Small businesses have been hurt badly by the COVID-19 pandemic, but help is on the way. On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security (CARES) Act. The CARES Act provides economic stimulus to individuals and businesses due to the economic hardship caused by this pandemic. This article outlines some of the provisions of the Act which are relevant to our small and mid-sized business clients.
Small Business Loans
The CARES Act authorizes the Small Business Administration (SBA) to make $367 billion in loans available to small businesses. It allows a small business to borrow money for the following expenses:
- Payroll costs;
- Contributions to Group Health Care Coverage;
- Mortgage Payments;
- Rent;
- Utilities; and
- Interest on debt.
To be eligible for these loans, the business must employ less than 500 employees, unless the business is in the hospitality industry. Certain hospitality businesses (ie. franchised restaurants) are eligible for a loan if they don’t employ more than 500 employees “per physical location.”
The amount of the loan that a small business can obtain is equal to the lesser of:
- The average total monthly payroll costs of such employer during the prior year multiplied by 2.5; or
- $10 million
So, if a business employs 30 employees at an average monthly payroll cost of $100,000 over the previous 1 year period, such employer would be eligible for a loan of $250,000.
Loans will have a 10 year maturity with an interest rate no greater than 4% per annum. The Act also allows for the waiver of certain normal SBA requirements, such as personal guarantees, and allows for the deferment of loan repayment for 6 months.
How Does a Small Business Get a Loan
Loans will be made available immediately through SBA-certified lenders, which include banks, credit unions and other financial institutions. The standard fees associated with SBA loans are waived. The deadline to apply for a loan is June 30, 2020. Every small business should contact their relationship manager at their bank to see if they will be participating in this loan program. If they are not, contact your Stark & Knoll attorney, who will recommend a banker to assist you.
Forgiveness of Small Business Loans
The CARES Act provides that the small business loans may be forgiven in an amount equal to that spent by the qualifying business during the 8 week period after the origination of the loan on the following:
- Payroll Costs (up to $100,000 per employee);
- Rent;
- Interest on secured debt obligations; and
- Utility payments.
The amount forgiven cannot exceed the principal amount of the loan. The amount of forgiveness will be decreased if the employer: (a) reduces its employees during the eight-week period, or (b) reduces wages paid to employees by more than 25% during such eight-week period. Further, to encourage employers to rehire employees who have already been laid off during this pandemic, employers that re-hire previously laid off workers or increase previously reduced wages will not be penalized for having a reduced payroll at the beginning of the period. The amounts forgiven will not be taxable as income to the employer.
Payroll Tax Relief
In order to increase cash flow, the CARES Act allows businesses to defer payroll taxes. Employers can delay paying payroll taxes during 2020, paying ½ of such deferred payroll taxes in 2021 and the remaining ½ of such deferred payroll taxes in 2022.
Employee Retention Tax Credit
The CARES Act provides an “employee retention tax credit.” However, this credit will not be available to employers that receive the above mentioned small business loan. The Act provides eligible employers with a refundable payroll tax credit for 50% of the wages paid by employers between March 13, 2020 and December 31, 2020. It is provided for the first $10,000 of compensation (including health benefits) paid to an eligible employee. The credit is available to employers whose: (a) operations were fully or partially suspended due to a COVID-19 related “shut-down order,” or (b) gross receipts declined by more than 50% when compared to the same quarter in the previous year.
Unemployment Insurance Provisions
The CARES Act provides $250 billion to expand unemployment insurance benefits. It increases the amount of money individuals can receive, extends the length of time that individuals can receive benefits and includes individuals previously not eligible for assistance. Generally, individuals are paid unemployment benefits from the state that are approximately half of their wages, up to a maximum amount, for a period of 26 weeks. Under the Act, individuals will be eligible for an additional $600 per week, in addition to what they would normally receive from the state, for up to 4 months. Once that additional federal assistance is used, individuals may continue to receive their normal benefits from the state. Further, the Act extends the period which individuals can receive benefits for an additional 13 weeks, up to 39 weeks. The Act expands unemployment to cover those who traditionally are not eligible to receive such benefits, specifically the self-employed, gig workers, independent contractors and freelancers. It also waives the usual one week waiting period for benefits.
Direct Payments to Individuals
As employers decide how to help employees during this crisis, they should know the individual benefits that the CARES Act will provide. The Act provides direct payments of $1,200 for individual taxpayers or $2,400 for joint taxpayers, plus $500 for each child of the taxpayer, subject to a phase-out for highly compensated individuals. These payments are not taxable income for the recipients. For most Americans, no action will be required to receive such payments, as the government will be using tax returns from 2018 and 2019 to calculate these payments.
These payments are reduced, until completely phased out, based on the individual’s adjusted gross income. Payments are reduced by 5% for every dollar of qualified income when the adjusted gross income exceeds $150,000 for joint taxpayers, $112,500 for a head of household and $75,000 for all other taxpayers. The rebates would be completely phased out when the adjusted gross income exceeds $198,000 for joint taxpayers with no children, $146,500 for head-of-household taxpayers with one child and $99,000 for single taxpayers.
Summary
Stark & Knoll is continuously monitoring the fast changing COVID-19 pandemic and the business and legal issues that may affect our clients. We will continue to send notices to update our clients on these matters. If you have any questions, contact your Stark & Knoll attorney for assistance.
By: Michael E. George, mgeorge@stark-knoll.com, 330-572-1304
Date: March 28, 2020