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CARES Act (Stimulus) Summary

3-30-20

On Friday, March 27, 2020, the President signed the Coronavirus Aid, Relief, and Economic Security Act (CARES) into law. CARES is a $2.2 trillion stimulus package which provides, among other things:

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Small business lending program (Paycheck Protection Program, or "PPP")

CARES provides federally-backed loans to small business, processed via various banks and credit unions. This aspect of the CARES is called the Paycheck Protection Program ("PPP") and resembles an expanded SBA 7(a) loan guaranty program.

Q: Are we eligible?

A: Generally speaking, businesses with 500 or fewer employees are eligible (as well as some above that threshold). Non-profits, independent contractors, sole proprietors, and certain self-employed individuals are also eligible.

Q: For how much could we qualify?

A: The maximum loan amount available is 2.5 times your average monthly payroll from the previous 12 months or from calendar year 2019, capped at $10 million total.

Q: What are the loan terms?

A: The interest rate for PPP loans will be a fixed rate of 1%. The loans are due within two years of origination, with no prepayment penalties or fees. All payments (including principal, interest, and fees) are deferred for six months; however, interest will continue to accrue over this period. In addition, certain fees normally applicable to SBA 7(a) loans are waived.

Q: For what purposes can we use these monies?

A: Loans under the program may be used for the following expenses:

  • Payroll expenses (e.g., salaries, wages, commissions, vacation, paid sick family or medical leave, severance, retirement benefits, group health benefits, insurance premiums, and applicable state and local payroll taxes);
  • Rent under a lease in existence prior to February 15;
  • Utility payments, where service began prior to February 15; and
  • Interest on pre-existing debt obligations.
  • Excluded are:
    • Cash compensation in excess of the equivalent of $100,000, as prorated during the covered period; and
    • Employer's portion of payroll taxes, income taxes, FFCRA payments.

Q: I’ve heard that these loans will be forgiven. True?

A: Yes, up to the amount spent on approved expenses during the eight-week period following the origination of the loan (not to exceed the original principal of the loan). Expenses eligible for forgiveness include all of the expenses outlined above for which the loan proceeds may be used, with the exception of interest on pre-existing debt obligations. However, due to high demand, the SBA will not allow more than 25% of the forgiven amount to be used for non-payroll costs.

In addition, the amount forgiven is reduced where the recipient has recently reduced employee counts or salaries/wages. For example:

  • In the case of headcount reductions, the amount forgiven will be reduced proportional to the number of layoffs (calculated by comparing the employer’s average headcount during the eight weeks following loan origination against average full-time employees between either 1/1/20 – 2/29/20, or 2/15/19-6/30/19).
  • As to wages, the amount forgiven will be reduced if compensation of employees earning less than $100,000 is reduced by more than 25%.
  • For seasonal employers, modified calculations apply.
  • The reduction in the amount of loan forgiveness does not apply where the borrowing employer has, by 6/30/20, rehired the same number of employees laid off and/or "eliminated the reduction of the salaries or wages."

Q: Any other significant aspects of the lending program?

A: Unlike under a traditional SBA 7(a) loan, borrowers need not personally guarantee the loan nor pledge any collateral.

Recipients of emergency grants/advances under the Economic Injury Disaster Loan (EIDL) program, and those receiving loan repayment relief under the Small Business Debt Relief Program may apply for PPP. EIDL recipients may also refinance these loans through PPP.

Q: What need I do?

  1. Immediately reach out to your banker. The loans are "first-come, first-served," and there is extraordinary demand. To apply, you will need to submit the PPP Application Form, along with payroll documentation (e.g., payroll processor records, payroll tax filings).
  2. Keep detailed records of business expenses, including monies paid out as payroll, rent, interest on mortgages and pre-existing debts, utilities, and under FFCRA (EPSL and EFML).

Unemployment Insurance

CARES provides for a major temporary expansion of unemployment insurance benefits — extending coverage to groups and circumstances who would not otherwise be entitled to benefits, lengthening the benefit period, and granting a significant temporary increase in the amount of benefits available. Some individuals may actually receive more in unemployment compensation than they would have in wages.

Q: Who is eligible?

A: CARES Act creates a temporary Pandemic Unemployment Assistance program which relaxes normal eligibility criteria to extends benefits to groups not traditionally eligible (e.g., freelancers and gig workers, independent contractors, those without sufficient work history).

Covered individuals under the program include anyone who self-certifies that they are generally available for work but are unable to work or unemployed fully or partially because:

  • The individual has been diagnosed with COV or is experiencing COV- like symptoms and seeking a medical diagnosis
  • A member of the individual’s household has been diagnosed with COVID-19
  • The individual is providing care for a family or household member who has been diagnosed with COV
  • The individual is the primary caregiver for a child or other person in the household who is unable to attend school or another facility as a direct result of COV
  • The individual is unable to reach their place of employment because of a quarantine imposed as a direct result of COV
  • The individual is unable to reach their place of employment because they have been advised by a health care provider to self-quarantine due to concerns related to COV
  • The individual was scheduled to commence employment and does not have a job or is unable to reach the job as a direct result of COV
  • The individual has become the breadwinner or major support for a household because the head of household died as a direct result of COV
  • The individual has to quit his or her job as a direct result of COVID–19
  • The individual’s place of employment is closed as a direct result of the COVID–19 public health emergency

Those who have the ability to telework with pay or are receiving paid sick leave or other paid leave benefits are not eligible for benefits under the program (although, depending on the amount of such paid leave, they may be eligible for lesser, partial unemployment benefits under existing state unemployment programs).

Q: For how much are they eligible?

A: CARES provides for an additional $600 per week for qualifying individuals for up to four months (7/31/20). Wisconsin’s maximum weekly benefit is currently $370. Thus, the maximum weekly benefit will be $970 until 7/31/20.

Q: For how long are they eligible?

A: CARES extends regular unemployment benefits up to an additional 13 weeks beyond what state law provides. In Wisconsin, that is 26 weeks, meaning the eligibility period is extended to 39 weeks.

Tax and other provisions

Employee Retention Credit

CARES provides a fully refundable payroll tax credit for 50 percent of qualified wages paid by the employer to employees between 3/12/20 and 1/01/21, up to a maximum credit of $5,000 per employee. Eligible employers are those who: (1) had to fully or partially suspend operations because of an order by the government limiting commerce, travel, or group gatherings; or (2) whose gross receipts in any quarter in 2020 are less than 50 percent of gross receipts during the same quarter in 2019 (until gross receipts exceed 80 percent of gross receipts for the same calendar quarter in 2019).

For employers with more than 100 full-time employees, qualified wages include only those wage paid to employees while the employees were not providing services because of either of the two hardship circumstances above. For employers with 100 or fewer full-time employees, qualified wages includes all wages paid to employees (irrespective of whether the employees were actually providing services to the employer) during such periods of hardship.

Employers may utilize this Employee Retention Credit and receive tax credits for paid leave under the FFCRA, but not for the same wages. Notably, the credit is not available to employers receiving assistance through the Paycheck Protection Program.

Deferral of employer payroll taxes

CARES permits employers (and self-employed individuals) to defer payment of their share of Social Security tax on employee wages between 3/27/20 and 12/31/20.

Deferred taxes will be due in two installments, 50 percent due by 12/31/21, and the other 50 percent due by 12/31/22. Any individual or entity receiving loan forgiveness under the Paycheck Protection Program is ineligible for this deferral provision.

Economic Injury Disaster Loan (“EIDL”) and Emergency Grant

The EIDL program is an existing program available to businesses impacted by disaster. CARES authorizes $10 billion to expand EIDL to businesses impacted by COVID-19. Unlike PPP loans, EIDL loans are not eligible for forgiveness. Applicants apply for EIDLs with the SBA directly.

CoV-related EIDLs are low interest loans (3.75% for businesses and 2.75% for non-profits) of up to $2 million, with a maximum term of 30 years. Borrowers may defer principal and interest payments for one year. However, the actual loan amount is limited to the amount of economic injury as determined by the SBA.

Eligible EIDL borrowers include small business with 500 or fewer employees (as well as some above that threshold), independent contractors, private nonprofits, and cooperatives and ESOPs with 500 or fewer employees. Applicants’ businesses must be located in a declared disaster area and have suffered “substantial economic injury” as a direct result of the COVID-19 pandemic.

CARES waives existing EIDL rules for personal guarantees for loans of $200,000 or less, but collateral requirements still apply. CARES also waives traditional requirements that the applicant have been in existence during the one year period before the disaster (so long as it was in operation on 1/31/20) and that the applicant is unable to obtain credit elsewhere.

EIDL’s may only be used to cover certain expenses, although CARES has expanded these permissible uses. These uses now include:

  • Working capital needed to sustain the business until resumption of normal operations
  • Maintaining payroll to retain employees
  • Providing paid sick leave to employees unable to work because of COVID-19
  • Meeting rent or mortgage obligations
  • Repayment of obligations that cannot be met due to revenue decreases
  • Increased costs to procure materials unavailable due to supply chain interruptions

EIDL proceeds may not be used to:

  • Refinance debt incurred prior to the disaster event
  • Make payments on loans owned by another federal agency or an SBIC
  • Repair physical damage
  • Pay certain tax penalties or non-tax fines or penalties for violations of laws or regulations.
  • Pay dividends or other disbursements to owners, partners, officers or stockholders, beyond reasonable compensation directly related to such individuals’ performance of services for the business

CARES also establishes an emergency advance (Emergency Grant) on the EIDL proceeds of up to $10,000, provided by the SBA within three days of application. The Emergency Grant need not be paid back, even if the borrower’s application is subsequently rejected. However, CARES requires that the Emergency Grant be reduced from any loan forgiveness amount under PPP (if the borrower receives a PPP loan).

Net operating losses ("NOL")

CARES expands the availability of Net Operating Loss ("NOL") carrybacks eliminated by the 2017 Tax Cuts and Jobs Act. More specifically, the Tax Cut and Jobs Act eliminated NOL carrybacks starting with the 2018 tax year. CARES reinstates and expands the NOL carryback provision by allowing NOLs incurred in 2018, 2019 and 2020 to be carried back five years. CARES also temporarily removes the 80% of taxable income limitation on the use of NOLs incurred in those years, such that NOLs can once again fully offset income. Taxpayers will be able to amend tax returns for the applicable years to claim refunds arising from the use of these NOLs.

Modifications to FFCRA

CARES amends FFCRA, enacted just a few weeks back, in a few important respects. Perhaps most importantly, employees laid off on or after March 1, and subsequently rehired, are eligible to receive family leave benefits. The 30-days of employment test is met if the rehired employee worked for the employer for at least 30 of the last 60 calendar days prior to the layoff.

Please note: This page contains general information and should not be construed as legal advice. Seek legal counsel for analysis and advice tailored to your particular circumstances.