By F. Gregory Pyke and Eric D. Tetrault
On Friday, March 27, 2020, President Trump signed the $2 trillion Coronavirus Relief Bill, also called the CARES Act, that provides support to individuals and businesses in response to the economic turmoil caused by the coronavirus. Federal social distancing requirements and Governor Newsom’s statewide Stay At Home Order have forced non-essential businesses to close, and businesses are faced with extremely difficult choices concerning payroll, rent, debt service, and other essential operating expenses. The CARES Act may provide a relief valve as this pandemic continues.
For businesses, a primary goal of the CARES Act is to provide attractive SBA loans up to $10 million, and to encourage businesses to retain and pay their employees during this difficult time, even as many businesses are forced to close.
Key aspects for businesses of the CARES Act include:
SBA LOANS TO BUSINESSES. The CARES Act creates a new Paycheck Protection Program that authorizes the Small Business Administration (SBA) to provide loans between February 15, and June 30, 2020 (Covered Period), to Eligible Businesses to help pay for certain Allowable Uses, including payroll, rent, health benefits, insurance premiums, utilities, mortgage payments, and other essential operating expenses.
PAYCHECK PROTECTION PROGRAM BENEFITS BUSINESSES OF NEARLY ALL SIZES. Under the Paycheck Protection Program, any business concern, private nonprofit organization, or public nonprofit organization which employs not more than 500 employees (Eligible Business) shall be eligible to receive a favorable Paycheck Protection Program loan.
PAYCHECK PROTECTION PROGRAM AUTHORIZES LOANS UP TO $10 MILLION FOR ALLOWABLE USES. Under the Paycheck Protection Program, Eligible Businesses may be eligible to receive an SBA Loan of up to $10 million. The maximum loan amount that an Eligible Business can receive is 250% of average monthly payroll costs, up to $10 million. The proceeds of a Paycheck Protection Program loan must be deployed for Allowable Uses, which are:
- Payroll costs;
- 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 compensation;
- Payments of interest on any mortgage obligation that existed on February 15, 2020 (which shall not include any prepayment of or payment of principal on a mortgage obligation);
- Rent payments (including rent under a lease agreement);
- Utilities; and
- Interest on any other debt obligations that were incurred before the Covered Period.
PAYMENTS ON PAYCHECK PROTECTION PROGRAM LOANS ARE DEFERRED. Eligible Businesses that are operating as of March 1, 2020, and that have pending or approved SBA loan applications are presumed to qualify for complete payment deferment relief for not more than one (1) year.
PAYCHECK PROTECTION PROGRAM LOANS MAY BE TOTALLY OR PARTIALLY FORGIVEN. The CARES Act provides that the obligation to repay the loan may be completely forgiven if an Eligible Business satisfies certain requirements. The amount of forgiveness is equal to the cost of maintaining payroll continuity during the Covered Period. In this way, the CARES Act encourages Eligible Businesses to retain their employees. In addition, the amount of the loan that is forgiven is excluded from gross income for federal income tax purposes, meaning that a borrower does not have to pay federal income tax on the amount of the loan that is forgiven. It is unclear at this point whether California will conform for state income tax purposes to the federal income tax treatment of Paycheck Protection Program loans that are forgiven. Nevertheless, the benefits of a Paycheck Protection Program loan likely outweigh the California income tax costs if California does not conform to the CARES Act.
EMPLOYEE RETENTION CREDIT. Under the CARES Act, eligible businesses (including some tax-exempt organizations) may take advantage of a refundable credit against payroll tax liability equal to 50% of the first $10,000 in wages per employee.
EMPLOYER PAYROLL TAX DELAY. The due date for depositing employer payroll taxes during 2020 is postponed. The deferred amounts are payable over the next two years, 50 percent December 31, 2021, and 50 percent due December 31, 2022.
We invite you to call us to discuss how the CARES Act can work for your business.