April 6, 2020

This alert focuses on the growing number of filing and tax payment deadlines postponed as a result of the COVID-19 outbreaks.

The Department of the Treasury and Internal Revenue Service recently issued Notice 2020-18 (the “Notice”), which provides relief to certain taxpayers by postponing the due date for certain Federal income tax return filings and payments from April 15, 2020 to July 15, 2020. Notice 2020-18 supersedes the relief provided in earlier Notice 2020-17. The IRS has also provided guidance in the form of Frequently Asked Questions (FAQs) with respect to the Notice as well as other issues and expects to update the FAQs on an ongoing basis. Accordingly, taxpayers should consult the IRS website for the latest guidance.

Eligibility and Application

Federal rules – The new July 15, 2020, filing and payment deadline applies to individuals, trusts, estates, partnerships, associations, companies, and corporations that have a Federal income tax return or payment otherwise due April 15, 2020, including a payment of self-employment tax and any payment otherwise due in order to extend the 2019 tax return. This is accomplished by an automatic postponement of the April 15, 2020 deadline to July 15, 2020. The taxpayer need not be sick, quarantined or otherwise affected by the COVID-19 pandemic to qualify for this relief.

The Notice confirms that (i) no filing of an extension request is required, (ii) there is no limit on the dollar amount of any payment that may be postponed, and (iii) the IRS will not impose any interest or penalty for a failure to file or pay, so long as the return is filed and taxes are paid by July 15, 2020. Taxpayers may be able to request an additional extension of the time to file, but not the time for payment.

Quarterly Estimates. The IRS has also now confirmed that quarterly estimates for the first quarter of 2020 have been postponed to July 15, 2020, although second quarter estimates for 2020 are currently still due as of June 15, 2020. The Notice and the FAQs do not address how the second quarter estimates for 2020 – which typically would be reduced by the first quarterly estimates already paid – should be calculated. In other words, if the first quarterly estimates have not already been paid by June 15, 2020 when the second quarterly estimates are due, without additional relief or clarification from the IRS, the taxpayer would conceivably be required to pay the aggregate of the first and second quarterly estimates on June 15, 2020 (notwithstanding the July 15, 2020 deadline for the first quarterly estimates).

State rules – Taxpayers are cautioned to confirm deadlines for state tax returns and estimates. States may require action by their legislatures or state tax agencies to ensure conformity.

IRA, HSA, MSA, and Keogh Contribution Relief

The IRS has explicitly stated that the following deadlines are also automatically postponed to July 15, 2020:

• Deadline for making contributions to individual retirement arrangements (IRAs), health savings accounts (HSAs), and Archer Medical Savings Accounts (MSAs) with respect to 2019.
• Payment of any 10% early withdrawal penalty due with respect to distributions from various forms of retirement plans and IRAs.
• Deadline for making 2019 employer contributions (including Keogh plan contributions) for which the deadline would otherwise be April 15, 2020.

Note that any distribution required for exceeding the Section 401(k) limit of $19,000 for 2019 must still be received by April 15, 2020 in order to avoid a double tax.

Limitations.
The Notice makes clear that the postponement of the April 15, 2020 deadline only applies to Federal income tax returns and payments otherwise due as of April 15, 2020. It does not, for example, postpone until July 15, 2020 a return that was on extension through April 15, 2020.

With the exception of gift returns and payments discussed below, the postponement only applies to Federal income tax returns and payments and not to other types of Federal tax filing and payments (such as payroll tax filing, excise tax filings, and information returns). April 15, 2020 also remains the date by which an individual must file a refund request with respect to the 2016 tax year.

Gift and Generation-Skipping Transfer Taxes

In Notice 2020-20, the IRS extended the filing and payment dates for Federal gift and generation-skipping transfer tax returns and payments from April 15, 2020 to July 15, 2020. Similar to the income tax extension, this extension is automatic and does not require the filing of an extension request. An extension request is required to extend the filing deadline (but not the payment deadline) from July 15, 2020 to October 15, 2020. However, the normal filing and payment due dates for estate taxes continue to apply.

Relief and Tax Forms at a Glance

The following tables set forth the forms with respect to which filing relief is and is not available as of the date of this Alert (April 6, 2020).*Note that deadlines for filing various Federal information returns (such as the Form 990) have not been postponed.

*Note that deadlines for filing various Federal information returns (such as the Form 990) have not been postponed.

Important Note:    An Eligible Employer may not receive the Employee Retention Credit if the Eligible Employer receives a Small Business Interruption Loan under the Paycheck Protection Program that is authorized under the CARES Act (“Paycheck Protection Loan”). An Eligible Employer that receives a Paycheck Protection Loan should not claim Employee Retention Credits.

 April 1, 2020

The IRS on Tuesday, March 31, 2020, issued a new form and instructions for employers to use to obtain advance payments of three tax credits that were created to help businesses cope with the coronavirus pandemic. Employers may file new Form 7200, Advance Payment of Employer Credits Due to COVID-19, to obtain advances of employment taxes that are refundable as a result of the new tax credits: the employee retention credit, the qualified sick leave credit, and the qualified family leave wages credit. The qualified sick leave credit and the qualified family leave wages credit were enacted by the Families First Coronavirus Response Act, P.L. 116-127 (“FFCRA”). The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, P.L. 116-136, created the employee retention credit and provided for advance repayment of the first two credits. The IRS also issued guidance on the employee retention credit.

Eligible credits

Qualified family leave credit: The FFCRA requires employers with fewer than 500 employees to provide public health emergency leave under the Family and Medical Leave Act, P.L. 103-3, when an employee is unable to work or telework due to a need for leave to care for a son or daughter under age 18 because the school or place of care has been closed, or the child care provider is unavailable, due to a public health emergency related to COVID-19. (Employers with fewer than 50 employees can be exempted from the requirement.) Subject to certain limitations, an employer receives a payroll tax credit equal to 100% of the qualified family leave wages paid by the employer. Self-employed individuals can get the credit as well but cannot use Form 7200 to obtain it.

Qualified paid sick leave credit: FFCRA also requires employers with fewer than 500 employees to provide up to 80 hours of paid sick time through the end of this year if an employee is unable to work due to being quarantined or self-quarantined or having COVID-19 or because the employee is caring for someone who is quarantined or self-quarantined or has COVID-19 or if the employee is caring for children whose school has been closed because of COVID-19 precautions. (Employers with fewer than 50 employees can be exempted from the requirement.) Subject to certain limitations, an employer can receive a payroll tax credit equal to 100% of the qualified sick leave wages paid by the employer. Self-employed individuals are also permitted to receive this credit.

Employee retention credit: The employee retention credit is available for employers that close or have much-reduced gross receipts due to the coronavirus pandemic. The credit is designed to encourage businesses to keep employees on their payroll by providing 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. (For more, see “Guidance on Employee Retention Credit,” below.)

Filing Form 7200

According to the IRS, employers can file the form for advance credits anticipated for a quarter at any time before the end of the month following the quarter in which the employer paid the qualified wages. Employers are permitted to file Form 7200 several times during each quarter. Employers should not file Form 7200 after they file Form 941, Employer’s Quarterly Federal Tax Return, for the fourth quarter of 2020, or file Form 943, Employer’s Annual Federal Tax Return for Agricultural Employees, Form 944, Employer’s Annual Federal Tax Return, or Form CT-1, Employer’s Annual Railroad Retirement Tax Return, for 2020 and should not file the form to request advance credits for any anticipated credit for which the employer has already reduced its employment tax deposits.

Employers file Form 7200 by faxing the completed form to 855-248-0552.

Guidance on employee retention credit

The IRS also issued its first informal guidance on the employee retention credit, which was just enacted last week (IR-2020-62).

The credit is available to all employers regardless of size, including tax-exempt organizations, but not to state and local governments and their instrumentalities and small businesses that take small business loans.

Qualifying employers must fall into one of two categories:

• The employer’s business is fully or partially suspended by government order due to COVID-19 during the calendar quarter; or
• The employer’s gross receipts are below 50% of the comparable quarter in 2019. Once the employer’s gross receipts go above 80% of a comparable quarter in 2019, the employer no longer qualifies after the end of that quarter.

These measures are calculated each calendar quarter.

The amount of the credit is 50% of qualifying wages paid up to $10,000 in total. Wages paid after March 12, 2020, and before Jan. 1, 2021, are eligible for the credit. Wages also include a portion of the cost of employer-provided health care.

Qualifying wages are based on the average number of a business’s employees in 2019. However, for purposes of the credit, eligible wages do not include wages counted for purposes of the paid sick leave and paid family leave payroll tax credits. Also, if an employer receives a covered paycheck protection program loan under Section 1102 of the CARES Act, the employer is not eligible to claim an employee retention credit.

Employers with fewer than 100 employees: 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 or not. If the employees worked full time and were paid for full-time work, the employer still receives the credit.

Employers with more than 100 employees: 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 exceed the credit, the employer may receive an advance payment from the IRS by submitting Form 7200.

IRS issues FAQs on CARES Act employee retention credit

IRS website – FAQs: Employee Retention Credit under the CARES Act

On its website, IRS has published frequently asked questions (FAQs) on the employee retention credit that is contained in the recently-enacted CARES Act. The FAQs include several examples showing the application of the credit rules.

Background. CARES provides a refundable payroll tax credit for 50% of wages paid by Eligible Employers to certain employees during the COVID-19 crisis. § 2301(a).[1] The credit is available to employers, including non-profits, whose operations have been fully or partially suspended as a result of a government order limiting commerce, travel, or group meetings. The credit is also provided to employers who have experienced a greater than 50% reduction in quarterly receipts, measured on a year-over-year basis. § 2301(c)(2). The maximum amount of qualified wages taken into account with respect to each employee for all calendar quarters is $10,000, so that the maximum credit for an Eligible Employer for qualified wages paid to any employee is $5,000. §§ 2301(c)(3)(C);  2301(b)(1).

IRS-IssuedFAQs.  IRS has now issued some FAQs on the credit.

Eligible Employers.  Governmental employers are not Eligible Employers for the Employee Retention Credit. Also, self-employed individuals are not eligible for this credit for their self-employment services or earnings.

When is the operation of a trade or business partially suspended for the purposes of the credit?  The operation of a trade or business may be partially suspended if an appropriate governmental authority imposes restrictions upon the business operations by limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19 such that the operation can still continue to operate but not at its normal capacity.

Example: A state governor issues an executive order closing all restaurants, bars, and similar establishments in the state in order to reduce the spread of COVID-19. However, the executive order allows those establishments to continue food or beverage sales to the public on a carry-out, drive-through, or delivery basis. This results in a partial suspension of the operations of the trade or business due to an order of an appropriate governmental authority with respect to any restaurants, bars, and similar establishments in the state that provided full sit-down service, a dining room, or other on-site eating facilities for customers prior to the executive order.

The 50% reduction in quarterly receipts rule.  Under the 50% reduction in quarterly receipts rule, the period during which the credit is available ends with the first calendar quarter that follows the first calendar quarter for which the employer’s 2020 gross receipts for the quarter are greater than 80% of its gross receipts for the same calendar quarter during 2019. (Act Sec. 2301(c)(2)(B))

Example: In the first, second and third calendar quarters of 2020, Employer’s gross receipts were $100,000, $190,000, and $230,000, respectively. In 2019, first, second and third quarter gross receipts were $210,000, $230,000, and $250,000, respectively. Thus, Employer’s 2020 first, second, and third quarter gross receipts were approximately 48%, 83%, and 92% of its 2019 first, second, and third quarter gross receipts, respectively. Accordingly, the employer had a significant decline in gross receipts commencing on the first day of the first calendar quarter of 2020 (the calendar quarter in which gross receipts were less than 50% of the same quarter in 2019) and ending on the first day of the third calendar quarter of 2020 (the quarter following the quarter for which the gross receipts were more than 80% of the same quarter in 2019). Thus, the employer is entitled to a retention credit with respect to the first and second calendar quarters.

Is an employer required to pay qualified wages to its employees under the CARES Act? No. CARES does not require employers to pay qualified wages.

Can Eligible Employers claim the credit for qualified wages paid in March 2020?  Eligible Employers may claim the Employee Retention Credit for qualified wages that they pay after March 12, 2020, and before January 1, 2021. Therefore, an Eligible Employer may be able to claim the credit for qualified wages paid as early as March 13, 2020.

Against what employment taxes does the credit apply?  The credit is allowed against the employer portion of social security taxes under IRS Code § 3111(a), and the portion of taxes imposed on railroad employers under section 3221(a) of the Railroad Retirement Tax Act (RRTA) that corresponds to the social security taxes under IRS Code § 3111(a).

Refundability of the credit. The Eligible Employer may get a refund if the amount of the credit is more than certain federal employment taxes the Eligible Employer owes. That is, if for any calendar quarter the amount of the credit the Eligible Employer is entitled to exceeds the employer portion of the social security tax on all wages (or on all compensation for employers subject to RRTA) paid to all employees, then the excess is treated as an overpayment and refunded to the employer under IRS Code § 6402(a) and IRS Code § 6413(a). Consistent with its treatment as an overpayment, the excess will be applied to offset any remaining tax liability on the employment tax return, and the amount of any remaining excess will be reflected as an overpayment on the return. Like other overpayments of federal taxes, the overpayment will be subject to offset under IRS Code § 6402(a) prior to being refunded to the employer.

Can an Eligible Employer paying qualified wages fund its payments of qualified wages before receiving the credits by reducing its federal employment tax deposits?  Yes. An Eligible Employer may fund the qualified wages by accessing federal employment taxes, including those that the Eligible Employer already withheld, that are set aside for deposit with the IRS, for other wage payments made during the same quarter as the qualified wages.

That is, an Eligible Employer that pays qualified wages to its employees in a calendar quarter before it is required to deposit federal employment taxes with the IRS for that quarter may reduce the amount of federal employment taxes it deposits for that quarter by half of the amount of the qualified wages paid in that calendar quarter. The Eligible Employer must account for the reduction in deposits on the Form 941, Employer’s Quarterly Federal Tax Return, for the quarter.

Example: Eligible Employer paid $10,000 in qualified wages (including qualified health plan expenses) and is therefore entitled to a $5,000 credit, and is otherwise required to deposit $8,000 in federal employment taxes, including taxes withheld from all of its employees, for wage payments made during the same quarter as the $10,000 in qualified wages. Eligible Employer has no paid sick or family leave credits under the FFCRA. Eligible Employer may keep up to $5,000 of the $8,000 of taxes the Eligible Employer was going to deposit, and it will not owe a penalty for keeping the $5,000. The Eligible Employer is required to deposit only the remaining $3,000 on its required deposit date. The Eligible Employer will later account for the $5,000 it retained when it files Form 941, Employer’s Quarterly Federal Tax Return, for the quarter.

May an Eligible Employer reduce its federal employment tax deposit by the qualified wages that it paid, without incurring a failure-to-deposit penalty? Yes. An Eligible Employer will not be subject to a penalty under Code Sec. 6656 for failing to deposit federal employment taxes relating to qualified wages in a calendar quarter if:

• Eligible Employer paid qualified wages to its employees in the calendar quarter before the required deposit,
• Amount of federal employment taxes that the Eligible Employer does not timely deposit, reduced by any amount of federal employment taxes not deposited in anticipation of the paid sick or family leave credits claimed under the FFCRA, is less than or equal to the amount of the Eligible Employer’s anticipated Employee Retention Credit for the qualified wages for the calendar quarter as of the time of the required deposit, and
• Eligible Employer did not seek payment of an advance credit by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19, with respect to any portion of the anticipated credits it relied upon to reduce its deposits.

For more information, see Relief from failure to make employment tax deposits due to coronavirus credits.

How can an Eligible Employer that is paying qualified wages fund the payment of these wages if the Eligible Employer does not have sufficient federal employment taxes set aside for deposit to cover those payments?

Can the employer get an advance of the credits?  Because quarterly returns are not filed until after qualified wages are paid, some Eligible Employers may not have sufficient federal employment taxes set aside for deposit to the IRS to fund their qualified wages. Accordingly, the IRS has established a procedure for obtaining an advance of the refundable credits.

The Eligible Employer should first reduce its remaining federal employment tax deposits for wages paid in the same calendar quarter by the maximum allowable amount. If the anticipated credit for the qualified wages exceeds the remaining federal employment tax deposits for that quarter, the Eligible Employer can file a Form 7200, Advance Payment of Employer Credits Due to COVID-19, to claim an advance refund for the full amount of the anticipated credit for which it did not have sufficient federal employment tax deposits.

If an Eligible Employer fully reduces its required deposits of federal employment taxes otherwise due on wages paid in the same calendar quarter to its employees in anticipation of receiving the credits, and it has not paid qualified wages in excess of this amount, it should not file the Form 7200. If it files the Form 7200, it will need to reconcile this advance credit and its deposits with the qualified wages on Form 941 (or other applicable federal employment tax return such as Form 944 or Form CT-1), and it may have an underpayment of federal employment taxes for the quarter.

Example: Eligible Employer paid $20,000 in qualified wages, and is therefore entitled to a credit of $10,000, and is otherwise required to deposit $8,000 in federal employment taxes, including taxes withheld from all of its employees, on wage payments made during the same calendar quarter. Eligible Employer has no paid sick or family leave credits under the FFCRA. Eligible Employer can keep the entire $8,000 of taxes that Eligible Employer was otherwise required to deposit without penalties as a portion of the credits it is otherwise entitled to claim on the Form 941. Eligible Employer may file a request for an advance credit for the remaining $2,000 by completing Form 7200.

May an Eligible Employer receive both the tax credits for the qualified leave wages under the FFCRA and the Employee Retention Credit under CARES?  Yes, but not for the same wages. The amount of qualified wages for which an Eligible Employer may claim the Employee Retention Credit does not include the amount of qualified sick and family leave wages for which the employer received tax credits under the FFCRA.

May an Eligible Employer receive both the Employee Retention Credit and a Small Business Interruption Loan under the Paycheck Protection Program that is authorized under the CARES Act? No. An Eligible Employer may not receive the Employee Retention Credit if the Eligible Employer receives a Small Business Interruption Loan under the Paycheck Protection Program that is authorized under the CARES Act (“PPP Loan”). An Eligible Employer that receives a PPP Loan should not claim Employee Retention Credits.

[1] All citations under this section are to the CARES Act unless otherwise indicated.

On March 20, 2020, the Internal Revenue Service released Notice 2020-18, its second round of formal guidance – postponing both the filing of federal income tax returns and the submission of federal income tax payments to July 15, 2020, which would have been due April 15, 2020. Notice 2020-18 is available here.

On March 24, 2020, the IRS posted frequently asked questions to provide additional clarification and guidance regarding the application of its relief guidance. The IRS’s FAQs can be found here.  Below is a summary of the FAQs.

What the IRS’s relief in Notice 2020-18 covers:

• Any person with a federal income tax return or payment due April 15, 2020, including individuals, trusts, estates, corporations, or any type of unincorporated business entity
• Fiscal-year filers with returns and payments due April 15, 2020
• First quarter estimated federal income tax payments
• IRC Sec. 965(h) transition tax payments due April 15, 2020
• Payments under IRC Sec. 59A (Basis Erosion and Anti-Abuse Tax, or BEAT)

How to proceed with filing or paying tax under Notice 2020-18?

• No additional action is required for a taxpayer to receive the postponement from April 15, 2020, to July 15, 2020 for filing or making payments.
• If an extension to file by October 15, 2020, is sought, an automatic extension (i.e., Form 4868 or 7004) must be filed on or before July 15, 2020
• Tax year 2019 liabilities must be properly estimated
• Any extended returns must then be filed on or before October 15, 2020

What is not covered by Notice 2020-18?

• Any federal income tax returns or income tax payments due on dates other than April 15, 2020
• Employment, excise, estate, and gift taxes (estate income taxes are included)
• Information returns
• Second quarter estimated tax payments; they continue to be due June 15, 2020
• 2016 amended tax returns
• Forms 4466, Corporation Application for Quick Refund of Overpayment of Estimated Tax
  • For calendar-year taxpayers, Forms 4466 are due April 15, 2020. The IRS reminds taxpayers that they may request refunds by filing their income tax return as well.
• Estimated tax installment payments required to have been made for 2019

Additional issues:

• If 2019 tax returns have been filed but taxes remain owed, they need to be paid in full by July 15, 2020, to avoid penalties and interest
• Penalties and interest will begin to be assessed as of July 16, 2020, on any unpaid amount due
• If a payment is already scheduled to be debited on April 15, 2020, it will still be debited April 15, 2020.  Payments may be canceled two days prior to scheduled payment date.
  • If it is needed prior, the payment can be canceled through IRS Direct Pay or EFTPS
  • If payment has been scheduled as part of filing the tax return, it can be revoked/canceled by calling U.S. Treasury Financial Agent at 888-353-4537
  • If payment is schedule by credit or debit card, contact the card processor to cancel payment

The IRS is expected to continue to update its FAQs as issues are raised.

The SBA allows the Administrator to provide loans directly or in cooperation with the private sector through agreements to participate on an immediate or deferred (guaranteed) basis. Lenders authorized to make loans under the SBA’s current Business Loan Program are automatically approved to make and approve loans under this new program, and they may opt to participate in the program under the terms and conditions established by the Department of Treasury (Treasury). Additionally, Treasury may extend such authority to additional private sector lenders under criteria established by Treasury (including, for instance, allowing additional lenders to originate loans).

The Administrator may guarantee covered loans under this program on the same terms, conditions, and processes as a loan made under the SBA’s current Business Loan Program. No collateral or personal guarantee is permitted or required to be approved for a loan. The interest rate on loans under the program cannot exceed four percent (4%). There will be no subsidy recoupment fee associated with the loans and no prepayment penalty for any payments made. Additionally, the Administrator has no recourse against any individual, shareholder, member, or partner of an eligible loan recipient for non-payment, unless the individual uses the loan proceeds for unauthorized purposes (see discussion below of permitted uses).

A loan made under the SBA’s Disaster Loan Program on or after January 31, 2020, may be refinanced as part of a covered loan under this new program as soon as these new loans are made available. The CARES Act specifically allows SBA Disaster Loan recipients with economic injury disaster loans made since January 31, 2020 for purposes other than the permitted loan uses under this program to receive assistance under this program.

Unlike prior drafts of the CARES Act, the final version contains a “Sense of the Senate” that the Administrator should issue guidance to lenders and agents to ensure that processing and disbursement of covered loans prioritizes:

• Small business concerns;
• Entities in underserved and rural markets (including veteran communities);
• Small business concerns owned by socially and economically disadvantaged individuals;
• Women; and
• Businesses in operation for less than two years.

ELIGIBLE LOAN RECIPIENTS

In addition to “small business concerns” as currently defined under the SBA, eligible businesses for the new program include any business concern, nonprofit organization, veterans’ organization, or Tribal business if it employs not more than the greater of—

• 500 employees (includes full-time, part-time, and those employed on other bases); or
• If applicable, the size standard in number of employees established by the Administration for the industry in which the entity operates.

There is a special eligibility rule for businesses in the hospitality and dining industries. For businesses with more than one physical location, if it employs 500 or fewer employees per location and is assigned to the “accommodation and food services” sector (Sector 72) under the North American Industry Classification System (NAICS), the business is eligible to receive a loan.

SBA regulations on entity affiliations (under 13 CFR 121.103) are waived for the covered period for business concerns, non-profits, and veterans’ organizations for:

• Businesses in Sector 72 under the NAICS with 500 or fewer employees;
• Franchise businesses with SBA franchisor identifier codes; and
• Any business that receives financial assistance from a company licensed under section 301 of the Small Business Investment Act.

Sole proprietors, independent contractors, and eligible self-employed individuals (as defined in Congress’s last COVID-19 bill, the Families First Coronavirus Response Act (Families First Act)) are eligible for loan recipients, subject to some documentation requirements to substantiate eligibility.

Loan Maximum, Borrower Eligibility Requirements, and Permissible Uses

• The maximum loan amount is the lesser of $10-million OR:2.5 times average total monthly payroll costs incurred in the one-year period before the loan is made (or for seasonal employers the average monthly payroll costs for the 12 weeks beginning on February 15, 2019, or from March 1, 2019 to June 30, 2019);
• PLUS the outstanding amount of a loan made under the SBA’s Disaster Loan Program between January 31, 2020 and the date on which such loan may be refinanced as part of this new program;

OR

(B) Upon request, for businesses that were not in existence during the period from February 15, 2019 to June 30, 2019 –

• 5 times the average total monthly payroll payments from January 1, 2020 to February 29, 2020;
• PLUS the outstanding amount of a loan made under the SBA’s Disaster Loan Program between January 31, 2020 and the date on which such loan may be refinanced as part of this new program;

There are very few borrower requirements to obtain a loan under the new program. Those requirements include a good-faith certification that:

• The loan is needed to continue operations during the COVID-19 emergency;
• Funds will be used to retain workers and maintain payroll or make mortgage, lease, and utility payments;
• The applicant does not have any other application pending under this program for the same purpose; and
• From February 15, 2020 until December 31, 2020, the applicant has not received duplicative amounts under this program.

PERMITTED USE. In addition to uses already allowed under the SBA’s Business Loan Program, businesses may use the loans for:

• Payroll costs:
  • Includes: compensation to employees, such as salary, wage, commissions, cash, etc.; paid leave; severance payments; payment for group health benefits, including insurance premiums; retirement benefits; state and local payroll taxes; and compensation to sole proprietors or independent contractors (including commission-based compensation) up to $100,000 in 1 year, prorated for the covered period;
  • Excludes: individual employee compensation above $100,000 per year, prorated for the covered period; certain federal taxes; compensation to employees whose principal place of residence is outside of the US; and sick and family leave wages for which credit is allowed under the Families First Act;
• Group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;
• Salaries, commissions, or similar compensations;
• Payments of interest on covered mortgage obligations;
• Rent/lease agreement payments;
• Utilities; and
• Interest on any other debt obligations incurred before the covered period.

In evaluating eligibility of borrowers, a lender must consider whether the borrower was operating on February 15, 2020 and had employees or independent contractors for whom the borrower paid.

LOAN FORGIVENESS AND PAYMENT DEFERRAL RELIEF

Regarding loan payment deferral rights, the CARES Act provides that businesses that were operating on February 15, 2020, and have a pending or approved loan application under this program are presumed to qualify for complete payment deferment relief (for principal, interest, and fees) for six months to one year. Lenders are required to provide such relief during the covered period (if secondary market investors decline to approve a lender’s deferral request, the Administration must purchase the loan). The Administrator has 30 days from enactment of the CARES Act to provide guidance to lenders on this process.

The program loans qualify for the CARES Act’s broader loan forgiveness provisions in Section 1106. Specifically, indebtedness is forgiven (and excluded from gross income) in an amount (not to exceed the principal amount of the loan) equal to the following costs incurred and payments made during the covered period:

• Payroll costs;
• Interest payments on mortgages;
• Rent; and
• Utility payments.

Forgiveness amounts will be reduced for any employee cuts or reductions in wages.

The reduction formula for fewer employees is:

1. The maximum available forgiveness under the rules described above multiplied by:
2. Average number of full-time equivalent employees (FTEEs) per month – calculated by the average number of FTEEs for each pay period falling within a month – during the covered period divided by:

Either (at election of the borrower) –

• Average number of FTEEs per month employed from February 15, 2019 to June 30, 2019; or
• Average number of FTEEs per month employed from January 1, 2020 until February 29, 2020;

Or, for seasonal employers –

• Average number of FTEEs per month employed from February 15, 2019 until June 30, 2019.

Note that this formula will be used to reduce forgiveness amounts, but cannot be used to increase them.

Reduction in Wages Calculation. This forgiveness reduction is a straight reduction by the amount of any reduction in total salary or wages of any employee during the covered period that is in excess of 25% of the employee’s salary/wages during the employee’s most recent full quarter of employment before the covered period. “Employee” is limited, for this purpose only, to any employee who did not receive during any single pay period during 2019 a salary or wages at an annualized rate of pay over $100,000.

There is relief from these forgiveness reduction penalties for employers who rehire employees or make up for wage reductions by June 30, 2020. Specifically, in the following circumstances, the forgiveness reduction rules above will not apply to an employer between February 15, 2020 and 30 days following enactment of the CARES Act –

• The employer reduces the number of FTEEs in this period and, not later than June 30, 2020, the employer has eliminated the reduction in FTEEs; or
• There is a salary reduction, as compared to February 15, 2020, during this period for one or more employees and that reduction is eliminated by June 30, 2020 (it is unclear whether this is also intended to be limited to employees who made under $100,000 in 2019).

The CARES Act clarifies that employers with tipped employees (as described in the Fair Labor Standards Act) may receive forgiveness for additional wages paid to those employees. Also, emergency advances received under the expanded SBA Disaster Loan Program discussed below will be excluded from forgiveness amounts.

Within 90 days of determining the ultimate forgiveness amount, the Administrator must remit payment plus interest accrued through the date of payment to the lender. Authorized lenders and secondary market participants (at the discretion of the Administrator) may report expected forgiveness amounts, up to 100% of principal, on program loans or on pools of such loans. The Administrator must purchase the expected forgiveness amounts in such reports within 15 days.

There are some required processes to apply for loan forgiveness. Borrowers seeking forgiveness of amounts must submit to their lender –

• Documentation verifying FTEE on payroll and their pay rates;
• Documentation on covered costs/payments (e.g., documents verifying mortgage, rent, and utility payments);
• Certification from a business representative that the documentation is true and correct and that forgiveness amounts requested were used to retain employees and make other forgiveness-eligible payments; and
• Any other documentation the Administrator may require.

Lenders who rely on documentation and accompanying certifications are held harmless from SBA enforcement actions and penalties relating to the loan forgiveness.

Forgiveness amounts that would otherwise be includible in gross income, for federal income tax purposes, are excluded.

The Administrator has 30 days following enactment of the CARES Act to issue regulations on these forgiveness provisions.

ADDITIONAL PROVISIONS

The CARES Act also:

• Waives certain fees that would otherwise apply under the SBA, as well as the usual requirement that a small business concern be unable to obtain credit elsewhere;
• Provides that loan balances following any forgiveness reductions will continue to be guaranteed by the Administration in accordance with this program;
• Establishes a maximum maturity date for loans under the program from the date the borrower applies for loan forgiveness;
• Stipulates that loans under the program are eligible to be sold in the secondary market consistent with rules under the current SBA Business Loan Program;
• Mandates a zero percent risk-weight of these loans for purposes of banking regulators’ risk-based capital requirements;
• For banks that modify the loans in a troubled debt restructuring related to COVID-19 on or after March 13, 2020, provides temporary relief from FASB’s troubled debt restructuring disclosure requirements;
• For participating lenders, sets forth compensation (based on loan balance at time of disbursement) of:
  • 5% for loans of $350,000 or less;
  • 3% for loans above $350,000 and less than $2 million; and
  • 1% for loans $2 million and above;
• Prohibits agents helping applicants apply for loans under the program from receiving a fee in excess of limits established by the Administrator;
• From February 15, 2020 until June 30, 2020, increases authorized commitments for SBA Business Loans, including those under this new program, to $349 billion (and takes those commitments out of the usual Business Loan Program Account); and
• Increases the loan limit for the SBA’s Express Loan Program to $1 million (from $350,000) with a prospective repeal date of January 1, 2021