On March 27th, 2020, Congress enacted the Coronavirus Aid, Recovery, and Economic Security Act (“CARES Act”) to provide relief to struggling businesses through the newly expanded SBA Section 7(a) Paycheck Protection Program, the amended SBA Economic Injury Disaster Loan program, SBA Emergency Grants, and Mid-Size Business direct loans.
7(a) Loans—Paycheck Protection Program
Under the CARES Act, the primary relief source for small businesses, including businesses with less than 500 employees, is the Paycheck Protection Program (“PPP”). The PPP provides loans of up to $10,000,000 which can be used to fund salaries, rent, utilities, mortgage interest payments, and other necessary expenses. The loans have a maturity of 2 years and an interest rate of 1%. Loan payments and interest are deferred for six months. The loans are partially forgivable with the forgiveness amount based on employee retention and the retained value of employees’ salaries. Applications are being accepted by current SBA lenders and processed on a first-come first-serve basis, starting April 3, 2020. The application is available here.
Economic Injury Disaster Loans
Economic Injury Disaster Loans (“EIDLs”) are available to Connecticut small businesses and non-profits that have suffered a “substantial economic injury” as a result of the COVID-19 pandemic. SBA EIDLs are payable over 30 years and have an interest rate of 3.75%, with a reduced interest rate of 2.75% for non-profits. These loans may be used for fixed debts, payroll, accounts payable and other bills that cannot be paid because of the disaster’s impact on the business. Under the CARES Act, the EIDL amends the current SBA Disaster Assistance Loan Program by eliminating the personal guaranty requirement for loans under $200,000 and waives the requirement that the applying business have no other source of credit. The application is available here.
EIDL applicants seeking an immediate influx of funds may also receive an Emergency Grant of up to $10,000 within three days after applying for an EIDL grant. Emergency Grants are available through December 31, 2020. Emergency grants can be used for: payroll costs; increased material costs; rent or mortgage payments; or repaying obligations that cannot be met due to revenue losses. Emergency Grants made under this program do not need to be paid back, even if the business’ SBA Disaster Assistance loan application is denied.
Mid-Sized Business Relief
The CARES Act provides relief for mid-sized companies, employing 500-10,000 employees. Once implemented by the Secretary of the Treasury, the program will provide direct loans with rates no higher than 2% to eligible businesses. Payments may also be deferred for the first 6 months of the loan. Mid-size businesses may use loan funds to retain their workforce and to stabilize due to the economic uncertainty. Businesses accepting these loans will be subject to certain restrictions, including a requirement to stay neutral on any union organizing efforts during the term of the loan and a prohibition on paying common stock dividends during the term of the loan.
Employee Retention Tax Credit
The CARES Act also created the Employee Retention Tax Credit (“ERTC”), which is designed to encourage businesses to keep employees on their payroll. The ERTC is a refundable tax credit of 50% of up to $10,000 in wages paid by an eligible employer whose business has been financially impacted by COVID-19. The credit is available to all employers regardless of size, including tax-exempt organizations. There are only two exceptions: state and local governments (and their instrumentalities) and small businesses who take small business loans are not eligible. Qualifying employers must fall into one of two categories: (i) the employer’s business is fully or partially suspended by government order due to COVID-19 during the calendar quarter; or (ii) the employer’s gross receipts are below 50% of the comparable quarter in 2019. Once the employer’s gross receipts go above 80% of the comparable quarter in 2019, they no longer qualify after the end of that quarter. Wages paid after March 12, 2020, and before Jan. 1, 2021, are eligible for the credit. Qualifying wages are based on the average number of a business’s employees in 2019. If the employer had 100 or fewer employees on average in 2019, the credit is based on wages paid to all employees, regardless of whether they worked. That is, if the employees worked full time and were paid for full time work, the employer still receives the credit. If the employer had more than 100 employees on average in 2019, then the credit is allowed only for wages paid to employees who did not work during the calendar quarter. Employers can be immediately reimbursed for the credit by reducing their required deposits of payroll taxes that have been withheld from employees’ wages by the amount of the credit. Eligible employers will report their total qualified wages and the related health insurance costs for each quarter on their quarterly employment tax returns or Form 941 beginning with the second quarter. If the employer’s employment tax deposits are not sufficient to cover the credit, the employer may receive an advance payment from the IRS by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19. Eligible employers can also request an advance of the Employee Retention Credit by submitting Form 7200. Borrowers using funds under the CARES Act should expect rigorous government oversight and enforcement.
If you would like guidance with any of the loans or programs under the CARES Act, please contact your regular Carmody attorney or any of our team members below:
Thomas R. Candrick, Jr.
(203) 784-3103; firstname.lastname@example.org
(203) 575-2621; email@example.com
Matthew H. Gaul
(203) 784-3106; firstname.lastname@example.org
Joseph L. Kinsella
(203) 575-2645; email@example.com
Mark J. Malaspina
(203) 575-2625; firstname.lastname@example.org
Ann H. Zucker
(203) 252-2652; email@example.com
Wesley D. Cain
(203) 784-3105; firstname.lastname@example.org
Stephanie E. Cummings
(203) 575-2649; email@example.com
Kevin G. Palumberi
(203) 252-2692; firstname.lastname@example.org
Holly G. Wheeler
(203) 784-3158; email@example.com