The CARES Act (the “Act”), signed into law on March 27, is a wide-sweeping stimulus package, estimated at $2.2 trillion, that provides small businesses and nonprofits almost $350 billion in partially forgivable loans, as well as $500 billion in support for hard-hit industries and a ban on corporate stock buybacks. Perhaps the most important aspect of the Act for employers is the Paycheck Protection Program, a loan program aimed at helping businesses keep their workers employed during the pandemic crisis.
The Act allows small and medium-sized businesses to receive federal loans—a portion of which will be forgivable—to cover payroll expenses, rent payments, mortgage interest, and utility payments.
Who is eligible?
Paycheck Protection Program loans are available for businesses and 501(c)(3) and 501(c)(19) nonprofits with less than 500 employees. Additionally, the Act waives affiliation rules for businesses in the hospitality industry (assigned NAICS Code of 72) and business entities that operate as a franchise (assigned a franchise code by the Small Business Administration). In other words, those entities are also eligible to apply for a loan for each physical location if such location does not employ more than 500 employees
Maximum Loan Amount
The maximum amount of the loan for any eligible recipient is the lesser of either $10,000,000 or 2.5 times the recipient’s average monthly payroll costs based upon the one year period prior to the loan date. For the purposes of this calculation, payroll costs include employee salary, wages, commissions, paid time off, health insurance costs, including premiums, payments for retirement benefits, and any state or local tax assessed on employee compensation. However, the portion of any employee’s compensation in excess of $100,000 is excluded.
Borrowers are permitted to use the loans for payroll costs (which includes salary, wages, commissions, payments for vacation or sick time, payments required for the provision of health care benefits, including premiums, payment of retirement benefits, and state or local tax assessed on employee compensation) as well other business-related expenses, including rent, payments of interest on any mortgage obligation, utilities, and interest on any debt incurred prior to the COVID-19 outbreak. These loans cannot be used for leave payments made following the new Families First Coronavirus Response Act, which has a separate tax credit mechanism.
The Act provides that, subject to certain adjustments, as discussed below, indebtedness will be forgiven, up to the principal amount of the loan, in an amount equal to the sum of the following costs incurred and payments made during the 8-week period commencing on the origination of the loan: (1) payroll costs; (2) any payment of interest on any covered mortgage obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation); (3) any payment on any covered rent obligation; (4) any covered utility payment. Generally, in order to be “covered”, the mortgage obligation, rent obligation, and utility payment must have been in existence prior to February 15, 2020.
The amount of loan forgiveness will be reduced in proportion to the difference in an entity’s average number of fulltime equivalent employees during the 8-week period after origination and its number of fulltime equivalent employees during the period of either February 15, 2019 to June 30, 2019 or January 1, 2020 to February 29, 2020. Non-seasonal employers may choose which of the previously mentioned periods to utilize, while seasonal employers must utilize February 15, 2019 to June 30, 2019.
The amount of loan forgiveness is also reduced by the amount of any reduction in total salary or wages of any employee during the 8-week period after the origination of the loan that is in excess of 25 percent of the total salary or wages of the employee during the most recent full quarter during which the employee was employed. This reduction does not apply to any employee that, during any single pay period during 2019, received wages or salary at an annualize rate of pay in an amount more than $100,000.
Recognizing the hard choices many employers have already made with respect to their workforce, the Act provides for a “cure period”. If an employer has reduced employees or wages between February 15, 2020 and April 26, 2020, then the loan forgiveness adjustments discussed above will be calculated without giving effect to such reductions as long as the reduction is eliminated by June 30, 2020.
Harris Beach PLLC is here to answer any questions regarding the Paycheck Protection Program. In addition, the following resources are available:
- SBA Guide Resource for Borrowers
- Senate Small Business Committee
- NADCO Section-by-Section Resource
- US Senate Committee on Small Business & Entrepreneurship
This alert does not purport to be a substitute for advice of counsel on specific matters.
Harris Beach has offices throughout New York state, including Albany, Buffalo, Ithaca, Long Island, New York City, Rochester, Saratoga Springs, Syracuse and White Plains, as well as New Haven, Connecticut and Newark, New Jersey.