CORONAVIRUS AID, RELIEF, AND ECONOMIC SECURITY ACT (THE “CARES ACT”) Key Payroll Forgiveness Provisions
On March 25, 2020, the Senate unanimously passed a COVID-19 relief bill known as the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The House is considering a voice vote by unanimous consent to pass it. The Act contains significant provisions which impact immediate decisions by Branscomb Law clients.
Among the most relevant features of the draft CARES Act bill is a program known as the Paycheck Protection Program. Here are the key features:
The Act appropriates $349 billion for small business loans, to be administered by a mix of private and public lenders and guaranteed by the Small Business Association (the “SBA”). These loans may bear interest at up to 4% per annum. They may be made only during the period ending June 30, 2020. No payments will be required on these loans for at least 6 months after they are made. Contact your bank to see if they will accept applications for this loan.
- The Act appropriates $349 billion for small business loans, to be administered by a mix of private and public lenders and guaranteed by the Small Business Association (the “SBA”). These loans may bear interest at up to 4% per annum. They may be made only during the period ending June 30, 2020. No payments will be required on these loans for at least 6 months after they are made. Contact your bank to see if they will accept applications for this loan.
- The loans would be available to small businesses (defined as having fewer than 500 full-time and part-time employees) and individuals who operate as sole proprietorships or independent contractors. To be eligible, the borrower must have been in operation as of February 15, 2020 and must certify, among other things, that (i) “the uncertainty of current economic conditions makes necessary the loan request to support the [borrower’s] ongoing operations,” and (ii) the loan proceeds “will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments.” No personal guarantees will be required for these loans.
- The maximum amount available to the borrower is the lesser of (i) $10 million or (ii) 2.5 times the borrower’s average monthly payroll costs over the one-year period prior to the date the loan is made. (Slightly different rules apply to businesses that were not in existence between February 15, 2019 and June 30, 2019.) “Payroll costs” is defined to include:
- salaries, wages and commissions (but excluding a portion of the compensation paid to employees making over $100,000 annually, and sick and family leave wages for which the employer is allowed a tax credit under the Families First Coronavirus Act)
- paid sick, family, and medical leave;
- severance pay;
- health insurance premiums and other payments for group health care benefits;
- retirement benefits; and
- state and local taxes assessed on employee compensation.
- In addition to uses already allowed under the SBA’s Business Loan program, the bill lists various other “allowable uses” for the loan proceeds, including payment of (i) payroll costs (as defined above), (ii) costs related to the continuation of group health care benefits during paid sick, family, and medical leave, (iii) employee salaries, commissions, or other compensation, (iv) mortgage interest, rent, and utilities obligations, and (v) interest on debt incurred before February 15, 2020. Important: even though these loans will not require a personal guarantee, the law specifically provides that the SBA may recover from any shareholder, member or partner of any borrower any loan proceeds that are used for purposes other than those described above.
- The Act provides for forgiveness of a portion of the loan equal to the amount of payroll costs and mortgage interest, rent, and utilities payments incurred over the eight weeks after the loan origination date. The Act also contains mechanisms to incentivize employers to retain employees and keep pay up, by reducing the extent to which loans may be forgiven if employers reduce their workforce, hours or wages over the eight-week period (with the amount of any reduction to be determined by reference to the employer’s practices pre-COVID-19). By law, amounts forgiven would normally be included in taxable income for federal income tax purposes. That requirement has been waived.
The provisions of the draft CARES Act are complex and subject to further interpretation by the SBA, but the bill seems promising for small business owners affected by the financial uncertainty caused by the COVID-19 pandemic and an analysis of its provisions should be included in any payroll decision immediately.
Branscomb Law is carefully watching the bill and is standing by to answer your specific questions regarding its provisions.
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