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An Overview of the Coronavirus Aid, Relief, and Economic Securities Act (“CARES Act”) for Small Business Owners

In the wake of COVID-19, two (2) critical methods of relief are being offered to business owners across the country.

The first is the Economic Injury Disaster Loan (“EIDL”) which is administrated by the Small Business Administration (“SBA”). The EIDL is a low-interest, non-forgivable loan available to a wide variety of business owners with key terms, including an Interest Rate of 3.75% (for-profit business) and 2.75% (non-profit organizations), a loan up to $2,000,000.00, Thirty (30) years for repayment and up to $10,000.00 in the form of a grant. For more details on how to apply for an EIDL, please visit [How to obtain a SBA Relief Loan].

The second form of relief is provided in the CARES Act which provides wide-ranging mechanics, including the Paycheck Protection Program. The summary below provides a high-level summary of the different features of the CARES Act. Though the SBA has provided the framework for the application process, the administration of the Paycheck Protection Program has been granted to SBA-Approved Financial Institutions, such as regional lenders. Therefore, certain questions remain unanswered and the application process will vary from lender to lender and we will do our best to provide comprehensive updates throughout this process.

Section 1102 – Paycheck Protection Program

  • Authorizes United States Small Business Administration (“SBA”) to make and guarantee loans under the CARES Act’s Paycheck Protection Program (“PPP”) within Section 7(a) of the Small Business Act.
  • All guarantees by the SBA of loans made for the PPP under Section 7(a) of the Small Business Act will be at 100%.
  • Eligibility extended to sole-proprietors, independent contractors, and other self-employed individuals.
  • Eligibility extended to businesses with less than 500 employees.
  • SBA waives affiliation rules for businesses in the hospitality and restaurant industries with fewer than 500 employees.
  • Establishes PPP formula as 2.5 x average monthly payroll. The monthly payroll caps salary wages at $100,000.00. The borrower can receive up to $10M with a maximum interest rate of 4%.
  • Funds received under PPP may be used towards most business purposes including working capital and capital expenditures; however, to maximize loan forgiveness under Section 1106 of the PPP, at least 75% percent of PPP funds must be used towards payroll and the remaining 25% used towards rent, utilities, and mortgage interest.
  • Permits a borrower who has received an Economic Injury Disaster Loan (“EIDL”) from 1/31/2020-4/3/2020 to refinance the EIDL loan under the PPP.
  • Provides that any portion of the loan not forgiven under Section 1106 will have a maturity of not more than 10 years.
  • Waives the prepayment penalty on PPP loans.

Section 1106 – Loan Forgiveness

  • Section 1106(b)
    • PPP Borrowers shall be eligible for loan forgiveness for costs incurred during the 8-week period following the origination date of the loan.
      • Payroll Costs
      • Rent Payments on Lease (as long as payment existed prior to 2/15/2020)
      • Utility Payments (as long as payment existed prior to 2/15/2020)
      • Mortgage Interest Payments (as long as payment existed prior to 2/15/2020)
    • Section 1106(c)(1)
      • Forgiven amounts shall be considered canceled debt by the Lender.
    • Section 1106(d)(1)
      • The forgiven amount may not exceed the principal amount of the loan.
    • Section 1106(d)(2)
      • The forgiven amount will be reduced proportionally by:
        • Any reduction in the average number of full-time employees per month during the 8-week period after loan origination, and
        • Any reduction in pay of employee beyond 25% of their compensation in the most recent full quarter during which employee was employed
      • Section 1106(g)
        • Lenders must issue a decision on the borrower’s forgiveness application within 60 days of receiving the application.
      • Section 1106(i)
        • Canceled indebtedness resulting under the PPP will not be included in the Borrower’s gross income for tax purposes.

Section 1110 – Emergency EIDL Grants

  • For any EIDL issued in response to COVID-19 prior to 12/31/2020, the SBA shall waive:
    • Personal guarantees on advances and loans below $200,000.00
    • Requirement that applicant must have been in business for 1-year prior to the disaster
    • Credit-elsewhere requirement
  • Establishes Emergency Grant to allow eligible entities that have applied for an EIDL due to COVID-19 to request an advance of $10,000.00, which the SBA must distribute within three (3) days. The advance is not to be repaid.

Section 1112 – Subsidy for Certain Loan Payments

  • A covered loan includes an existing 7(a) loan, 504 loan, or microloan product. PPP Loans are NOT covered.
  • Requires the SBA to pay the principal, interest, and any associated fees that are owed on covered loans made prior to the enactment of the CARES Act for a Six (6) month period beginning on the next payment due date. Loans made prior to the enactment of the CARES Act that are already on deferment shall have their 6-month period of payments made by the SBA begin after the deferment period.

Section 1113 – Bankruptcy

  • Temporarily (for one year) amends the United States Bankruptcy Code’s eligibility for businesses to access the streamlined Chapter 11 process available to small businesses. The Chapter 11 debt limit threshold is increased from $2,724,625.00 to $7,500,000.00.
  • Temporarily (for one year) amends the Bankruptcy Code’s Chapter 7 and Chapter 13 definition of “income” to exclude COVID-19 related payments from the federal government.

Section 2201 – Recovery Rebates for Individuals

  • US Residents, that are not dependents of another taxpayer and have a work-eligible social security number, are eligible for a $1,200.00 tax rebate ($2,400.00, if married). Residents are also eligible for an additional $500.00 per child. Residents are eligible regardless of whether they are employed or not. The rebate is phased out for taxpayers with an adjusted gross income in excess of $75,000.00. The IRS will use the taxpayer’s latest filed return to determine eligibility.

Section 2202 – Special Rules for Use of Retirement Funds

  • Waives the 10-percent early withdrawal penalty for distributions up to $100,000.00 from qualified retirement accounts for coronavirus-related purposes made on or after January 1, 2020.
    • A coronavirus-related purpose includes a distribution made to an individual who is diagnosed with COVID-19, whose spouse or dependent is diagnosed with COVID-19, or who experiences adverse financial consequences due to being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19, or other factors as determined by the US Treasury Secretary.
  • Income attributable to the distribution is subject to tax over three years and the taxpayer may re-contribute the funds within three years without regard to that year’s cap on contributions.

Section 2205 – Modification of Limitations on Certain Charitable Contributions of Cash and Food

  • The limitation on deductions available for certain cash charitable contributions made by individuals who itemize their deductions as well as corporations. The 60% of adjustable gross income limitation is suspended for 2020 for individuals. The 10% limitation is increased to 25% of taxable income for corporations. The food inventory contribution deduction limitation is increased from 15% to 25%.

Section 2301 – Employee Retention Credit for Employers Subject to Closure due to COVID-19

  • Provides a refundable payroll tax credit for 50 percent of wages paid by eligible employers to employees during the COVID-19 crisis. The credit is available to employers who
    • Have had operations fully or partially suspended due to a COVID-19 related shutdown order, or
    • Gross receipts in a given quarter declined by more than 50% compared to the same quarter in the prior year.
  • For employers with 100 or fewer full-time employees, all employee wages qualify for the credit, whether the employer is open for business or subject to a shut-down order. The credit covers the first $10,000.00 of compensation per employee, including health benefits, with certain additional allowances for amounts paid by an employer to maintain a group health plan. The credit is provided for wages paid or incurred from March 12, 2020 through December 31, 2020.

Section 2302 – Delay of Payment of Employer Payroll Taxes

  • Allows employers and self-employed to defer payment of all (employers) or half (self-employed) of the employer share of the social security tax they are responsible for paying the federal government.
  • The tax must be paid over the following two years with the first half due 12/31/2021, and the second half due 12/31/2022.

Section 2303 – Modification for Net Operating Losses

  • Net operating losses arising in 2018, 2019, or 2020 may be carried back 5 years. It also temporarily removes existing taxable income limitations on net operating loss deductions to allow the losses to offset a company’s full income.

If you find yourself in need of any assistance, please contact Krishan Patel at kpatel@patellegal.com or  Kishan Patel kdpatel@patellegal.com any member of our team.

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