Impacts of the Federal Legislative Relief Packages on Small Businesses

On March 25, 2020 the Senate passed the Coronavirus Aid Relief and Economic Security Act (the "CARES Act"). The CARES Act is a monumental $2 trillion stimulus package, which provides over $349 billion for the Small Business Administration (the "SBA") to guarantee loans to small businesses (businesses with 500 employees or less).

The $349 billion cap under the CARES Act was hit on April 16, 2020. As a result, an additional relief package called the Paycheck Protection Program and Health Care Enhancement Act (together, with the CARES Act, the "Act") was signed into law by President Trump on April 24, 2020. This law allocates an additional $321 billion to SBA program loans, with $60 billion of that amount set aside to fund loans through small lenders. An additional $60 billion was allocated for small-business disaster loans and grants.

This article provides a preliminary summary of the basics of how these loans will apply to small businesses:

Eligibility

All small businesses that were operational on February 15, 2020, had employees or independent contractors for whom it paid salaries and payroll taxes, are not currently receiving duplicative funds for the same uses from another SBA program are eligible for a loan under the Act. Borrowers must certify in good faith that the loan is necessary due to Coronavirus and they will use the funds to retain workers and maintain payroll, lease, and utility payments.

A loan through this stimulus package cannot be used to pay for payroll taxes, compensation of any employee in excess of an annual salary of $100,000.00 or who lives outside of the United State, or any qualified sick leave or family medical leave as covered under the Families First Coronavirus Response Act.

Relief Available

SBA Loans
The CARES Act has made loans available to small businesses for a "covered period" of February 15, 2020 through June 30, 2020. These loans are referred to as Paycheck Protection Program loans. During this period, small businesses may apply for loans up to $10 million, with a maximum 4% interest. The formula for determining the loan amount is tied to payroll costs of the business. Borrowers obtaining loans under the Paycheck Protection Program will not be eligible for Coronavirus related EIDL or other SBA loans.

Payroll Tax Credit or Deferment
Businesses that are forced to suspend or close due to the pandemic are eligible for a one-year credit against their payroll taxes. To be eligible for this payroll tax credit, the business must have had to close or suspend operations due to Coronavirus or, if they remained open, have had their gross receipts for the quarter in 2020 decrease by at least 50% from what they were in the same quarter in 2019. Employers will also be able to delay payment of payroll taxes for 2020, where after 50% would be paid in 2021 and the other 50% would be paid in 2022.

Forgiveness
Businesses obtaining loans under the Act are eligible for forgiveness of a portion of these loans. Costs that can be forgiven include payroll, rent payment, utility payment, and payment of interest on mortgage obligations, which are incurred during the 8-week period starting on the loan's origination date. Any amounts forgiven will be considered cancelled indebtedness which will not be included in the borrower's taxable income.

The amount of forgiveness will be reduced proportionally by any reduction in the number of employees the employer compared to the prior year and reduced by the reduction in any pay of an employee beyond 25% of their compensation in the prior year. However, this reduction will not apply if the employer rehires employees or reduces the salary of one or more employees during the period beginning on February 15, 2020 and ending on April 27, 2020.

How to Apply

All loans will be distributed using the existing framework for the Small Business Administration's section 7(a) program. Applications for loans may be made through banks, credit unions, and other lenders that are approved to issue SBA loans.

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As with everything involving the Coronavirus pandemic, this situation is evolving. This article will be updated as developments happen or amendments are made.