure Due to COVID-19 (ERC) is equal to 50% of the qualified wages of each employee of an eligible employer. Total wages eligible for the credit are capped at $10,000 (including health benefits), limiting the maximum total credit to $5,000 per employee.
The ERC offsets an eligible employer’s portion of the Social Security tax, after reduction for the credits in IRC §§ 3111(e) and (f) (credits for the employment of qualified veterans and the research expenditures of qualified small businesses) and for the paid sick and family leave payroll tax credits in §§ 7001 and 7003 of the Families First Coronavirus Response Act (FFCRA). If the ERC exceeds the applicable taxes in any calendar quarter, the excess credit is treated as an overpayment and is refunded to the employer. Employers subject to the Railroad Retirement Tax Act are also entitled to the ERC.
Eligible Employers
An employer carrying on a trade or business in 2020 is eligible for the ERC if its business has been impacted in one of two ways:
- Suspension under a COVID-19 shut-down order. An employer is eligible for the ERC in each calendar quarter that its business is fully or partially suspended due to a government shut-down order related to COVID-19.
- Over 50% decline in gross receipts. An employer is eligible for the ERC starting the first 2020 calendar quarter the employer’s gross receipts are less than 50% of the employer’s gross receipts in the same quarter in 2019. Eligibility ends after the 2020 calendar quarter in which the employer’s gross receipts return to more than 80% of gross receipts from the same quarter in 2019.
Tax-exempt organizations are eligible for the ERC. Government employers are not eligible.
Qualified Wages
The ERC is available for wages paid between March 12, 2020 and before January 1, 2021. Wages that qualify for the ERC depend on the size of the employer.
- Employers with over 100 full-time employees, on average in 2019. Qualified wages are limited to compensation paid to employees who are not working because of one of the two COVID-19 impacts describe above (suspension of the business or decline in revenue). For employers with over 100 employees, qualified wages exclude increases to a retained employee’s compensation.
- Employers with 100 or fewer full-time employees, on average in 2019. All employee wages qualify for the ERC, whether or not the employee is working, as long as the employer is experiencing one of the two impacts of COVID-19.
Employer-provided health plan costs count toward qualified wages. However, qualified wages exclude any wages that count toward the federal paid sick and family leave payroll tax credits under sections 7001 and 7003 of the FFCRA.
Employers Receiving SBA Paycheck Protection Loans Ineligible
An employer who receives a Small Business Administration (SBA) loan under section 1102 of the CARES Act (i.e., a Paycheck Protection Loan) is not eligible for the ERC.
Importantly, the Act states that an employer must affirmatively elect not to have the ERC apply to its payroll taxes. This indicates that the ERC may apply automatically, absent taxpayer action. Although no guidance has been published addressing the election, employers applying for a Paycheck Protection Loan should be aware that the Internal Revenue Service has been authorized to recapture the ERC if it is allowed to a taxpayer that receives a Paycheck Protection Loan.
How to Receive the ERC
On March 31, 2020, the Internal Revenue Service released the final Form 7200, allowing advance payment of employer credits due to COVID-19, and corresponding instructions. Form 7200 is used to claim advanced payment of both the ERC and the refundable payroll tax credits for paid sick and family leave under sections 7001 and 7003 of the FFCRA.
To receive advance payment of these payroll tax credits, employers must first offset the amount of all employment taxes (not just Social Security taxes) by an amount equal to the payroll tax credits. In other words, the ERC and the FFCRA payroll tax credits will first reduce amounts withheld for federal income tax, the employee portion of both Social Security and Medicare taxes, and the employer portion of both Social Security and Medical taxes. Employers will not be required to deposit these employment taxes with the IRS to the extent that they are used to offset the payroll tax credits.
If the quarterly employment taxes do not fully cover the available payroll tax credits in a calendar quarter, an employer should then file Form 7200, requesting advance payment of the remaining credit amount. Employers who use a third-party payer for employment taxes (e.g., a payroll service provider or professional employer organization), must provide copies of the Form 7200 to the third-party payer.
For any calendar quarter in which an employer paid qualified wages, Form 7200 can be filed at any time during the quarter and before the end of the month following the quarter. Form 7200 can be filed several times during each calendar quarter, as anticipated payroll tax credits accrue. Form 7200 cannot be filed for a calendar quarter after an employer files its Form 941. Notably, Form 7200 can only be filed by faxing the form to (855) 248-0552.
Penalty Waiver
The Internal Revenue Service will waive penalties under IRC § 6656 for failure to deposit taxes if it determines that the employer acted in reasonable anticipation of the ERC.
Important Limitations
Employers should be aware of the additional limitations in the ERC.
- Employer aggregation rules. Businesses will be treated as a single employer for purposes of the ERC if they are part of a controlled group or under common control, as determined under IRC § 52(a) or (b), or that are part of an affiliated service group, as defined in IRC § 414(m), or that are otherwise treated as a single employer under regulations promulgated pursuant to IRC § 414(o).
- Employer owners and family likely not eligible. Wages paid to relatives including children, parents, siblings, in-laws, dependents, members of the employers household will likely not qualify for the ERC. Wages paid to anyone who owns, directly or indirectly, more than 50% of the employer will likely not qualify for the ERC.
- Work Opportunity Credit wages excluded. An employer cannot count wages for employees for whom the employer takes the Work Opportunity Credit in IRC §§ 38 and 51.
- Qualified wages excluded from Employer Credit for Paid Family and Medical Leave Credit.
- ERC belongs to the employer, not a PEO. If an employer works with a Certified Professional Employment Organization (i.e. a third-party payer), the credit is treated as belonging to the employer with respect to work-site employees.
Section 2302 – Delay of payment of employer payroll taxes
Under the CARES Act, employers and self-employed individuals can defer paying payroll and self-employment income taxes, respectively, that accrue from March 27, 2020 through December 31, 2020 (the payroll tax deferral period).
- Employers. Employers can defer the employer portion of Social Security taxes (and not Medicare taxes).
- Self-employed individuals. Self-employed individual can defer 50% of the Social Security portion (and not the Medicare portion) of the self-employment income tax.
- Deferred payment due dates. 50% of the deferred taxes must be paid by December 31, 2021. The remaining 50% must be paid by December 31, 2022.
Note that an employer taking the ERC and the payroll tax credits for paid sick and family leave under sections 7001 and 7003 of the FFRCA may be able to significantly reduce, if not entirely eliminate, its total payroll tax liability.
An employer that uses third party agents (e.g. payroll processing service providers) and certified professional employer organizations to remit its payroll taxes can instruct the agent or PEO to defer payment of payroll taxes during the payroll tax deferral period. In that case, the employer will be solely responsible for payment of those taxes.
No Deferral for Employers with Paycheck Protection Loan Forgiveness. Payroll tax deferral does not apply to employers who receive a Paycheck Protection Loan that is forgiven under section 1106 of the CARES Act.