CARES Act Intended to Provide Critical Loans for Small and Medium-Sized Businesses

Wednesday night, the Senate unanimously passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which will provide approximately $2 trillion in aid to individuals, businesses, and healthcare organizations. The bill now moves to the House for consideration. President Trump has already indicated that he will sign it into law.

Our previous alert highlighted some of the key provisions of the bill. Although it has not yet been signed into law and there may still be some fine-tuning of the details, we wanted to provide some additional insight into the financial assistance being made available for small and medium-sized businesses.

CARES Act Loans 

One of the most significant elements of the Act would allow businesses with fewer than 500 employees to borrow up to the lesser of:

  • 2.5 times average total monthly payroll costs incurred in the one-year period prior to the date of the loan plus the outstanding balance of any loans under the SBA’s Disaster Loan Program between January 31, 2020 and the date on which the loan may be refinanced as part of this new program; or
  • $10 million.

Employers can use borrowings under the program to cover compensation to employees up to $100,000 per employee (prorated in the 1st year), certain healthcare benefits and premiums, interest payments on mortgage obligations, rent and lease payments, utilities, and interest on other debt obligations.

The CARES Act specifies that no collateral or guarantees are permitted and only requires that an employer make a good faith certification that:

  • the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the borrower;
  • funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments;
  • the eligible recipient does not have an application pending for a loan under the same program or for the same purpose or duplicative payments; and
  • during the period beginning on February 15, 2020 and ending December 31, 2020, that the borrower has not received amounts under the program for the same purpose and for duplicative amounts.

The Act also specifies that the maximum interest rate on loans will be 4 percent and requires lenders to provide borrowers with payment deferrals. Perhaps most importantly, the Act specifies that borrowings under the loan are subject to forgiveness in an amount equal to employment levels during the 8-week period after the date of the loan compared to either:

  • the average number of full time equivalent employees per month employed by the borrower during the period from February 15, 2019 and ending on June 30, 2019; or
  • the average number of full-time equivalent employees per month employed by the borrower during the period from January 1, 2020 through February 29, 2020.

Importantly, the Act specifies the employment levels used in the loan forgiveness calculation must be reduced for employees whose wages were reduced by more than 25 percent. The Act also includes special provisions for seasonal employers as well as employers who rehire employees or replenish wage reductions by June 30, 2020.

Two other elements of the CARES Act that have been of particular interest to our clients as they seek financial relief are employee retention credits and employer payroll tax deferral.

Employee Retention Credits

Under the CARES Act, an employer is eligible for a refundable payroll tax credit in an amount equal to 50 percent of wages paid to employees during the crisis. This credit is available if the employer’s operations were fully or partially suspended due to a COVID-19 shut-down order or if the gross receipts of the business fell by more than 50 percent from the comparable quarter in the prior year.

Employer Payroll Tax Deferral

The Act allows employers and the self-employed to pay the employer’s share of the Social Security tax over a two-year period, with 50 percent payable by December 31, 2021 and the remainder by December 31, 2022.

As previously mentioned, the CARES Act must pass the House of Representatives before it can be signed into law and, if it does, we expect that its provisions would have a significant impact on small and middle-market businesses as they try to navigate this unexpected financial crisis.

We will update you with more detailed information once the CARES Act is finalized, but for now, we wanted to provide information about the loan program in particular, as you may want to consider reaching out to your banker.
We will continue to provide updates as additional tax, legislative, and other COVID-19 related developments emerge. We are also regularly updating our COVID-19 Resource Center, which you can access at any time here. In the meantime, if you have any questions about these or any other matters, please do not hesitate to contact your Kreischer Miller professional or any member of our team.

Information contained in this alert should not be construed as the rendering of specific accounting, tax, or other advice. Material may become outdated and anyone using this should research and update to ensure accuracy. In no event will the publisher be liable for any damages, direct, indirect, or consequential, claimed to result from use of the material contained in this alert. Readers are encouraged to consult with their advisors before making any decisions.