New SBA Loan Program Incentivizes Employers to Keep American Workers Paid and Employed By Charles A. Nemer Attorney at McCarthy, Lebit, Crystal & Liffman On March 27, 2020, the President signed an historic stimulus bill into law to provide a much-needed boost to the economy in the wake of the COVID-19 coronavirus pandemic. Named the CARES Act, this law, among other things, created the Paycheck Protection Program (“Program”) to provide cash infusion through loans to small businesses, sole proprietors, and independent contractors. The Program provides eligible small businesses with loans administered through the Small Business Administration ( “SBA”) to support certain continued business operations. Below are some commonly asked questions you may find useful to help evaluate whether a Program loan is right for your business. What businesses qualify for the Program? Although SBA loans are typically limited to “small business concerns” that, among other requirements, do not exceed the small business size standard associated with their respective North American Industry Classification System (“NAICS”) designation, the Program expands coverage to any business concern, non- profit organization, veteran organization, or tribal business employing not more than 500 people. Self- employed individuals are also eligible to receive a Program loan. Franchises that have more than one location are eligible as well, but must have fewer than 500 employees at each site. An applicant must have been operational on or before February 15, 2020, with employees for which it was making payroll or otherwise was paying independent contractors. What is the maximum loan amount that a business can receive through the Program? The loan amounts are awarded pursuant to a mathematical formula based on the applicant’s payroll (subject to certain adjustments and limitations), and in all cases, limited to $10,000,000. Program loans will have an interest rate not exceeding 4% and a maximum term of 10 years. The loans will be nonrecourse with no required collateral or personal guaranty. The applicants do not need to show they first sought credit through other means. Most importantly, a portion of these loans may be forgiven if certain conditions are met, as discussed below. What can the Program loan funds be used for? Program loans are permitted to cover payroll costs including salary, commission, or similar compensation, but not salary costs in excess of $100,000 annualized on a per employee basis. Loan proceeds may also be used to pay costs to continue health care benefits during periods of paid sick, medical, or family leave, and payments of interest on any mortgage obligation (but not prepayments or payments of principal), rent, and utilities. How are loans made under the Program different from traditional SBA 7(a) loans? Unlike traditional SBA 7(a) loans, no personal guarantee will be required to receive funds and no collateral needs to be pledged. Similarly, the CARES Act waives the requirement that a business show that it cannot obtain credit elsewhere. In lieu of these requirements, borrowers must certify that the loan is necessary due to the uncertainty of current economic conditions; that they will use the funds to retain workers, maintain payroll, or make lease, mortgage, and utility payments; and that they are not receiving duplicative funds for the same uses. Payments of principal, interest, and fees will be deferred for at least 6 months, but not more than 1 year. Interest rates are capped at 4%. The SBA will not collect any yearly or guarantee fees for the loan, and all prepayment penalties are waived. The SBA has no recourse against any borrower or any owner of borrower for non-payment of the loan, except where the borrower has used the loan proceeds for a non-allowable purpose. A business must seek a Program loan from lenders who must be either SBA Qualified Lenders — those already deemed qualified under section 7(a) — or additional lenders — those insured depository institutions, insured credit unions, and other lenders that the SBA and Secretary of the Treasury determine are qualified SBA is also waiving its credit-elsewhere test, meaning that small businesses with credit available elsewhere are eligible for loans under the Paycheck Protection Program. Loan applications must be submitted before June 30, 2020. What due diligence must Program lenders conduct prior to extending loans under the Program? Prior to the extension of any loan under the Program, the Program lender must evaluate the eligibility of each borrower that applies for a covered loan. Under the Program, a Program lender must consider whether the applicant: • Was in operation on February 15, 2020; and • Had employees for whom the borrower paid salaries, including commissions, cash tips or equivalent , and payroll taxes, or paid independent contractors, as reported on Form 1099-MISC. How does a business apply for a loan under the Program? We expect additional guidance from the SBA regarding how to apply for Program loans, including additional resources on the SBA website about how to find a qualified lender. Borrowers who have outstanding SBA loans may also want to contact their existing lenders to inquire about applying for loans under the Program. Is relief available for businesses with pre-existing SBA loans? Businesses that received SBA Economic Injury Disaster Loans (“EIDLs”) on or after January 31, 2020, may refinance those EIDLs under the Program. Keep in mind that a business cannot have an EIDL and a Program loan for the same purpose. The SBA EIDL program is separate and distinct from the Paycheck Protection Program, and more information on it can be found here. Further, the SBA will pay the principal, interest, and associated fees on certain pre-existing SBA loans for 6 months. Are loans made under the Program eligible for forgiveness? Borrowers may be eligible for a partial loan forgiveness, based on amounts expended for the permissible purposes set forth above. Amounts forgiven will be based on the amount the borrower spends on the permitted uses, starting on the date the loan is granted and extending 8 weeks therefrom. However, amounts eligible for forgiveness will be reduced based on a formula that examines the applicant’s reduction in both the applicant’s number of employees and the applicant’s workforce salary. How much of a loan is guaranteed under the Program? For any amount of a Program loan that is not forgiven, the SBA will continue to guarantee such amount for up to 10 years from the date the borrower applied for forgiveness. ------------------- The attorneys at McCarthy Lebit remain available to discuss any questions or needs that your business may have. We are continuing to stay apprised of COVID-19 developments and will continue to update our materials accordingly. {01425506 - 1} Tax Benefits of the CARES Act Coronavirus Economic Stimulus Bill After significant deliberation and debate, the CARES Act has been signed into law by President Trump It constitutes the United States’ largest stimulus package ever, in an amount greater than $2 trillion , aimed at boosting the economy due to the national Coronavirus quarantine. The CARES Act will impact individuals and businesses by its tax - saving s provisions. Individual Relief and Retirement Fund Changes Under the CARES Act, individuals will be granted $1,200 in relief ($2,400 for those filing jointly) with an additional amount of $500 for each qualifying child. This relief, however, phases out for individuals with an adjusted gross income ( AGI ) greater than $75,000 ($15 0,000 for those filing jointly). Th is relief phases out at $5 dollars for each $100 increment of income above the applicable AGI threshold so it will be completely phased out for individuals with an AGI greater than $99,000 ($198,000 for joint returns) Further, this relief will not apply to nonresident aliens, estates, trusts, or individuals claimed as a dependent on another’s income tax return. These amounts should be available for immediate distribution with the government working to issue checks or m ake direct deposits, as promptly as possible. Generally, the payouts will be based on 2018 income tax returns filed. The CARES Act also impacts the retirement fund rules. Early retirement funds withdrawal typically incurs a 10% penalty, but that penal ty will be waived under the CARES Act (for distributions up to $100,000) , thereby allowing individuals access to cash flow in direct response to Coronavirus - related need. Taxpayer s taking advantage of this provision can elect to incur the {01425506 - 1} associated income tax burden ratably over a three (3) year period or may ratably repay the funds over the same period (essentially making the early distribution equivalent to a loan). Repayment of the withdrawal will avoid the inco me tax consequences associated with the distribution. Also, required minimum distribution s for 2020 will be temporarily waived under the CARES Act , allowing taxpayers to leave money in their retirement accounts, should they so choose Charitable Givi ng To encourage charitable giving, the CARES Act will allow i ndividuals to subtract up to $300 of charitable cash contributions from the ir 2020 AGI calculation, if the y do not itemize. For those that itemize , certain cash contributions to charity by individuals in 2020 will have increased deductibility because the 50% AGI limitation has been temporarily suspended. The 10% taxable income limitation on corporate charitable cash gifts will be increased to 25% Student Loan Assistance Nontaxable employer provided education assistance will be expanded to include payment of principal and interest on an employee ’ s qualified education loan if such payment is made prior to January 1, 2021. The payment can be made by the employer to either to the employee or the lender and such payments will not constitute income to the employee. These payments remain subject to th e $5,250 annual limitation of educational assistance that an employee may receive tax - free. Employee Retention The CARES A ct make s adjustment s to payroll tax by giving impacted employers a credit for each quarter equal to 50% of each employee’s qualified wages for the quarter. The amount of employee wages is limited to $10,000 (resulting in a maximum credit of $5,000 after application {01425506 - 1} of the 50% limitation) and the credit is fu rther limited to the amount of taxes owed as reduced by other applicable credits, including those available under the Families First Coronavirus Response Act , so there will not be a “double - dip” . Employers eligible for this credit are those who were in bu siness during 2020 and either suffered suspended business operations due to government order as a result of the virus outbreak or suffered significant declines in gross receipts. Business Assistance T he CARES Act is relaxing the restrictions on the use of net operating losses imposed under the Tax Cuts and Jobs Act of 2017 (“ TCJA ”). Net operating losses from 2018, 2019, or 2020 will now be eligible for a five (5) year carry back. Also , the net operating losses can be fully used to offset income rat her than being subject to limitation Under the TCJA, the business interest expense deduction was limited to 30% of adjusted taxable income. The CARES Act increases the deduction limit ation to 50% . Also, the taxpayer will may elect to base the limitat ion calculation on 2019 adjusted taxable income instead of the ir 2020 income number. Due to the Coronavirus impact on the economy, most businesses will have a stronger 2019 income, and with the CARES Act election, will therefore be able to increase the bu siness interest expense deduction’s impact. The TCJA also imposed certain “excess business loss” limitations on noncorporate (e.g., passthrough) taxpayers, which has now been held in abeyance until the 2021 tax year. Eligible businesses are now per mitted to take an immediate deduction (rather than a 39 - year depreciation deduction) for building improvement costs. Business making facility improvements should consult with their tax advisor. Coronavirus Business Guidance Legislative responses to the economic have been fast and complex. Please contact your professional advisors to discuss the CARES Act impact on your personal taxes and on your {01425506 - 1} business. Relief is available and we are here to help maximize the opportunitie s for capturing the economic aid available. Our tax attorneys and business advisors remain resolute in protecting our clients during this trying time. CARES Act Expands the SBA EIDL Program By Adam Glassman Attorney at McCarthy, Lebit, Crystal & Liffman Last week, Congress passed the CARES Act in an effort to help stimulate the economy due to the devastating effects of COVID-19. Most coverage of the CARES Act has focused on the Paycheck Protection Program that offers forgivable loans to small businesses through the Small Business Administration (“SBA”), however, the Act also includes some notable changes to the existing SBA Economic Injury Disaster Loan (“EIDL”) program. The EIDL program has traditionally been used by the SBA to provide small businesses with low-interest loans in the aftermath of a “declared disaster”. Because COVID-19 is now recognized as a “declared disaster”, the CARES Act changes to the EIDL program are worth highlighting for small businesses that want to explore all the available COVID-19 loan assistance options. Expanded Eligibility In addition to small business concerns, small agricultural cooperatives, and private non-profit organizations, the following entities are now eligible to receive an EIDL through December 31, 2020: A business with not more than 500 employees; Any individual who operates under a sole proprietorship, with or without employees, or as an independent contractor; A cooperative with not more than 500 employees; An Employee Stock Ownership Plan (“ESOP”) with not more than 500 employees; or A tribal small business concern with not more than 500 employees. Rules Waiver To further accommodate the many businesses affected by COVID-19, the SBA relaxed some of its EIDL specific requirements. Among the requirements waived pursuant to the CARES Act is the requirement that an applicant must have been in business for 1-year preceding the COVID-19 “disaster”, except that no waiver may be made for a business that was not in operation on January 31, 2020. Not only that, but applicants are no longer required to demonstrate the inability to obtain credit elsewhere, and the SBA may approve an applicant based solely on its credit score. Loan Advances An eligible entity may request an advance of not more than $10,000 when applying for an EIDL. An applicant that requests such an advance must self-certify under penalty of perjury that they are in fact an eligible entity. Advances may be used to address any allowable purpose for an EIDL, including, maintaining payroll, making rent or mortgage payments, and repaying obligations that cannot be met due to revenue losses, among others. Most importantly, there is no requirement that an applicant repay any amount of an advance, even if they are subsequently denied an EIDL. However, if an applicant receives an EIDL advance, and is later approved for the SBA Paycheck Protection Program, the advance amount will be reduced from loan forgiveness amount under the Paycheck Protection Program. ------------------- The attorneys at McCarthy Lebit remain available to discuss any questions or needs that your business may have. We are continuing to stay apprised of COVID-19 developments and will continue to update our materials accordingly. {01427353 - 1} New SBA Guidance for the Paycheck Protection Program By Adam Glassman Attorney at the Cleveland, OH - based law firm, McCarthy, Lebit, Crystal & Liffman The Small Business Administration (SBA) releas ed an interim final rule for the Paycheck Protection Program (the “Program”) Information about the Program w a s released quickly and le d to rampant speculation and self - interpretation The new SBA guidance attempts to resolve some of the ambiguity and better defines how the Pro gram loans will be administered Application Period and Requirements The application window for Program loans opened Friday, A pril 3 for small businesses and sole proprietors, but many lenders are delaying the acceptance of applications as they seek additional guidance and understanding for administering the Program. I ndependent contractors must wait until April 10 to apply , pursuant to the new guidance In all cases, l oans will be available until June 30 unless the $349 billion allocated to th e Program is exhausted before that point. The new guidance has further clarified that certain businesses may not be eligible for a Program loan, including any business that has obtained a direct or guaranteed loan from the SBA ( or any other Federal agency ), and is currently delinquent or has defaulted within the last seven years The application requires certain representations and certifications from the borrower, which includes an acknowledge ment that submitted tax documents are identical to those submitted to the Internal Revenue Service. Businesses must also acknowledge that they will make a good faith effort to purchase American - made equipment and products to the extent feasible. This is particularly important to keep in mind for busine sses that currently rely on foreign suppliers. {01427353 - 1} Low Interest Rate and Maturity Period One of the more notable details of the new SBA guidance is that all loans will be subject to a 1% interest rate and will mature over a two - year period. This is a departure from previous guidance issued by the SBA that suggested the interest rate would be 0.5%. Although the Program , by law, allows for a maximum interest rate of 4% and a 10 - year maturity period, the SBA and Secretary of the Treasury , who have been de legated authority to govern the loan program within the confines of the law, determined that the temporary nature of the Program and current economic climate warranted a 1% interest rate and shortened maturity period. Interest will begin to accrue when a loan originate s , however, it is clear now that businesses may defer interest payments for up to six months. Treatment of Independent Contractors and Federal Taxes For businesses that make use of independent contractors, those contractors cannot be counted as employees when calculating the business ’ s loan amount. Similarly, independent contractors will not be considered for loan forgiveness purposes. As noted above, independent contractors may apply for a Program loan on their own beginning April 10. With respect to employer withheld federal employment taxes, including FICA, those are expressly excluded from the definition of payroll costs and should not be factored in when calculating loan amounts. Use of Loan Proceeds and Loan Forgiveness Another key point that was clarified through the new guidance is that at least 75% of a business’s loan proceeds must be allocated to payroll costs to be eligible for loan forgiveness. Thus, not more than 25% of a Program loan can be used for non - payroll costs such as rent, utilities or other costs This ensures that the pu rpose of the Program, to keep American workers paid and employed, is uniformly maintained. S trict adherence to these percentages will be considered when the lender calculates the forgivable amount of a Program loan. Businesses should note that the principa l amount of a Program loan, including accrued interest, is eligible for forgiveness. It is anticipated that further guidance regarding loan forgiveness will be disseminated soon. {01427353 - 1} ------------- The attorneys at McCarthy Lebit remain available to discuss any questions or needs that your business may have. We are continuing to stay apprised of COVID - 19 developments and will continue to u pdate our materials accordingly.