Employee Retention Credit

April 10, 2020

In an effort to incentivize businesses to retain employees during the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), signed into law by President Trump on March 27, 2020, offers incentives to businesses in the form of fully refundable tax credits.

The Internal Revenue Service has provided guidance on the new credits through Notice 2020-22 (the Notice) and through Frequently Asked Questions (FAQs). In this client alert, we have synthesized in a question-and-answer format information from the CARES Act, the Notice and the FAQs.

What are the eligibility requirements for employee retention credits?

To be eligible to receive employee retention credits, employers must satisfy the following requirements:

• Cannot have obtained a Paycheck Protection Program (PPP) “forgivable” loan;
• Must be carrying on a trade or business during 2020; and

Either:

• Operations of the employer are fully or partially suspended as a result of a governmental order that limits commerce, travel or group meetings (for commercial, social, religious or other purposes) in any calendar quarter as a result of the pandemic ; or
• The employer experiences a “significant decline in gross receipts” during the calendar quarter.

Nonprofit organizations are eligible for this relief and are also not subject to the significant decline in gross receipts requirement.

Neither governmental employers nor self-employed individuals, with respect to their own self-employment income, are eligible for employee retention credits.

How is a “significant decline in gross receipts” measured?

To meet this standard, gross receipts in the first calendar quarter of 2020 must have decline by at least 50% of the gross receipts for that same calendar quarter of 2019. The business is no longer considered to have a significant decline in gross receipts after a 2020 calendar quarter in which gross receipts are in excess of 80% of the gross receipts for that same calendar quarter in 2019.

How are employee retention credits claimed?

Employers may claim employee retention credits for an applicable quarter by not depositing the employer portion of Social Security taxes (6.2% of wages up to the 2020 Taxable Wage Base of $137,700) in an amount equal to 50% of an employee’s “qualified wages.” (Note: employers must still deposit the employer share of Medicare taxes, and federal income and Social Security and Medicare taxes withheld from the employee.)

The maximum amount of qualified wages that an employer can take into account for all quarters is $10,000 per employee. As a result, the maximum credit available to an employer with respect to any individual employee is the lesser of $5,000 or 50% of the employee’s qualified wages.

If the amount of employee retention credits that an employer is entitled to is more than the corresponding quarterly employer portion of Social Security taxes, the excess is treated as an overpayment. An employer can obtain a refund of this amount, after first applying any excess to the employer’s remaining quarterly employment tax liability, by filing new Form 7200. Form 7200 is the same form that is used to obtain a refund for the new Emergency Family and Medical Leave and Paid Sick Leave credits that were enacted as part of the Families First Coronavirus Response Act (FFCRA).

Alternatively, the Notice provides that an employer can use all withheld amounts within a quarter (including the employer share of Medicare taxes, and federal income and Social Security and Medicare taxes withheld from employees) to fund qualified wages so long as those wages are paid prior to the time the deposit of the withheld amounts would otherwise be required without any failure to deposit penalty provided the requirements of the Notice are satisfied.

What are qualified wages?

The starting point for qualified wages is the definition of wages used for purposes of the Social Security tax (Box 3 of Form W-2). The following adjustments are then made –

Only amounts paid after March 12, 2020 and before January 1, 2021 may be included.

“Qualified health plan expenses,” such as the employer’s cost of coverage, are included (or, stated differently, added back to the Box 3 amount).

An employer must exclude any wages taken into account for purposes of determining Emergency Family and Medical Leave and Paid Sick Leave tax credits under FFCRA. (An employer can benefit from employee retention credits and the tax credits provided in FFCRA, but, not surprisingly, not for the same wages. Other limitations also exist, such as the prohibition of the credit with respect to wages for which the Work Opportunity Credit is claimed.)

For employers who employed on average 100 or less full-time employees in 2019 (full-time meaning for this purpose that the individual was employed on average at least 30 hours per week), the qualified wages of all employees are available for purposes of claiming the credit.

For larger employers, only the qualified wages of employees who are not providing services as a result of a suspension of the employer’s operations resulting from the pandemic or due to a significant decline in gross receipts are available for purposes of claiming the credit, and in this situation the amount cannot exceed what the employee would have been paid for working for an equivalent duration during the 30 days immediately preceding the economic hardship.

In determining whether an employer is small or large for this purpose, an expansive aggregation rule applies that can result in parent-subsidiary and brother-sister affiliations using a more than 50% ownership test (rather than an at least 80% ownership test). The affiliated service group rules of Internal Revenue Code § 414(m), as well as the anti-abuse rules of Internal Revenue Code § 414(o), also apply.

The following chart may be helpful in determining whether and how employee retention credits might apply.

Employee Retention Credits Chart

Certain Tax Filing and Tax Payment Deadlines Postponed in Wake of Coronavirus

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.

Federal Income Tax Forms Whose Deadlines and Corresponding Payments Have Been Postponed to July 15, 2020
1040, 1040-SR, 1040-NR, 1040-NR-EZ, 1040-PR, 1040-SS
1041, 1041-N, 1041-QF
1120, 1120-C, 1120-F, 1120-FSC, 1120-H, 1120-L, 1120-ND, 1120-PC, 1120-POL, 1120-REIT, 1120-RIC, 1120-SF
8960
8991
990-T (if due on April 15, 2020)
709

 

Federal Income Tax Forms* Whose Deadlines and Corresponding Payments Have Not Been Postponed
990-T (if due on May 15, 2020)
1065, 1065-B (for calendar year taxpayers)
1066 (for calendar year taxpayers)
1120-S (for calendar year taxpayers)

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

Paycheck Protection Program (“PPP”) Under CARES

The PPP authorizes up to $349 billion in forgivable loans to small businesses with 500 employees or less. All loan terms will be the same for everyone. Loans carry a fixed rate of 1%, and are payable in 2-years unless forgiven.

Who can apply? All businesses – including nonprofits, sole proprietorships, self-employed individuals, and independent contractors – with 500 or fewer employees can apply. Businesses may begin applying for loans on April 3, 2020.[1] Businesses in certain industries may have more than 500 employees if they meet applicable SBA employee-based size standards for those industries.

Payroll Costs. Payroll Costs generally include:

  1. Salary, wages, commissions, or tips (capped at $100,000 on an annualized basis for each employee).
  2. Employee benefits including costs for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payments required for the provisions of group health care benefits including insurance premiums; and payment of any retirement benefit.
  3. State and local taxes assessed on compensation.
  4. For sole proprietors or independent contractors: wages, commissions, income, or net earnings from self-employment, capped at $100,000 on an annualized basis for each employee.
  5. Payroll Costs exclude certain items from calculation(s).

Cap on “Payroll Costs.” In determining both the loan amount and the forgiven amount, “Payroll Costs” are capped at $100,000 on an annualized basis for each employee.

Loan Amount. Loan amounts are determined by multiplying 2.5 x Average Monthly Payroll Costs from the last year, with a cap of $10-million.

Use of Loan Proceeds. Borrower may use the proceeds for (i) Payroll Costs, including benefits; (ii) Interest on certain mortgage obligations, incurred before February 15, 2020; (iii) Rent under a lease agreement in force before February 15, 2020; and (iv) Utilities, for which service began before February 15, 2020.

Loan Forgiveness. To be forgiven, loan proceeds must be used in the 8-weeks after receiving the loan for (a) Payroll Costs (capped at $100,000 on an annualized basis for each employee), (b) Mortgage Interest, (c) Rent, and (d) Utilities Payments.

  • The Department of Treasury (“Treasury”) is requiring that Payroll Costs account for, at least, 75% of the Amount Forgiven.
  • Borrowers may submit a request to the lender servicing the loan. Requests will include documents that verify (i) the number of full-time equivalent employees and pay rates, (ii) payments on eligible mortgage interest, lease or rent payments, and utility obligations during the 8-week period after receiving the loan. Borrower must certify to the truth and accuracy of documents submitted and use of the loan. Lender will make a decision within 60-days of Borrower’s request.
  • If 100% of the Loan is forgiven, the accrued interest is also forgiven.

Reduction in Amount Forgiven (retention of employees). According to Treasury, a Borrower will owe money if staff and payroll are not maintained.

  • Number of Staff: Amount Forgiven will be reduced if Borrower decreases full-time employee headcount.
  • Level of Payroll. Amount Forgiven will also be reduced by any decrease in salaries and wages by more than 25% for any employee that made less than $100,000 annualized in 2019.
  • Borrowers have until June 30, 2020, to restore full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020.

Are there Fees or Prepayment Penalties?  No.

All Payments Deferred for Six (6) Months. All payments are deferred for 6 months. However, interest will continue to accrue over that period.

Will the Borrower be required to pledge collateral or personally guarantee the loan? No.

Call a Templeton partner today for more details or assistance applying for a PPP loan, or with related questions about PPP Loans.

[1] Except for Self-Employed Individuals and Independent Contractors who may apply beginning April 10, 2020.

Employer Tax Credits Form, Employee Retention Credit Guidance Posted

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 7200Advance 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.

SMBs: Act Now to Take Advantage of SBA Loans and Payroll Tax Incentives

Background

In light of the novel coronavirus (COVID-19) global pandemic, many small-to-medium sized businesses are struggling to manage revenue losses amid prolonged economic uncertainty.

To offset the pandemic’s financial impacts, Congress has passed several stimulus bills, including the Families First Coronavirus Response Act and the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which includes provisions that can provide for increased cashflow as well as tax savings.

Businesses should quickly consider how these provisions could help their companies during this uncertain time to ensure they are maximizing available benefits.

SBA Paycheck Protection Program (“PPP”)

See Templeton’s PPP article for more information and call a Templeton partner with any questions.

Employee Retention Credit

The CARES Act provides eligible employers with a refundable credit against payroll tax liability.

How much does the credit cover?
The credit is equal to 50% of the first $10,000 in wages per employee (including value of health plan benefits).

Who is eligible for the credit?
Eligible employers must have carried on a trade or business during 2020 and satisfy one of two tests:

  • Business operations are fully or partially suspended due to orders from a governmental entity limiting commerce, travel, or group meetings.
  • A year-over-year (comparing calendar quarters) reduction in gross receipts of at least 50% – until gross receipts exceed 80% year-over-year.

For employers of more than 100 employees, only wages for employees who are not currently providing services for the employer due to COVID-19 causes are eligible for the credit. For employers of 100 or fewer employees, qualified wages include those for any, regardless of if the employee is providing services.

Employers receiving a loan under the SBA Paycheck Protection Program are not eligible for this credit.

Delay of Employer Payroll Taxes

The CARES Act postpones the due date for employers and self-employed individuals for payment of the employer share of taxes related to Social Security.

When are the deferred payments due?
The deferred amounts are payable over the next two years – half due December 31, 2021, and half due December 31, 2022.

Who is eligible for the deferral?
All businesses and self-employed individuals are eligible. However, employers who receive a loan under the SBA Paycheck Protection Program and whose indebtedness is forgiven are not eligible for the payroll tax deferral.

How We Can Help

Small to medium-sized businesses have many potential avenues—including the SBA loan program and payroll tax incentives—to help offset costs during this uncertain time. However, navigating the complex loan application process is a daunting task. The payroll tax provisions in the CARES Act interact with the SBA loan provisions, adding to the complexity.

In the immediate term, we can assist in analyzing which approach will be the most beneficial for your employees and your company. Those seeking SBA loans will need to move quickly to get their loans approved and funded. We can help you navigate the required paperwork and help organize the necessary information in an expedited manner—so you can boost your cashflow ASAP.

In addition to maximizing these available options, there are also beneficial income tax provisions to claim on income tax returns, including 2019 returns. We can assist companies in determining possible cash tax refunds through net operating loss (NOL) carrybacks and quick refunds of 2019 taxes already paid.

IRS Releases FAQs Regarding July 15, 2020, Postponed Income Tax Filing and Income Tax Payment Date

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.

Guidance Issued For Families First Coronavirus Response Act

Families First Coronavirus Response Act – Guidance Related to Required Paid Sick Leave, Extended FMLA Requirements and Payroll Tax Credits Designed to Fund These Required Payments

Introduction

Please note that the items discussed in this memo should be discussed with legal counsel.  We are attempting to provide a summary of the rules based on our understanding of them but we are not a law firm and we cannot provide legal advice. Also, please note that the Department of Labor, at the time of this writing, has issued limited guidance on this act and we have incorporated that guidance into this memo. Additional guidance from the DOL will be critical in fully understanding the act in more detail.

The provisions discussed below become effective April 1, 2020 and extend through the end of 2020.  These rules apply to employers with fewer than 500 employees.  This is not retroactive and the paid leave and payroll tax credits discussed in this memo cannot be taken until April 1, 2020.  April 1st  is a new date that was clarified by the DOL. It is also our current understanding that this act and the related credits are only available for paid leave for time paid starting April 1st or after and is not based on the pay date but is based on the date the time was taken off and paid.  The check date does not appear to be the relevant date to focus on but the date that the leave is taken and paid for under this act.  Example:  If someone is off on March 29th March 30th and March 31st and the employer chooses to pay them for that time and that payroll is paid on April 2nd, that time from March 29th through March 31st  is not eligible for this act and no payroll credits would be applied to it and those amounts paid would be taxed like normal paid leave.

Based on current materials available, we have created this guidance to help you understand these rules. This may be modified at a future time as more information becomes available. The Families First Coronavirus Response Act recently signed into law by President Trump is designed to do two primary things:

  1. Provide a safety-net for employees of companies with fewer than 500 employees who cannot work due to Coronavirus related situations. The Department of Labor is using language pointing to FLSA and regular FMLA rules for determining which employers need to be aggregated for purposes of this determination. We recommend consulting a labor attorney for assistance with this determination if there is any question.  Please note that this determination is not based on tax code controlled group rules and the rules for aggregating employers for this purpose is different so please consider that.
    • Please note that this act does NOT require employers to pay employees if they are not working due to a business closure, lay-offs due to slow business or furloughs.

2. Provide employers a mechanism to be reimbursed via payroll tax credits to be claimed by reducing otherwise due and payable federal payroll and federal withheld income taxes as you submit them each pay cycle. This is the mechanism you will use to fund these new required payments to employees. An employer does not have to wait until they file their quarterly Form 941 to claim the credit but instead, it is immediately available as a reduction in otherwise payable taxes.

Safety Net for Employees Portion of Law

This summary will first focus on item one above. This act addresses providing a safety net to employees in two primary ways. They are the “Emergency Paid Sick Leave” component and the “Emergency Family and Medical Leave Expansion” component of the act, each to be discussed now.

Emergency Paid Sick Leave Component

This provision provides for up to 2 weeks of fully paid leave for the reasons discussed below for any employee of the company, and there is no waiting period to be eligible for this portion of the law. This portion of the act requires employers to provide:

  1. 80 hours of fully paid sick leave to full-time employees or
  2. Two weeks of fully paid sick leave to part-time employees, based on the average hours that the part-time employee works.

This paid leave requirement would be triggered if an employee were unable to work for one of six reasons:

  1. To self-isolate due to federal, state or local requirements. There are some unknowns in this category as to what rises to this level. If a governor of a state issues an order to close certain businesses, do the employees of that business fall into this category at that time?  We need additional guidance on this and this is a common question that is being asked.
  2. To quarantine due to COVID-19 concerns on the advice of a health care provider.
  3. To obtain medical diagnosis or medical care if the employee has COVID-19 symptoms. Please note these first three categories are referred to as “Self-Care Leave” to be discussed further below.
  4. To care for someone (very broad definition, such as Parent, Spouse, Child, Sibling, Next of Kin, Grandparent, Grandchild, Senior Citizen, Individual with Disabilities) experiencing one of the first two situations listed above.
  5. To care for the employee’s son or daughter (under age 18) if the school or daycare provider has closed or if the daycare provider is no longer available due to COVID-19.
  6. The employee is experiencing another substantially similar condition to those above. Please note these last three categories are referred to as “Family Care Leave” to be discussed next.

Leave in the first three categories, called “Self-Care Leave,” has to be paid at the employee’s full normal rate of pay but that is capped at $511 per day or $5,110 total for each employee. Leave in the last three categories, called “Family Care Leave,” has to be paid at 2/3’s of their normal rate of pay but that is capped at $200 per day or $2,000 total for each employee. It is important to note that an employer CANNOT require an employee to use any existing paid leave provided by an employer before using this newly required paid leave.

The DOL can exclude certain healthcare workers and emergency responders from having to comply with this act. At this time, the definition of what qualifies as a healthcare worker is not clear. Based on what we have read, the entire company that is a health care provider is not exempt from this act, only the employees that work for that employer as a health care provider are exempt.  Support employees not in the field of providing health care are required to be covered by this act.

The DOL MAY also exempt small businesses from portions of this act with fewer than 50 employees if complying would put the business in jeopardy.  At this time, the DOL has said they will be issuing more guidance on this under 50 employee exemption but in general it only applies if following this acts rules would jeopardize the viability of the business.

PAYROLL TIP: It is important to note that from a payroll logistics standpoint, new and separate earnings codes will need to be set up in the payroll system to be able to track each of these newly required types of payments. That will be critical to effectively quantify the dollars paid for these types of leave and will make it possible to claim the payroll tax credit to be discussed later in this article.  Do not lump this pay in with any other PTO or sick leave payments that you might otherwise make.

Emergency Family and Medical Leave Expansion Component

This provision requires employers (even those with less than 50 employees who are not normally subject to normal FMLA rules) to protect an employee’s job and pay compensation after the first two-week period has lapsed as discussed below.

This new category of leave under FMLA rules is referred to as “Public Health Emergency Leave” and requires employers to pay employees who are unable to work due to a need to care for a child under age 18 if school or daycare is unavailable due to Covid-19.  Under this rule, employers are required to:

  1. Provide “Public Health Emergency Leave” as part of FMLA leave.
  2. Provide “Public Health Emergency Leave” if needed by ANY employee who has been employed for at least 30 calendar days.
  3. Pay eligible employees at a leave rate of NO LESS than 2/3’s of their normal rate of pay. This kicks in after 10 days have passed.  Please note that this portion of the law is intended to run concurrent with the emergency paid sick leave component just discussed.  If an employee qualifies for this portion of the act based on the same event that qualified them for the emergency paid sick leave pay, this portion is an additional 10 weeks.  The total would be 12 weeks of protected leave and 12 weeks of pay.  This pay is capped at $200 per day and $10,000 in total per each employee.

The DOL can exclude certain healthcare workers and emergency responders from having to comply with this act.  At this time, the definition of what qualifies as a healthcare worker is not clear. Based on what we have read, the entire company that is a health care provider is not exempt from this act, only the employees that work for that employer as a health care provider are exempt.  Support employees not in the field of providing health care are required to be covered by this act.

 The DOL MAY also exempt small businesses from portions of this act with fewer than 50 employees if complying would put the business in jeopardy.  At this time, the DOL has said they will be issuing more guidance on this under 50 employee exemption but in general it only applies if following this acts rules would jeopardize the viability of the business.  Employers with fewer than 25 employees do not have to comply with the job protection aspect of this bill, but do have to provide the pay.

It is important to note that this provision is in addition to all normal FMLA rules that already exist for employers that must comply with the existing FMLA rules.

PAYROLL TIP: It is important to note that from a payroll logistics standpoint, new and separate earnings codes will need to be set up in the payroll system to be able to track each of these newly required types of payments. That will be critical to effectively quantify the dollars paid for these types of leave and will make it possible to claim the payroll tax credit to be discussed later in this article. Do not lump this pay in with any other PTO or sick leave payments that you might otherwise make.

Funding Mechanism Available to Employers to Pay These New Wages

Now that we have addressed the safety-net components set in place to protect employees, let us turn our attention to the second component of this act, which is the mechanism put in place to fund these payments for the employer.

Any wages paid as a result of the provisions discussed above are not subject to the Employer portion of Social Security Tax (the 6.2% payroll tax). They are subject to the Employee portion of this tax, however – that must be withheld from the payments made to the employee. Because these wages are not taxed the same as normal sick pay or PTO pay, you must segregate these wages in your payroll system.

In addition to these new wages not being subject to the employer portion of Social Security tax as they are paid, this law also provides a refundable credit to be applied to reduce otherwise due and payable federal social security, Medicare and federal income tax withholdings on normal wages paid each pay period.  In essence, a credit is given to the employer that allows them not to have to pay otherwise required payroll taxes and that is the mechanism to quickly reimburse the employer for having to pay wages under this act.  If the amount of the credit is more than otherwise due and payable taxes for a pay period, there is going to be a process (not yet defined) to allow the employer to get a refund check mailed to them within 2 weeks of that submission.   Also, the process to claim the credit at the time of submitting otherwise due and payable payroll taxes is not yet defined. Finally, there is a component to this credit also for health insurance costs paid on behalf of an employee on leave under this act as well.  We need additional guidance on that at this time. As we mentioned earlier in our PAYROLL TIP sections, this is why it is important for employer to be able to separately identify compensation paid to employees as a result of this act. The amount of the credits available are as follows:

  1. For the wages paid as a result of the “Emergency Paid Sick Leave Component” (first two weeks) of the act, the credit is equal to the amount of the wages paid required by this act.
  2. For the wages paid as result of the “Emergency Family and Medical Leave Expansion Component” (after first two weeks) of the act, the credit is equal to the amount of wages paid required by this act and is capped at $10,000 per employee.
  3. In the aggregate, the sum of the credits available in number 1 and 2 can be as much as $15,100 per employee. (Up to $5,100 in wages for the first two weeks + $10,000 for the FMLA portion). Given that the employer’s share of social security tax on any individual employee is limited to $8,537.40 ($137,700*6.2%), this credit is meaningful and actually can exceed the actual social security tax paid for an individual.
  4. As mentioned earlier, there is also a component of this credit that is tied to the amount of health insurance paid by the employer on behalf of an employee out on leave under this act. At this time, we need more clarification on this part of the credit. One unknown is does it go above and beyond the caps discussed in number 3 above or is that cap inclusive of this portion for the credit?

We feel it is important that employers that may be potentially impacted by these new rules work now with their payroll systems to create the earnings codes necessary to track and tax these new types of wages correctly.

Expansion of The SBA’s Business Loan Program ($10,000,000 Limit)

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

 

 

Families First Coronavirus Response Act (“FFCRA”) – COVID-19 Second Relief Package: President Signs Scaled Back Law

On March 18, the President signed the Families First Coronavirus Response Act (FFCRA).  The signed bill scaled back the version of the law that passed the House on March 14.

The FFCRA will become effective on April 1, according to guidance issued on March 24 by the U.S. Department of Labor (DOL). The FFCRA contains a number of major provisions concerning paid leave, job protection and tax implications that will affect employers nationwide.  The FFCRA “sunsets” on December 31.

Importantly, the FFCRA only applies to employers with fewer than 500 employees. The threshold for coverage is tied to the Fair Labor Standards Act, which means that all but the smallest employers with 500 or fewer employees will be covered. Tax credits are available to help employers defray the costs for paid sick leave, and employers with less than 50 employees may apply for an exemption. The DOL’s guidance, FAQ’s and Factsheets will help employers better understand if they are covered by the FFCRA.

Overview of the Important Points for Employers

Changes to FMLA to Include Paid Leave When Child’s School or Child Care Provider is Closed FMLA Protections. The bill expands FMLA and provides paid leave for “Qualifying need related to a public health emergency.”

  • Covered Employers. This law covers employers with fewer than 500 employees.  According to the recently released DOL guidance, the headcount is taken at the time the employee’s leave is to be taken.  Employers should include employees on leave, temporary employees (if the employer is a joint employer with another entity), and day laborers supplied by a temporary agency. Independent contractors are not part of the headcount for the 500-employee threshold.
  • Joint employers may aggregate common employees to reach the 500-employee threshold.  Entities will be considered joint employers if (as to common employees) the same group of people (1) hires or fires the employees; (2) supervises and controls the employee’s work schedule or conditions of employment to a substantial degree; (3) determines the employee’s rate and method of payment; and (4) maintains the employee’s employment records. See the most recent joint employer guidance from the DOL. Entities will be considered a single integrated enterprise if there is (a) common management, (b) interrelation between operations, (c) centralized control of labor relations, and (d) degree of common ownership or financial control.
  • Reduced Threshold for Eligible Employees. Employees are eligible to receive leave from an employer if they have been employed by that employer for at least 30 calendar days.  This is lower than the general FMLA threshold of 12 months and 1250 hours worked.
  • Qualifying Need Related to a Public Health Emergency Defined. Eligible employees will have the right to take up to 12 weeks of FMLA to care for a child under 18 years old if the child’s school or place of care has been closed, or the paid childcare provider is unavailable due to a public health emergency; provided thatthe employee is unable to work or telework.
  • Job Protection. FMLA job protections still apply, but employers with less than 25 employees do not have to return the employee to the previous position if that position no longer exists, but employers must make reasonable efforts to place the employee into an equivalent position.

Paid FMLA Leave.

  • Limited to certain circumstances. Paid leave only applies to “qualifying needs related to a public health emergency.” Other FMLA leave remains unpaid.
  • First 10 days. The first 10 days of leave may be unpaid but employees can choose to use accrued paid leave.
  • Subsequent Leave Paid at Two-Thirds of the Regular Rate. The leave must be paid at no less than two-thirds of the employee’s regular rate of pay (note that this may be greater than an employee’s hourlyrate, see the Department of Labor’s regular rate guidance for more information). The daily rate of paid leave cannot exceed $200, and aggregate leave shall not exceed $10,000.
  • Calculating Number of Hours. Generally, employers must use the number of hours the employee would otherwise be normally scheduled to work. Special rules apply, however, for employees with varying schedules.
  • Mandatory Substitution Prohibited. Employers cannot require employees to use other paid leave in lieu of leave granted under the FFCRA.

Exemptions. The U.S. Department of Labor will develop rules exempting certain healthcare providers and emergency responders from taking leave under the bill. Rules will also exempt businesses with fewer than 50 employees from the requirements of the bill if it jeopardizes the viability of the business.

Federal Paid Sick Leave (PSL)

Qualified PSL Reasons. Employers with fewer than 500 employees must provide all employees with PSL when an employee is unable to work (or telework) due to a need for leave because of the following six reasons:

  1. The employee is subject to a Federal, State or local quarantine or isolate order related to COVID-19;
  2. The employee has been advised by a health care provider to self-quarantine due to concerns related to COVID-19;
  3. The employee is experiencing symptoms of COVID-19 and seeking a medical diagnosis;
  4. The employee is caring for an individual who is subject to an order as described in reason 1 (above) or has been advised as described in reason 2 (above);
  5. The employee is caring for their child if the school or childcare has been closed, or the childcare provider is unavailable, due to COVID-19; or
  6. The employee is experiencing any other substantially similar COVID-19 condition as specified in rules from the Department of Health and Human Services.

Amount of PSL. Full-time employees are entitled to up to 80 hours of PSL. For part-time employees, they are entitled to a pro-rata share of hours worked, on average, over a two-week period.

PSL Payments. PSL will be paid at the regular rate of pay for reasons 1, 2 or 3 (above). PSL for reasons 4, 5 or 6 (above) will be paid at two-thirds the regular rate of pay.

Daily PSL Payments and Caps. Employers provide PSL based on the number of hours the employee would otherwise be normally scheduled to work. However, the FCCRA sets caps of $511 per day (and $5110 maximum) for PSL taken for reasons 1, 2 or 3 (above), and $200 per day (and $2000) maximum for PSL taken for reasons 4, 5 or 6 (above).

No carryover. There is no carryover of PSL from one year to the next.

Eligibility. Paid sick leave under FFCRA shall be provided regardless of how long the employee has been employed.

Interaction with Existing Paid Leave Benefits. Employers may not require an employee to use any other type of paid leave before the employee uses PSL under the FFCRA. Thus, employees are entitled to use PSL under the FFCRA prior to using any employer-provided vacation, PTO or paid sick leave under state or local law.

Employer Notice. Employers are obligated to post a PSL notice to employees, and by March 25, the DOL will provide a model notice.

Multi-Employer CBAs. Employees covered by a multi-employer collective bargaining agreements who receive paid leave benefits from a trust arrangement are entitled to receive leave benefits commensurate with the above requirements.

DOL Rules. The DOL will issue PSL guidelines to assist employers by April 2.

Non-Discrimination, Non-Retaliation

It shall be unlawful for any employer to discharge, discipline or, in another manner discriminate against any employees because they have taken leave provided under FFCRA, or filed any complaint, instituted any proceeding, or testified or is about to testify in any proceeding relating to FFCRA.

Remedies for Violations

Employers are liable for unpaid benefits, liquidated damages of 100 percent, injunctive relief, fines of up to $10,000 along with criminal penalties and attorney’s fees for a violation of the FFCRA.

Unemployment Compensation, Coverage for COVID-19 Testing

FFCRA provides for increased funding for state unemployment programs and requires a waiver of co-pays for COVID-19 testing by health care plans and insurers.

Tax Considerations

Employers required to pay workers can offset some of the financial impact through refundable employment tax credits. The tax credit equals 100 percent of qualified sick leave and qualified paid FMLA paid by employers. A credit would also be available for self-employed taxpayers.

Credits for both qualified sick leave and qualified family leave wages are subject to caps. The credit for qualified sick leave is limited to $511 per day for employees when an employee is taking care of themselves or $200 per day for employees caring for a family member – both with an aggregate cap of 10 days. This effectively caps the qualified sick leave credit between $2,000 and $5,110 per employee. The credit for qualified FMLA wages is limited to $200 per day and $10,000 aggregate for any employee. The FFCRA would prevent double benefits by increasing an employer’s gross income by the amount of credits received (i.e., the payroll credit is offset by an equal income item which results in a net-zero effect on taxable income, though of course the credit is more valuable than the income tax deduction). It would also prevent a credit for wages where a credit is allowed under section 45S (employer credit for paid family and medical leave).

The FFCRA leaves out many details. These may be covered through future regulations issued by the Internal Revenue Service. One important detail is what happens when businesses lack cash to pay employees for payments subject to the refundable credit. According to the Wall Street Journal, “Treasury Secretary Steven Mnuchin has said the government is prepared to advance the funds to businesses that can’t cover the costs now.” The budgetary impacts of the FFCRA would not impact budget limitations imposed by pay-as-you-go requirements.

HR Considerations

Covered employers should strongly consider implementing COVID-19 policies, which should include a discussion about the interaction with state and local paid sick leave laws. Many states, including

Businesses should also consider the impact of PSL on businesses that close due to lack of work or because of a state or local order to close non-essential businesses. There is no question that businesses and employees are facing a significant impact because many people are self-isolating or quarantined. As written, the FCCRA does not cover employees who are sent home by their employers due to a COVID-19 related decrease in business. But it may cover employees who are sent home due to a “shelter-in-place” or related order public health order. Again, we recommend working with counsel to discuss your businesses’ individual circumstances.

 Treasury, IRS and Labor announce plan to implement Coronavirus-related paid leave for workers and tax credits for small and midsize businesses to swiftly recover the cost of providing Coronavirus-related leave. 

IRS Statements and Announcements

 IR-2020-57, March 20, 2020

The U.S. Treasury Department, Internal Revenue Service (IRS), and the U.S. Department of Labor (Labor) announced that small and midsize employers can begin taking advantage of two new refundable payroll tax credits, designed to immediately and fully reimburse them, dollar-for-dollar, for the cost of providing Coronavirus-related leave to their employees. This relief to employees and small and midsize businesses is provided under the Families First Coronavirus Response Act (Act), signed by President Trump on March 18, 2020.

The Act will help the United States combat and defeat COVID-19 by giving all American businesses with fewer than 500 employees funds to provide employees with paid leave, either for the employee’s own health needs or to care for family members. The legislation will enable employers to keep their workers on their payrolls, while at the same time ensuring that workers are not forced to choose between their paychecks and the public health measures needed to combat the virus.

Key Takeaways

Paid Sick Leave for Workers

For COVID-19 related reasons, employees receive up to 80 hours of paid sick leave and expanded paid child care leave when employees’ children’s schools are closed or child care providers are unavailable.

Complete Coverage

Employers receive 100% reimbursement for paid leave pursuant to the Act.

  • Health insurance costs are also included in the credit.
  • Employers face no payroll tax liability.
  • Self-employed individuals receive an equivalent credit.

Fast Funds

Reimbursement will be quick and easy to obtain.

  • An immediate dollar-for-dollar tax offset against payroll taxes will be provided
  • Where a refund is owed, the IRS will send the refund as quickly as possible.

Small Business Protection

Employers with fewer than 50 employees are eligible for an exemption from the requirements to provide leave to care for a child whose school is closed, or child care is unavailable in cases where the viability of the business is threatened.

Easing Compliance

  • Requirements subject to 30-day non-enforcement period for good faith compliance efforts.

To take immediate advantage of the paid leave credits, businesses can retain and access funds that they would otherwise pay to the IRS in payroll taxes. If those amounts are not sufficient to cover the cost of paid leave, employers can seek an expedited advance from the IRS by submitting a streamlined claim form that will be released next week.

Background

The Act provided paid sick leave and expanded family and medical leave for COVID-19 related reasons and created the refundable paid sick leave credit and the paid child care leave credit for eligible employers. Eligible employers are businesses and tax-exempt organizations with fewer than 500 employees that are required to provide emergency paid sick leave and emergency paid family and medical leave under the Act. Eligible employers will be able to claim these credits based on qualifying leave they provide between the effective date and December 31, 2020. Equivalent credits are available to self-employed individuals based on similar circumstances.

Paid Leave

The Act provides that employees of eligible employers can receive two weeks (up to 80 hours) of paid sick leave at 100% of the employee’s pay where the employee is unable to work because the employee is quarantined, and/or experiencing COVID-19 symptoms, and seeking a medical diagnosis. An employee who is unable to work because of a need to care for an individual subject to quarantine, to care for a child whose school is closed or child care provider is unavailable for reasons related to COVID-19, and/or the employee is experiencing substantially similar conditions as specified by the U.S. Department of Health and Human Services can receive two weeks (up to 80 hours) of paid sick leave at 2/3 the employee’s pay. An employee who is unable to work due to a need to care for a child whose school is closed, or child care provider is unavailable for reasons related to COVID-19, may in some instances receive up to an additional ten weeks of expanded paid family and medical leave at 2/3 the employee’s pay.

Paid Sick Leave Credit

For an employee who is unable to work because of Coronavirus quarantine or self-quarantine or has Coronavirus symptoms and is seeking a medical diagnosis, eligible employers may receive a refundable sick leave credit for sick leave at the employee’s regular rate of pay, up to $511 per day and $5,110 in the aggregate, for a total of 10 days.

For an employee who is caring for someone with Coronavirus, or is caring for a child because the child’s school or child care facility is closed, or the child care provider is unavailable due to the Coronavirus, eligible employers may claim a credit for two-thirds of the employee’s regular rate of pay, up to $200 per day and $2,000 in the aggregate, for up to 10 days. Eligible employers are entitled to an additional tax credit determined based on costs to maintain health insurance coverage for the eligible employee during the leave period.

Child Care Leave Credit

In addition to the sick leave credit, for an employee who is unable to work because of a need to care for a child whose school or child care facility is closed or whose child care provider is unavailable due to the Coronavirus, eligible employers may receive a refundable child care leave credit. This credit is equal to two-thirds of the employee’s regular pay, capped at $200 per day or $10,000 in the aggregate. Up to 10 weeks of qualifying leave can be counted towards the child care leave credit. Eligible employers are entitled to an additional tax credit determined based on costs to maintain health insurance coverage for the eligible employee during the leave period.

Prompt Payment for the Cost of Providing Leave

When employers pay their employees, they are required to withhold from their employees’ paychecks federal income taxes and the employees’ share of Social Security and Medicare taxes. The employers then are required to deposit these federal taxes, along with their share of Social Security and Medicare taxes, with the IRS and file quarterly payroll tax returns (Form 941 series) with the IRS.

Under guidance that will be released next week, eligible employers who pay qualifying sick or child care leave will be able to retain an amount of the payroll taxes equal to the amount of qualifying sick and child care leave that they paid, rather than deposit them with the IRS.

The payroll taxes that are available for retention include withheld federal income taxes, the employee share of Social Security and Medicare taxes, and the employer share of Social Security and Medicare taxes with respect to all employees.

If there are not sufficient payroll taxes to cover the cost of qualified sick and child care leave paid, employers will be able file a request for an accelerated payment from the IRS. The IRS expects to process these requests in two weeks or less. The details of this new, expedited procedure will be announced next week.

Examples

  • If an eligible employer paid $5,000 in sick leave and is otherwise required to deposit $8,000 in payroll taxes, including taxes withheld from all its employees, the employer could use up to $5,000 of the $8,000 of taxes it was going to deposit for making qualified leave payments. The employer would only be required under the law to deposit the remaining $3,000 on its next regular deposit date.
  • If an eligible employer paid $10,000 in sick leave and was required to deposit $8,000 in taxes, the employer could use the entire $8,000 of taxes in order to make qualified leave payments and file a request for an accelerated credit for the remaining $2,000.
  • Equivalent child care leave and sick leave credit amounts are available to self-employed individuals under similar circumstances. These credits will be claimed on their income tax return and will reduce estimated tax payments.

Small Business Exemption

Small businesses with fewer than 50 employees will be eligible for an exemption from the leave requirements relating to school closings or child care unavailability where the requirements would jeopardize the ability of the business to continue. The exemption will be available on the basis of simple and clear criteria that make it available in circumstances involving jeopardy to the viability of an employer’s business as a going concern. Labor will provide emergency guidance and rulemaking to clearly articulate this standard.

Non-Enforcement Period

Labor will be issuing a temporary non-enforcement policy that provides a period of time for employers to come into compliance with the Act. Under this policy, Labor will not bring an enforcement action against any employer for violations of the Act so long as the employer has acted reasonably and in good faith to comply with the Act. Labor will instead focus on compliance assistance during the 30-day period.

For More Information

For more information about these credits and other relief, visit Coronavirus Tax Relief on IRS.gov.

Summary of Federal Loan Programs – Coronavirus Aid, Relief and Economic Security Act, HR 748 (“CARES Act”)

The federal government recently enacted three phases of relief in response to the coronavirus outbreak. Phase 1 offers an Economic Injury Disaster Loans available under the existing Disaster Loan Program overseen by the U.S. Small Business Administration (“SBA”). Phase 2 features no loan programs. Phase 3 is the Coronavirus Aid, Relief and Economic Security Act (“CARES”).[1] CARES features both a Paycheck Protection Program (“PPP”) and an Economic Stabilization Loan Program geared for larger businesses. For information about the PPP, please see our article, Paycheck Protection Program (“PPP”) Under CARES, posted on our website.

Name Law/Status Loan Program Short Description
Phase 1: Coronavirus Preparedness and Response to Supplemental Appropriations Act, 2020, 3/6/2020 H.R. 6074 (Law) 1. Economic Injury Disaster Loans (through the Disaster Loan Program Account) 1. Provides up to $2 million per borrower in working capital loans for small businesses. Small businesses must meet a list of size standards which vary per NAICS industry code.
Phase 2: Families First Coronavirus Response Act, 3/18/2020 H.R. 6201 (Law) N/A No loan programs as a part of this law, which addresses emergency preparedness and leave, health provisions, and tax credits for sick and family leave.
Phase 3: CARES Act 3/27/2020 H.R. 748 (Law) 2. Paycheck Protection Program;

3. Economic Stabilization Loans & Loan Guarantees

2. Makes temporary changes to the SBAs 7(a) loan program by providing 100% loan guarantees or SBA-administered loans of up to $10 million per small business, for payroll losses and selected working capital costs. While administered by SBA, loans are issue by private lenders. Small businesses are defined as having less than 500 employees or meet SBA NAICS code size standards.

3. Provides loans and loan guarantees to businesses of all sizes in industries most impacted by the coronavirus pandemic through the Federal Credit Reform Act of 1990, administered by the Treasury Secretary. Eligible businesses must demonstrate covered losses resulted from the pandemic.

Economic Injury Disaster Loan Program (“EIDL”) For Small Businesses

The SBA is making available its EIDL Program to qualifying small businesses and nonprofits. The Federal government has announced that it has made $50 billion available for this program, which is available to applicants in those states that have declared disasters to the SBA. As of March 25, 2020, most states and the District of Columbia have been declared statewide as “Disaster Areas,” in which eligible businesses can apply for the loans. A full list of Disaster Area Declarations can be found here:

https://disasterloan.sba.gov/ela/Declarations

Eligibility

CARES modified the eligibility requirements for the EIDL loans. In order to qualify as a “small business,” a business must:

  • Be a business concern having not more than 500 employees;
  • Be a sole proprietorship or an independent contractor;
  • Be a cooperative with not more than 500 employees;
  • Be an ESOP with not more than 500 employees;
  • Be a tribal business concern with not more than 500 employees; or
  • Qualify under the SBA’s eligibility standards prior to the CARES Act, which require that the applicant comply with SBA size standards that are determined by reference to the applicant’s industry NAICS code. The SBA’s table of codes can be found here:

https://www.sba.gov/managing-business/running-business/size-standards

  • Each industry classification has either a maximum number of employees or a maximum amount of annual receipts (averaged over a three-year period). An applicant must have no greater that the applicable maximum in order to be eligible. Note that employees of certain affiliates of an applicant must be included in calculating eligibility.

How to Apply and Loan Standards

Qualifying small businesses and nonprofits can apply directly to the SBA by following this link: https://www.sba.gov/funding-programs/disaster-assistance

The SBA has stated it will consider the following among its criteria for underwriting these loans:

  • An applicant’s credit history;
  • An applicant’s ability to repay the loan;
  • The applicant’s location in a county declared as a Disaster Area; and
  • Whether the applicant’s working capital losses are due to the COVID-19 disaster, as opposed to a downturn in the economy generally or other reasons.

Loan Terms

  • Principal, Term and Interest: The SBA can loan an approved applicant up to $2 million, depending on need and underwriting, with a term of up to 30 years for repayment and at interest rates of 3.75% per annum for small businesses and 2.75% per annum for non-profits. Loans in excess of $25,000 may require collateral.
  • Personal Guaranties and Collateral: CARES modified EIDL temporarily so personal guaranties will not be required for loans under $200,000. CARES also waived the requirement that an applicant must not be able to obtain credit elsewhere. In a change from its past practice, the SBA has advised it will not decline a loan due to insufficient collateral or lack of collateral. This statement, however, was not embodied in the CARES Act legislation.
  • Use of Proceeds: Loan proceeds can be used for working capital, payroll and other expenses that the applicant could have paid had the disaster not occurred. But loan proceeds are not intended to be used to replace lost profits or to finance business expansion.

Advance

CARES provides that during the period from January 31, 2020 through December 31, 2020 the SBA may advance an up-to-$10,000 grant to each applicant, paid within three days after completing its application to the SBA. The grant is not required to be repaid, even if the applicant does not obtain a loan under the EIDL program, or if the applicant instead obtains a grant under CARES’ Paycheck Protection Program (described in our article Paycheck Protection Program (“PPP”) Under CARES). But if the applicant does instead obtain a grant under the PPP, the amount of the advance will be reduced from the forgivable amount of such PPP loan. The advance may be used to pay allowable costs:

  • providing paid sick leave to employees unable to work due to the direct effect of the COVID–19
  • maintaining payroll to retain employees during business disruptions or substantial slowdowns
  • meeting increased costs to obtain materials unavailable from the applicant’s original source due to interrupted supply chains
  • making rent or mortgage payments
  • repaying obligations that cannot be met due to revenue losses.

For more information on requirements for qualification for an Economic Injury Disaster Loan, and the SBA’s programs relating to COVID-19 generally: https://www.sba.gov/page/coronavirus-covid-19-small-business-guidance-loan-resources     A checklist of items to be provided with the application and a description of the procedures for applying for a loan follow.

Checklist of items to be provided with the application:

  • Completed Form 5 application form.
  • Completed IRS Form 4506-T, including information for:
    • Each owner with 20% or more ownership interest
    • Each general partner or managing member, regardless of ownership %
    • Each owner who owns more than 50% of an affiliate business
  • At least 2 years complete business tax returns with all schedules
  • Most recent year-end balance sheet and income statement
  • Current YTD balance sheet and income statement as of most recent month-end
  • Schedule of fixed debts
  • Personal financial statement on each owner with 20% or more ownership interest

Process:

  • Applicants should register for log-in credentials and complete the application on the SBA website.
  • The checklist above will be verified and credit will be checked by SBA.
  • Forecasts will be completed to determine loan amount.
  • Decision can take up to four weeks.
  • After approval and loan signing, the first $25,000 is disbursed within five business days.
  • Each business or non-profit will work with an assigned case officer on additional disbursements.
  • Loan disbursements can repay bank bridge loans up to $25,000.

OTHER LOAN PROGRAMS UNDER PHASES 1 & 3 (EXCLUDING PPP)

EXPRESS LOANS

Up to $1 million is available through the existing SBA express loan process, an increase from the previous maximum of $350,000. SBA express loans feature a 36-hour turnaround time.

Summary of Economic Stabilization Loan & Loan Guarantees

The program exists to provide emergency assistance and health care response for individuals, families, and businesses affected by the 2020 coronavirus pandemic.

Summary

  • Provides $29 billion to aviation companies, $17 billion to businesses critical to maintain national security and $454 billion to other negatively impacted businesses through loan, loan guarantees within provisions of the Federal Credit Reform Act of 1990 and other investments in programs and facilities through the Federal Reserve.
  • States and Municipalities may receive loans, loan guarantees and investments from the amounts listed above as long as the total amounts awarded through the program do not exceed $500 billion.
  • The CARES Act does not provide a specific allocation distribution of direct loans vs. loan guarantees, nor does it include language on maximum amounts.
  • Eligible businesses must have incurred covered losses, direct or incremental, incurred as a result of coronavirus, as determined by the Treasury Secretary.
  • Provides limits on wage increases to high-wage employee compensation during a two-year period.
  • Specific procedures for application and minimum requirements will be published by the Treasury Secretary within 10 days after enactment of the CARES Act.

Distribution of Loans and Loan Guarantees

The Treasury Secretary authorizes $500 billion in loans and loan guarantees to businesses, states and municipalities of any size through the provisions of the Federal Credit Reform Act of 1990.

  1. Not more than $25,000,000,000 shall be available for passenger air carriers.
  2. Not more than $4,000,000,000 shall be available for cargo air carriers.
  3. Not more than $17,000,000,000 for businesses critical to maintaining national security
  4. Not more than $454,000,000,000 shall be available for other eligible businesses.

Eligibility

  1. Must be a state or municipality or an eligible business. An “eligible business” is defined as:
    1. an air carrier; or
    2. a United States business that has not otherwise received adequate economic relief in the form of loans or loan guarantees provided under the CARES Act.
  2. Other credit must not be reasonably available at the time of the transaction.
  3. Intended obligations must be prudently incurred.
  4. The loan or loan guarantee must be sufficiently secured.

Rates

Any loans made by the Treasury Secretary shall be at a rate not less than a rate taking into consideration the current average yield on outstanding marketable obligations of the United States of comparable maturity.

Terms

The loan or loan guarantee is either (a) sufficiently secured, or (b) is made at a rate that (i) reflects the risk of the loan or loan guarantee, and (ii) is to the extent practicable, not less than an interest rate based on market conditions for comparable obligations prevalent prior to the outbreak of COVID-19.

The duration of loans or loan guarantees should be as short as practicable, and not to exceed 5 years.

Except to the extent required under a contractual obligation in effect as of the date the CARES Act became law, the CARES Act prohibits the eligible business from repurchasing any outstanding equity interests while the loan or loan guarantee is outstanding.

The CARES Act provides that, until the date 12 months after the date the loan or loan guarantee is no longer outstanding, the eligible business shall not pay dividends or make other capital distributions with respect to the common stock of the eligible business.

Prohibition on Loan Forgiveness

The principal amount of any obligation issued by an eligible business, state, or municipality that is acquired under a program or facility shall not be reduced through loan forgiveness.

Employee Retention

The loan or loan guarantee through agreement requires eligible businesses to maintain existing employment levels as of March 24, 2020 until September 30, 2020, and shall not reduce its employment by more than 10 percent from the levels on such date.

High-Wage Employee Compensation Limits

If an eligible business receives a loan or loan guarantee, during a 1-year period starting on the date the agreement is executed, no officer or employee of the eligible business whose total compensation exceeded $425,000 in calendar year 2019 will receive from the eligible business:

  1. total compensation which exceeds, during any 12 consecutive months of such period, the total compensation received by the officer or employee from the eligible business in calendar year 2019; and
  2. will receive from the eligible business severance pay or other benefits upon termination of employment with the eligible business which exceeds twice the maximum total compensation received by the officer or employee from the eligible business in calendar year 2019.

If an eligible business receives a loan or loan guarantee, during a 1-year period starting on the date the agreement is executed, no officer or employee of the eligible business whose total compensation exceeded $3,000,000 in calendar year 2019 will receive from the eligible business during any 12 consecutive months of such period total compensation in excess of the sum of:

  1. $3,000,000; and
  2. 50% of the excess over $3,000,000 of the total compensation received by the officer or employee from the eligible business in calendar year 2019.

The term “total compensation” includes salary, bonuses, awards of stock, and other financial benefits provided by an eligible business to an officer or employee of the eligible business.

General Terms & Conditions

For the avoidance of doubt, any applicable requirements under section 13(3) of the Federal Reserve Act (12 U.S.C. 343(3)), including requirements relating to loan collateralization, taxpayer protection, and borrower solvency, shall apply with respect to any obligation or other interest issued by an eligible business, State, or municipality that is acquired under a program or facility under subsection (b)(4).

Terms, conditions and containment of covenants, representatives, warranties, and requirements (including requirements for audits) will be determined as Treasury Secretary deems appropriate.

Further Guidance & Future Programs for Consideration

No later than 10 days after the date of enactment of the CARES Act, the Treasury Secretary shall publish procedures for application and minimum requirements, which may be supplemented by the Treasury Secretary in the Treasury Secretary’s discretion, for the making of loans and loan guarantees.

Mid-size & Large Business Financing

The Treasury Secretary shall endeavor to create a program or facility that provides financing to banks to make direct loans to eligible businesses between 500 – 10,000 employees with an annualized interest rate not higher than 2% per annum, with no principal or interest during the first 6 months. The loans would be based on good faith certifications that a) uncertainty of economic conditions deem the loan necessary, b) funds will be used to retain 90% of the recipients’ workforce at full compensation and benefits until September 30, 2020, c) workforce and compensation levels from February 1, 2020 will be restored no later than 4 months after termination of the COVID-19 public health emergency

Main Street Lending Program

Nothing shall limit the Federal Reserve System to establish a Main Street Lending Program or other similar program or facility that supports lending to small and mid-sized businesses on such terms and conditions as the Board may set consistent with section 13(3) of the Federal Reserve Act 16 (12 U.S.C. 343(3)), including any such program in which the Treasury Secretary makes a loan, loan guarantee, or other investment under subsection (b)(4).

Government Participants

The Treasury Secretary shall endeavor to seek the implementation of a program or facility in accordance with subsection (b)(4) that provides liquidity to the financial system that supports lending to states and municipalities.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.

[1] This summary is based on the bill text available on March 25, 2020