Attempting to lessen the economic devastation wrought by the Coronavirus, Congress passed a sweeping new law designed to provide incentives for employers to keep their workers on the job.
Called the Coronavirus Aid, Relief and Economic Security (CARES) Act, it was signed onto law by President Trump on March 27. Its primary component is a $349 billion forgivable loan initiative called the Paycheck Protection Program (PPP), which is aimed at helping companies with 500 or fewer employees.
The CARES Act also provides funding for an additional $454 billion loan program to help companies with between 500 and 10,000 employees designed to ensure continued employment. The loan portion of the act is in addition to similar support programs for employers mounted by some states and cities, such as New York City’s Small Business Continuity Loan program.
PPP is available to employers that were operational on Feb. 15, 2020, had 500 or fewer employees for whom they paid salaries and payroll taxes, and that have been impacted by COVID-19. Lending institutions participating in the federal Small Business Administration (SBA) loan program will make these loans, which also will carry a federal guarantee.
Borrowers do not need to qualify for SBA loans generally, according to attorneys Bonnie J Roe and Sophia Soejung Kim of the law firm of Cohen & Gresser LLP.
Each borrower will be required to submit a good-faith certification that:
● The loan is needed to continue operations during the COVID-19 emergency.
● Funds will be used to retain workers and maintain payrolls, including continuation of healthcare benefits, salaries, commissions and similar compensation or make mortgage, lease and utility payments.
● The borrower does not have any other application pending under this program for the same purpose.
● From Feb. 15, 2020, until Dec. 31, 2020, the borrower will not receive duplicative amounts under this program.
● Employers must be based in the United States and have substantial U.S. operations in order to be eligible.
● Not-for-profit organizations, individual proprietorships and self-employed individuals are eligible for the loans, depending on the circumstances.
Forgiveness & Tax Breaks
The amount of the loan may not generally exceed the lower of 2.5 times the average monthly payroll cost during the year prior to the loan (as calculated under a formula included in the CARES Act) or $10 million.
Payroll costs as calculated under the CARES Act exclude, among other things, individual employee compensation above $100,000 per year as prorated for the applicable period and payroll costs for individuals located outside the U.S.
Interest on the loans is capped at 4% annually. No personal guarantees or collateral for the loan are required, no administrative fees must be paid in connection with the loans, and there is no prepayment penalty, the attorneys point out.
All or a portion of the loan may be forgivable and debt service payments may be deferred for up to one year. The borrower is eligible for loan forgiveness equal to the amount that it spent on rent, payroll costs, interest on a mortgage and utility payments during an eight-week period after the loan origination date.
The forgiven portion of the loan will not be included in the borrower's taxable income. However, the amount forgiven will be lowered by reductions in full-time employment and in situations where total salaries and wages of any employees making less than $100,000 annually fall by more than 25% from the most recent full quarter. However, this can be mitigated by rehiring employees.
Loan amounts that are not forgiven at the end of one year will continue to be fully guaranteed by the federal government and will have a maximum maturity date of 10 years from the date the borrower applied for loan forgiveness.
Only if an employer does not receive a PPP loan will it then be eligible for a refundable credit against Social Security taxes if, during any calendar quarter of 2020, it had to fully or partially suspend operations due to a COVID-19-related governmental order.
In addition, the credit is available if the employer suffers a decline in gross receipts of more than 50% compared to the same quarter of the prior year. To be eligible, employers must have carried on a trade or business during 2020.
The refundable credit is applicable for all wages paid between March 12, 2020, and before Jan. 1, 2021. The credit equals 50% of the first $10,000 in wages per employee (including the value of health plan benefits).
This credit can be claimed by employers with more than 100 full-time employees for employees who are retained but not currently working as a result of COVID-19. For employers with 100 or fewer full-time employees, all wages paid qualify for the credit so long as they meet other requirements related to suspension of business or reduction in gross receipts.
Employers should keep in mind that the CARES Act permits them to defer the deposit of their share of Social Security taxes attributable to wages paid during 2020. Half of these deferred Social Security taxes would be required to be paid by Dec. 31, 2021. The remaining half of the deferred taxes would be due Dec. 31, 2022.
The law authorizes up to $500 billion in loan programs to businesses larger than those eligible for the Paycheck Protection Program. Up to $46 billion is earmarked for cargo and passenger air carriers and businesses necessary to national security. The remaining $454 billion may be used for loan programs to support states, municipalities and businesses that have between 500 and 10,000 employees.
Under the $454 billion program borrowers must certify that: the uncertainty of economic conditions makes the loan necessary; proceeds will be used to retain at least 90% of their workforce at full compensation and benefits until Sept. 30, 2020. They also must declare they intend to restore no less than 90% of the workforce that existed on Feb. 1, 2020, within four months after the termination of the public health emergency declared on Jan. 31, 2020.
Borrowers must be domiciled in the U.S.; may not pay common stock dividends or repurchase shares listed on a national securities exchange while the loan is outstanding; not outsource or offshore jobs or abrogate any collective bargaining agreement for the term of the loan and two years following repayment; and remain neutral in any union organizing effort during the term of the loan.
Further guidance and an application for the Paycheck Protection Program loans can be found on the U.S. Treasury Department's website.