Coronavirus Aid, Relief, and Economic Security (CARES) Act
On March 27, 2020, Congress passed, and the President signed, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act into a law. A historic $2 trillion stimulus package, the CARES Act provides relief to American workers in the form of one-time direct payments, expanded unemployment insurance, suspended student loan payments, and more. And for small businesses, the CARES Act creates a new Small Business Administration (“SBA”) loan program—the Paycheck Protection Program (“PPP”)—portions of which can be forgiven.
There is much to unpack in the 880-page, newly adopted CARES Act. This issue will focus on the PPP and other disaster loan programs that a small-to-medium-sized business may access to assist it in addressing COVID-19-related concerns. Roedel Parsons will be issuing additional blogs examining other areas of the CARES Act and other recent developments that should be of interest to small- and medium-sized businesses.
Who is eligible for a PPP loan?
- “Small business concerns,” which are businesses that are independently owned and operated, not dominant in their field of operation, and which qualify as small businesses under the SBA’s criteria and size standards.
- Any business concern, nonprofit organization, veteran’s organization, or Tribal business concern, provided they have no more than 500 employees, or, if applicable the size standard in number of employees established by the SBA.
- Sole proprietors, independent contractors, and eligible self-employed individuals.
My business employs more than 500 employees but at multiple locations. Is my business eligible for a PPP loan?
Maybe. If your business does not employ more than 500 employees at a single location and is assigned a North American Industry Classification System (“NAICS”) code beginning with 72 at the time of disbursal, then your business may be eligible to receive a PPP loan. NAICS sector 72 businesses cover “accommodation and food services,” including but not limited to: hotels; casino hotels; bed-and-breakfast inns; RV parks; drinking places; and restaurants and other eating places.
For purposes of the 500-employee cap, do only full-time employees count?
No. For purposes of determining whether your business employs 500 or fewer employees, the term “employees” includes individuals employed on a full-time, part-time, or other basis.
What is the maximum PPP loan amount?
The CARES Act provides a specific formula for determining the maximum amount of a PPP loan that an eligible borrower may receive. This amount, called the “Maximum Loan Amount” or “MLA,” is the lesser of:
- $10 million (the cap for any PPP loan); or
- the sum of:
- 250% of the average total monthly payments by the applicant for “payroll costs” incurred during the one-year period before the date on which the loan is made (meaning the monthly average payroll costs for that period times 2.5), plus
- the outstanding amount of any Economic Injury Disaster Loan (“EIDL”) that the applicant may wish to refinance with the PPP loan.
What expenses qualify as "payroll costs" for calculating the MLA?
- Compensation, including: salaries, wages, commissions, or similar compensation; and payment of cash tips or equivalent.
- Payment for vacation, parental, family, medical, or sick leave.
- Allowance for dismissal or separation.
- Payment required for the provisions of group health care benefits, including insurance premiums.
- Payments of any retirement benefits.
- Payment of state or local taxes assessed on employee compensation.
What expenses do not qualify as "payroll costs" for calculating the MLA?
- Individual employee compensation above $100,000 per year.
- Taxes imposed or withheld under Chapters 21, 22, and 24 of the Internal Revenue Code. These taxes include FICA and income tax withholdings.
- Qualified sick leave and family leave wages paid by an employer for which a credit is allowed under the Families First Coronavirus Response Act ("FFCRA").
- Compensation paid to an employee who resides outside of the United States.
What can a PPP loan be used for?
- Payroll costs, including: salaries, wages, commissions, and similar forms of compensation; vacation, parental, family, medical, or sick leave; severance payments; group health care benefit payments, including insurance premiums, retirement benefit payments; and state or local tax payments assessed on the compensation of employees.
- Costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums.
- Employee salaries, commissions, or similar compensations.
- Payments of interest on any mortgage obligation.
- Interest on any other debt obligations that were incurred before the “covered period,” which is the period beginning on February 15, 2020 and ending on June 30, 2020.
What can a PPP loan not be used for?
- Individual employee compensation above $100,000 per year.
- Certain taxes, such as FICA and income tax withholdings.
- Qualified sick leave and family and medical leave wages paid by an employer for which a credit is allowed under the Families First Coronavirus Response Act (“FFCRA”).
- Compensation paid to an employee who resides outside of the United States.
- Prepayment or payment of the principal on a mortgage obligation.
- Interest on debt obligations that were incurred after the “covered period.”
Will I be personally liable if I can't repay a PPP loan?
No, as long as you use the proceeds for an allowed purpose. PPP loans are “nonrecourse” loans. This means that the SBA has no recourse against any individual shareholder, member, or partner of an eligible recipient of a PPP loan for nonpayment, except to the extent that such shareholder, member, or partner uses the loan proceeds for a nonallowable purpose.
Does a PPP loan require a personal guarantee or collateral?
No. Unlike most loans, the borrower does not have to provide a personal guarantee or collateral to receive a PPP loan.
Is my business required to show that is unable to obtain credit elsewhere in order to be eligible for a PPP loan?
No. Unlike other SBA loans, the borrower does not have to show it is unable to obtain credit elsewhere to receive a PPP loan.
Can repayment of a PPP loan be deferred?
Yes. An eligible loan recipient can receive a deferment of up to one year. The deferment includes payment of the principal, interest, and fees.
Is there an SBA fee associated with applying for or receiving a PPP loan?
No. The SBA will not charge a fee; however, lenders may charge a fee.
Can all or part of a PPP loan be forgiven?
Yes! PPP loan forgiveness is available for up to eight weeks of qualifying expenses from the date the loan is issued, as long as certain conditions are met. Loan forgiveness is one of the key components that differentiates a PPP loan from traditional EIDLs that might otherwise be available from the SBA.
What portion(s) of a PPP loan can be forgiven?
While a PPP loan may be used for many purposes, such as providing working capital and refinancing existing EIDL loans, the only portion of a PPP loan that can be forgiven are qualified expenses incurred during the eight-week covered period after the loan is issued. These qualified expenses are strictly limited to the following:
- Payroll costs.
- Payment of interest on covered mortgage obligations.
- Utility payments.
How can I apply for forgiveness of a PPP loan?
You must apply through your lender for forgiveness of the qualifying portions of your loan.
What happens to non-forgivable portion(s) of a PPP loan?
Any loan amounts not forgiven are carried forward as an ongoing loan with a maximum term of 10 years at a maximum interest rate of 4%.
What is the difference between a PPP loan and an EIDL?
In addition to the SBA’s new PPP loan program, traditional EIDLs are still available from the SBA for qualifying businesses. The biggest difference between these two loan programs is that up to 100% of a PPP loan may be forgivable if used for qualifying purposes.
For businesses that need emergency money immediately, the SBA may provide up to $10,000 in emergency grants to EIDL applicants that need it. Applicants are not required to repay these grants, even if they loan application is denied. The SBA must provide the emergency grants within three days after receipt of an application by an employer. The emergency grant can be used to pay sick leave to employees due to COVID-19, maintain payroll to retain employees, retain rent, and more. Any amounts granted will be reduced from the loan forgiveness if the applicant eventually transfers into or is approved for a PPP loan.
Assuming Congress refills the PPP bucket, should I apply for a PPP loan or an EIDL?
Congress is likely to refill the Paycheck Protection Program (“PPP”) bucket this week. Many small businesses were not able to take advantage of the first round of PPP loans and are most likely eager to get a jump on the second batch before the funding dries up. That raises a thorny question for many small businesses: Is a PPP loan the best option? The answer requires careful consideration of an employer’s particular situation and consultation with the employer’s CPA and attorney. At the end of the day, however, it may make more economic sense for a small business to forgo the PPP loan and apply for an Economic Injury Disaster Loan (“EIDL”) from the SBA instead. Here’s why.
Employers are required to withhold from employees’ wages and pay to the IRS certain taxes, such as federal income tax and the employees’ share of social security and Medicare taxes. A tax credit for small employers was recently created in the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, the same act that created the PPP. The tax credit applies to these employee-related taxes and is called the Employee Retention Credit (“ERC”). The ERC is a refundable tax credit against certain employment taxes equal to 50% of the “qualified wages” an eligible employer pays to employees after March 12, 2020 and prior to January 1, 2021. The definition of qualified wages depends on how many employees the employer had in 2019 (as explained below). Qualified wages generally means wages paid to employees under the conditions described below and includes qualified health plan expenses allocated to the qualified wages. Qualified wages don’t include wages for which the employer receives a credit for sick or family leave under Families First Coronavirus Response Act (“FFCRA”). In other words, an employer may not double-dip by combining the ERC and the tax credits available under the FFCRA.
To be eligible to claim the ERC, an employer must have been in business during 2020, meaning start-ups can be eligible. Eligible employers are permitted to claim this refundable payroll tax credit equal to 50% of wages paid to employees for any quarter in which they have either had to fully or partially suspend operation of business because of governmental orders due to COVID-19, or if they have had more than a 50% decline in gross receipts as compared to the same quarter a year ago. So, to claim the credit, an employer must have been in operation in 2020 and either had its operations fully or partially suspended or have its gross receipts decrease by at least 50% during a given quarter. The amount of compensation for each employee to determine the credit is limited to $10,000.
If an employer averaged 100 or less full-time employees in 2019, the credit for that employer is based on the qualified wages paid to all employees during these periods. If, on the other hand, an employer averaged more than 100 full-time employees in 2019, the credit is based on qualified wages paid to those employees not providing services due to the suspension of operations or decline in gross receipts.
For each employee, wages (including certain health plan costs) up to $10,000 can be counted to determine the amount of the 50% credit. Because this credit can apply to wages already paid after March 12, 2020, many struggling employers can get immediate access to this credit by reducing upcoming deposits or requesting an advance credit on Form 7200, Advance of Employer Credits Due to COVID-19 . Click here for instructions on filling out the Form 7200. The refundable credit is capped at $5,000 per employee (i.e., a 50% credit multiplied by a maximum of $10,000 of qualified wages) and applies against certain employment taxes on wages paid to all employees. Eligible employers can reduce federal employment tax deposits in anticipation of the credit. They can also request an advance of the employee retention credit for any amounts not covered by the reduction in deposits. In other words, employers should be able to receive the $5,000 maximum amount per employee either through the reduction advanced employment tax deposits or by payment from the IRS.
Here’s how employers can receive advanced payment of the ERC. If an employer is entitled to an ERC of $5,000 and is otherwise required to deposit $8,000 in employment taxes, the employer could reduce its federal employment tax deposits by $5,000. The employer would only be required to deposit the remaining $3,000 on its next regular deposit date. For information about additional relief that may be available to employers that allows them to delay the deposit of certain employment taxes, go to this link. If an employer is entitled to an ERC of $10,000 and was required to deposit $8,000 in employment taxes, the employer could retain the entire $8,000 of taxes as a portion of the refundable tax credit it is entitled to and file a request for an advance payment for the remaining $2,000 using Form 7200.
But here’s the catch. Employers who receive a PPP loan under the CARES Act can’t claim the Employee Retention Credit. An employer should be able to obtain an EIDL and still claim the ERC, however. So, while some or all of a PPP loan may be forgivable – and as we explained in our recent alerts – if an employer cannot retain or rehire a sufficient number of employees, the amount forgiven under a PPP loan will be reduced and the employer will have to repay that portion of the loan. Depending on a particular employer’s situation, including whether it has had to let go and may not be able to rehire a significant number of employees, it may make more economic sense to take out an EIDL and use the $5,000 credit per employee than risk having a portion of a PPP loan not be forgivable. Further, if the employer is allowed a Work Opportunity Tax Credit under section 51 of the Internal Revenue Code for an employee, that employee may not be included as an employee for purposes of the ERC. And, government entities aren’t entitled to the ERC. The employer should, therefore, carefully examine whether it meets the criteria for the ERC and whether that tax credit would be larger than the potentially forgivable portion of an anticipated PPP loan.
Are there any special tax credits available to my small business?
Eligible employers are permitted to claim a refundable payroll tax credit equal to 50% of wages paid to employees. An employer must either have its operations fully or partially suspended by governmental order (which should be applicable to Louisiana businesses as a result of Governor Edwards’ Stay-at-Home Order and related orders) or have its gross receipts decrease by at least 50%. The amount of compensation for each employee to determine the credit is limited to $10,000. The credit also may not exceed the otherwise payable payroll taxes (i.e., the otherwise payable payroll taxes is the cap on the credit). That said, the credit is refundable, meaning that if the amount of the credit exceeds the employer’s payroll tax liability the IRS will pay the excess amount to the employer. So, the employer should receive a $10,000 break on employment taxes, regardless of the size of such taxes.
Can I use net operating losses to reduce my taxable income?
Currently, corporations may not use net operating losses (“NOLs”) to reduce taxable income in a prior tax year and the use of NOLs is limited to 80% of taxable income. The Act temporarily relaxes these rules by providing a five-year carryback for NOLs generated in tax years 2018 through 2020 and allowing NOLs to fully offset taxable income in tax years prior to 2021. This will allow corporations previously subject to the NOL limitations to claim a refund by filing an amended return for prior years.