What You Need to Know as a Business or Nonprofit About the CARES Act

The CARES Act was signed into law by the President on March 27, 2020. The U.S. Department of Treasury (the Treasury) and the U.S. Small Business Administration (SBA) are expected to release more information related to the programs authorized by CARES Act in the upcoming days. While we cannot predict the timing of these programs, some anticipate these programs should be made available within a couple of weeks or up to a month. We are closely monitoring all regulatory activity related to the CARES Act and will continue to provide more information as it becomes available.

Below are some highlights of the CARES Act you may find relevant. However, it is important to note there are many sections within the CARES Act not discussed in this document.

Modification/Expansion of the SBA 7(s) Loan Program: Paycheck Protection Program (PPP)

The CARES Act includes a "Paycheck Protection Program" which authorizes $349 Billion for SBA guarantees of forgivable loans that may provide relief for businesses and nonprofits. The Paycheck Protection Program:

• Expands the businesses eligible for the loans
  • Generally, businesses with no more than 500 employees or the applicable size standard for the industry as defined by the SBA (if higher) are eligible.
  • The requirement for businesses to seek out other sources of capital first, also known as the "credit elsewhere" requirement, is waived.
  • To assess eligibility, the lender will determine whether a business was:
    • Operational on February 15, 2020
    • Had employees for whom it paid salaries and payroll taxes
• Modifies the loan terms and requirements
  • Eligible businesses may receive loan amounts up to 2.5 times monthly payroll costs (averaged during the one year period before the loan), or $10 million, whichever is smaller.
  • Proceeds may be used for payroll costs (excluding compensation of an individual employee excess an annual salary of $100,000, prorated for the covered period), group healthcare benefits, insurance premiums, mortgage, rent, and utility payments.
  • Collateral or personal guarantees are not required from the business or owners.
  • Maximum interest rate is set at 4%.
  • Automatic deferments of principal and interest are allowed for at least 6 months and not more than one year.
• Allows a portion of the loan to be forgiven
  • Businesses are eligible for loan forgiveness equal to the amount spent during an 8 week period after the origination date of the loan on payroll costs, payment of interest on mortgage obligations incurred prior to February 15, 2020, payment of rent on a lease in force prior to February 15, 2020, and payment for utility service if it began before February 15, 2020.
  • The amount forgiven will be reduced proportionately by any reduction in employees compared to the prior year or a reduction of pay to employees beyond 25% of the prior year compensation.
  • Borrowers who re-hire workers previously laid off will not be penalized for a reduced payroll at the beginning of the period.
  • Amounts not forgiven will have a term up to 10 years.
  • Loans forgiven will be considered canceled indebtedness.
• Makes the loan process faster and more efficient
  • Treasury has authority to approve new lenders (there are 800 current lenders, and more are expected to be added).
  •  Provisions are included to encourage banks to make the loans.
• Prohibits/limits obtaining the SBA Disaster Loan and Paycheck Protection Loan for the same purpose

To apply for this loan, contact your local bank and ask them about "Paycheck Protection Program loans." It is the local lender that will be providing and administering the loans, not the federal government.

Changes to Emergency Economic Injury Disaster Loans for COVID-19

• Expands access to Emergency Economic Injury Disaster Loans
• Waives the personal guarantee on loans below $200,000
• Waives the requirement that the applicant needs to be in business 1 year before the disaster
• Waives the “credit elsewhere” requirement
• Allows an eligible entity to request a loan advance of not more than $10,000 which the SBA must distribute within 3 days

Business Provisions

• Employee Retention Credit for employers subject to closure due to COVID-19
  • Refundable payroll tax credit for 50% of wages if:
    • Operations were fully or partially suspended due to a COVID-19 related shut-down order.
    • Gross receipts declined more than 50% when compared to the same quarter in the prior year.
• Delay of payment of employer payroll taxes
  • Allows deferral of payment of the employer share of the Social Security Tax (half paid 12/31/2021 and half paid by 12/31/2022).
• Other tax provisions:
  • Includes various tax provisions that may free up cash flow, such as:
    • Relaxes limitations on a company’s use of net operating losses
      • Provides an NOL arising in a tax year beginning 2018, 2018, or 2020 can be carried back 5 years.
      • Allows a NOL to fully offset income.
    • Expands net interest deduction limitation from 30% of earnings before interest, tax, depreciation, and amortization (EBITDA) to 50% of EBITDA.

Unemployment Insurance Provisions: Pandemic Unemployment Assistance

• Expands those eligible for unemployment benefits.
• Provides an additional $600 per week payment for unemployment for up to four months.
• Provides funding to pay the cost of the first week of unemployment benefits through December 31, 2020, for states that choose to pay recipients as soon as unemployed instead of waiting one week.
• Provides funding for “short-time” compensation programs, where employers reduce employee hours instead of laying off workers.
• Provides an additional 13 weeks of unemployment benefits through December 31, 2020 to help those still unemployed after employment benefits are no longer available.

Recovery Rebate for Individual Taxpayers

• $1200 for individuals ($2,400 for joint taxpayers)
• $500 per child
• Phases out at $75,000 for singles, $112,000 for head of household, and $150,000 for joint taxpayers

Taxpayers do not need to apply for these checks. They will be sent out automatically based on the 2019 income tax return. If returns for 2019 haven't been filed, then it will be based on the 2018 income tax return.

Health Emergency Funds

• Appropriated $100 Billion in grants to hospitals and other healthcare providers for COVID-19-related response costs.
• The administrative contractor will use criteria to be outlined by HHS to determine:
  • The eligibility of the provider
  • The justifiably of amount
  • The amount of the claim
  • Payment

Medicare Sequestration Relief

• Temporarily lifts the Medicare Sequester, which reduced payments to providers by 2%, from May 1 through December 31, 2020.

Temporary Student Loan Relief

• Requires the Secretary of Treasury to defer student loan payments, principal, and interest for 6 months, through September 30, 2020, without penalty to the borrower for all federally-owned loans.

Telehealth

• Allows a high-deductible health plan with a health savings account to cover telehealth services prior to a patient reaching the deductible, increasing the access for patients.
• Expanded telehealth flexibilities including eliminating the requirement to situations where the physician or other professional has treated the patient in the past three years.

The information contained here is for informational purposes only and not for the purpose of providing legal advice. Individuals and businesses should consult with their attorney to obtain advice regarding their specific situation.