On Friday March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), providing over $2 trillion in economic relief to individuals, businesses and hospitals impacted by the economic fallout from the coronavirus (“COVID-19”) pandemic.
Earlier in the week, Governor Wolf announced the creation of the COVID-19 Working Capital Access Program (“CWCA”) to provide working capital for small businesses located within the Commonwealth of Pennsylvania impacted by COVID-19. This Client Alert is intended to provide guidance to businesses seeking to take advantage of the programs available under the CARES Act and CWCA. Riley Riper Hollin & Colagreco attorneys are available to help you take advantage of programs that may be available to you under the CARES Act and CWCA.
- CARES Act: Financial Relief Available for Small Businesses (Including Eligible Self-Employed Individuals, Independent Contractors and Nonprofit Organizations)
- Paycheck Protection Program
One of the key aspects of the CARES Act is the “Paycheck Protection Program” funded by $349 billion appropriated by Congress pursuant to an amendment to Section 7(a) of the Small Business Act (“SBA”). The Paycheck Protection Program provides 100% federally-backed loans through approved banks and non-bank lenders to eligible recipients during the covered period of February 15, 2020 to June 30, 2020 to help pay certain operational costs. Critically, the CARES Act greatly expands the number of businesses that are eligible for SBA loans under Section 7(a).
Specifically, in addition to “small business concerns” as currently defined under the SBA, eligible recipients of loan funds under the Paycheck Protection Program include:
- Businesses, nonprofits and certain other organizations employing not more than 500 employees (including full-time, part-time, and those employed on other bases) (or a greater number based upon the size standard applicable to the industry);
- Sole proprietors, independent contractors, and eligible self-employed individuals (subject to certain documentation requirements); and
- Certain hospitality and dining entities which employ less than 500 employees per location.
In order for any of the foregoing to be eligible, the lender must determine that the borrower was operational on February 15, 2020, and had employees or independent contractors for whom the borrower paid. Unlike current Section 7(a) loans, there is no requirement that the borrower demonstrate an inability to obtain credit elsewhere. Borrowers applying for funds must make certain certifications to the lender pertaining to the need for program loan funds and the use of program loan funds for certain qualifying costs (as discussed below).
Generally, the amount of the loan cannot exceed the sum of 2.5 times the average monthly payroll cost during the year prior to the loan (plus the amount of any economic disaster loans eligible for refinance under the program), with a maximum loan amount of $10 million. The interest rate of loans under the program is not to exceed 4%. In addition to uses already allowed under SBA Section 7(a), loan funds may be used for payroll costs, group health care benefits, salaries and commissions, mortgage interest, rent, utilities and other debt obligations. Payroll costs include compensation to employees, paid leave, severance payments, retirement benefits, state and local payroll taxes, and compensation to sole proprietors and independent contractors up to $100,000, prorated for the covered period. Payroll costs do not include compensation in excess of an annual salary of $100,000, as prorated for the covered period.
No personal guarantees or collateral are required for a covered loan and there is no prepayment penalty for any payment made on a covered loan. In addition, the Small Business Administration (“Administration”) shall have no recourse against any individual shareholder, member, or partner of an eligible recipient of a covered loan for non-payment of any covered loan, except to the extent that loan proceeds were utilized for unauthorized purposes.
Businesses that were operating on February 15, 2020 that have a pending or approved application for a covered loan are presumed to qualify for payment deferment relief of not less than six months and not longer than one year.
Generally, borrowers are eligible for forgiveness of covered loans. The amount eligible for forgiveness is the sum of costs incurred for payments toward qualifying costs made during the 8-week period after origination of the covered loan, reduced (but not increased) by any employee cuts or reductions in wages of employees making less than $100,000 during the covered period. However, employers who rehire employees or make up for salary reductions prior to June 30, 2020 will not be subject to reduction of loan forgiveness amounts. Borrowers seeking loan forgiveness must submit to the lender servicing the loan certain supporting documentation demonstrating the use of funds for qualifying costs and verifying employment figures and salary information. Amounts so forgiven will be excluded from gross income for federal income tax purposes. If a covered loan has a remaining balance after loan forgiveness, the remaining balance continues to be guaranteed by the Administration and the loan shall have a maximum maturity of 10 years from the date the borrower applied for loan forgiveness.
Lenders authorized to make loans under the current SBA 7(a) loan programs are automatically approved to make Paycheck Protection Program loans. The authority to make covered loans under the program may be extended to additional lenders determined by the Administrator and Secretary of the Treasury to have the necessary qualifications to process, close, disburse and service loans with the guarantee of the Administration.
Expect the Administration to promulgate regulations in the coming days or weeks which provide further guidance related to loans offered through the Paycheck Protection Program.
- Disaster Loan Program
In addition to the Paycheck Protection Program discussed above, the CARES Act also expands the SBA Economic Injury Disaster Loan Program (“EIDL”). EIDL loans provide up to $2 million of financial assistance to small businesses or private, non-profit organizations that suffer substantial economic injury as a result of a declared disaster. EIDL loans carry an interest rate of 3.75% for small businesses and 2.75% for non-profit organizations, with repayment terms up to a maximum of 30 years. The CARES Act greatly expands eligibility to the EIDL program during the covered period of January 31, 2020 to December 31, 2020 to include businesses with fewer than 500 employees, sole proprietorships with or without employees, independent contractors, cooperatives with 500 or fewer employees and others.
EIDL loans during the covered period may be approved solely based on an applicant’s credit scores (without tax return submission). Further, the CARES Act waives rules related to personal guarantees on advances and loans of $200,000 or less for all applicants during the covered period, waives the requirement that the applicant had been in business for one year prior to the disaster (applicant must have been in operation on January 31, 2020) and waives the requirement that the applicant not be able to find credit elsewhere.
Perhaps most notably, applicants may request an emergency advance from the Administrator of up to $10,000, which does not have to be repaid, even if the applicant’s loan application is later denied. Advances are to be awarded within three days of an application.
EIDL program funds may be used for purposes already authorized under the existing EIDL program, as well as providing sick leave to employees unable to work due to COVID-19, maintaining payroll, meeting increased supply chain costs, making rent or mortgage payments, and repaying debts. If an entity that receives an emergency advance transfers into, or is approved for, a loan under the Paycheck Protection Program, the EIDL advance will reduce any payroll cost forgiveness available under the Paycheck Protection Program proportionately. Loans made under the EIDL program on or after January 31, 2020 may be refinanced as part of a loan under the Paycheck Protection Program.
- Loan Payment Subsidies
Exclusive of the Paycheck Protection loans and EIDL loans discussed above, the Administrator shall pay the principal, interest and fees owed for certain SBA loans made prior to or within 6 months of the date of the CARES Act, including certain loans made by an intermediary. For loans made prior to the CARES Act which are not in deferment, payments will commence with the next payment and continue for a period of six months. For loans made prior to the CARES Act that are in deferment, payments will commence with the next payment due after deferment. For loans made within six months of the CARES Act, payments will be made for six months from the date of the loan.
- Business Tax Credits and Assistance
- Employee Retention Credit
The CARES Act provides eligible employers a credit against applicable employment taxes for each calendar quarter in an amount equal to 50% of the first $10,000 in qualified wages for each employee of such employer paid after March 12, 2020 and prior to January 1, 2021. Eligible employers must have been carrying on a trade or business during calendar year 2020 and with respect to any calendar quarter: (i) have business operations fully or partially suspended due to orders from a governmental entity limiting commerce, travel or group meetings; or (ii) have experienced a reduction in gross receipts of at least 50% when compared to the same quarter of the previous year. Further, an employer that receives a small business interruption loan under the CARES Act may not claim the employee retention credit.
For employers with more than 100 full time employees, only employees who are currently not providing services for the employer due to COVID-19 causes are eligible for the credit.
- Delay of Employer Payroll Taxes
The CARES Act will allow most employers to defer payment of their share of applicable employment taxes from the date the CARES Act is signed into law through December 31, 2020. The deferred amounts would be payable over the next two years – half due December 31, 2021, and the reminder due December 31, 2022.
- Treatment of Losses
The CARES Act suspends certain provisions of the Tax Cuts and Jobs Act (“TCJA”), including a temporary repeal of taxable income limitations. Specifically, (i) in the case of a tax year beginning before January 1, 2021, the CARES Act suspends the 80% taxable income limitation on net operating loss (“NOL”) carryovers, so that the limit would not apply to tax years beginning in 2018, 2019, 2020; and (ii) in the case of NOL arising after December 31, 2017 and before January 1, 2021, allows carryback for each of the five (5) taxable years preceding such loss. Further, the CARES Act extends such NOL carryback opportunities to sole proprietorships and pass-through entities.
- Alternative Minimum Tax Credits
The TCJA previously repealed the alternative minimum tax, but corporate AMT credits remained available as refundable tax credits until 2021. The CARES Act accelerates the ability of companies to recover those AMT credits, allowing companies to claim a refund now.
- Modification of Limitation on Business Interest
The CARES Act temporarily increases the limitation on interest deductions imposed by the TCJA, by increasing the 30% limitation to 50% of adjusted taxable income for 2019 and 2020. The taxpayer may also elect to substitute the taxpayer’s 2020 adjusted taxable income with the taxpayer’s adjusted taxable income for tax year 2019.
- Working Capital for Pennsylvania Small Businesses[i]
Governor Wolf created the CWCA, administered by the Pennsylvania Industrial Development Authority (“PIDA”), which provides $60 million toward working capital financing to small businesses located within the Commonwealth of Pennsylvania. Working capital is considered capital used by a small business for operations. Working capital does notinclude capital for fixed assets, production machinery and equipment. The maximum loan amount for a CWCA loan is $100,000.
In order to be eligible, a business must be a for-profit entity located in the Commonwealth of Pennsylvania and have 100 or fewer full-time employees at the time of application submission.
Some of the key aspects of the CWCA program are as follows:
- Interest rate is set by PIDA
- Loan terms are 3 years with a 12-year amortization.
- No payments are due during the first year, with principal and interest payments made during years 2 and 3, followed by a balloon payment due and payable at the end of the third year.
- The loan is secured by a blanket lien on all assets.
- Loans require guarantees from individuals or entities with a 20% or greater ownership interest in the borrower.
- The borrower must be current in the payment of all applicable taxes (with limited exceptions).
- Funds cannot be used for the payments to owners, partners or shareholders except as ordinary compensation for services rendered.
- Funds cannot be utilized to finance a project located outside of the Commonwealth.
CWCA loan applications must be submitted through an approved Certified Economic Development Organization (“CEDO”).
For any questions about, or to discuss, the CARES Act or CWCA, contact the following Riley Riper Hollin & Colagreco attorneys: Edward J. Hollin, Robert A. Cohen, Jonathan A. Jordan, or Jeff Cronin.
[i] As of March 29, 2020, approximately half of the $60 million CWCA fund had been exhausted with additional applications in queue for processing. While we do not know how many applications have been filed and are in queue for consideration, it is likely that the remainder of the CWCA fund will be exhausted quickly.