On March 27, 2020, Congress passed and the President signed into law the Coronavirus Aid, Relief, and Economic Security Act, known as the CARES Act (the “Act”) in response to the COVID-19 pandemic. The Act aims to pump roughly $2 trillion into the U.S. economy which has suffered major disruptions due to the precautions enacted to slow the spread of COVID-19. The Act includes several elements designed to provide relief to the American public, including direct cash payments to certain individuals, additional benefits for the unemployed, and special loan programs for businesses. Below is a brief overview of certain programs and modifications made available for small businesses under the Act:
- Paycheck Protection Program (“PPP”): The PPP authorizes up to $349 billion in loans to small businesses to cover certain essential business functions - mainly payroll - during the period of February 15th through June 30, 2020. Program highlights include:
- Small businesses (fewer than 500 employees) in operation as of February 15, 2020 are eligible for a loan of up to $10 million (determined by a formula related to payroll costs) to cover payroll and other rent or mortgage interest expenses from February 15, 2020 - June 30, 2020.
- Critically, businesses may qualify for loan forgiveness up to 100% of the loan to the extent the loan proceeds are used to maintain payroll and pay rent or mortgage interest expenses incurred during the eight-week period after the loan is disbursed. The amount of loan forgiveness is reduced according to a specific formula to the extent the borrower reduces the number of employees or reduces pay.
- No personal guarantees or collateral will be required to obtain a loan under the PPP.
- The interest rate to be charged on any portion of the loan not forgiven will be 0.5% with no loan fees or prepayment fees. In addition, no loan payments are required for the first 6 months. The maximum loan term is 2 years.
- Small Business Debt Relief Program: The Act further provides for relief for small businesses already taking advantage of a Small Business Administration (“SBA”) loan (such as 7(a), 504, or a microloan). Under the Small Business Debt Relief Program, the SBA will cover all loan payments, including principal, interest, and fees, for six months.
- Economic Injury Disaster Loans (“EIDL”): While EIDLs were available prior to the passage of the Act, the Act greatly expanded access to these loans for small businesses.
- Specifically, the Act modified the program to waive the following requirements which traditional existed under the EIDL program: (1) personal guarantees on amounts less than $200,000, (2) that the business must have been in operation for more than 1 year, and (3) that borrowers are unable to access credit elsewhere.
- These loans, as modified, will be available until December 31, 2020 (as opposed to cutting off as of June 30, 2020 under PPP).
- Those applying for an EIDL can also request an immediate advance of up to $10,000 which will be paid within three days of submitting an application. This advance does not have to be repaid, even if the EIDL loan is subsequently denied.
- Taxes: The Act also includes provisions for tax credits and deferment of certain federal payroll taxes.
- Businesses can defer the employer portion of Social Security Payroll taxes through January 1, 2021.
- Any deferred payroll taxes are then payable over the following two years, with 50% being due on December 31, 2021 and the remaining 50% due on December 31, 2022.
Small businesses may begin applying for loans under the PPP starting April 3, 2020. Independent contractors and self-employed individuals are eligible to apply starting April 10, 2020.
Bressler has created a dedicated COVID-19 Task Force to assist clients in directly addressing and responding to any issues created by the recent environment, including applying for relief under the CARES Act. For more information, please contact any of the Bressler Task Force attorneys, a list of whom can be found on the Firm’s COVID-19 webpage.