The Coronavirus CARES Package | The CARES Act: An Overview

By Dwayne W. Asay, CPA (DwayneA@Squire.com) and Shane Edwards, CPA, CIA (Shanee@Squire.com)

Mr. Asay will also present a webinar on the CARES Act on April 7, 2020, at 11 am MDST.  For more information and to register click here. 

The roughly $2 trillion stimulus bill (CARES Act) has been signed by President Trump into law and is designed to reduce the devastating economic impact of the Coronavirus.  The bill includes provisions related to individuals, taxes, unemployment, healthcare, state governments, small businesses, and large businesses.  This article will primarily focus on small business assistance available through the U.S. Small Business Administration (SBA) in the form of a Paycheck Protection Program, Economic Injury Disaster Loans and Economic Disaster Relief Grants.

Paycheck Protection Program (PPP)

The CARES Act includes a small business $349 billion loan program, known as the Paycheck Protection Program (PPP), that makes available forgivable loans of up to $10 million during the covered period of February 15, 2020, to June 30, 2020, if the business retains its employees and otherwise meets the requirements.

Who is eligible?

1. Companies, including nonprofits, with fewer than 500 employees, independent contractors, sole proprietors, and others
2. Covers the period of February 15, 2020, to June 30, 2020
3. Companies need to have been in business as of February 15, 2020, and have paid employee salaries and payroll taxes.
4. Companies in the accommodation and food services industry can be eligible despite being affiliated (under common control or ownership) with a larger business under traditional SBA rules.  Specifically, these companies may be eligible for loans if they have more than one physical location and employ fewer than 500 employees at each location.

Loan Amount and Terms?

1. The loan amount applied for will depend on the Company’s payroll costs – loan can be up to $10 million and is based on 250% or 2.5 times a Company’s average monthly payroll.
2. Interest at 4%
3. Borrowers can defer payments for six months to a year
4. There is a loan forgiveness component included in the bill for businesses that retain their works or rehire ones that were laid off.
5. The Companies spoken of in item 4 in this section would be eligible for loan forgiveness on portions or all of the loan that is used for “covered costs.”
6. Covered costs include payroll, rent payment, mortgage obligations and utilities that are incurred during an eight-week period starting on the loan’s origination date.
7. The amount of forgiveness takes into account the number of workers retained or rehired and maintaining previous employee salaries.
8. The loans are nonrecourse and 100% guaranteed by the SBA

How to apply?

Most banks, credit unions and other lenders, but not through the SBA.  FinTechs, which can process loans in a little as 48 hours, could also become approved PPP lenders.  Lenders for PPP loans are not required to be regular 7(a) SBA lenders.

What is needed?

1. Proof of payroll costs – very relaxed standards compare to previous SBA requirements.
2. Borrowers to make a good faith certification that the loan is necessary due to the uncertainty of current economic conditions caused by COVID-19
3. No borrower and lender fees scrap the “credit elsewhere test” for loans made under the program, and waives collateral and personal guarantee requirements.

SBA Economic Injury Disaster Loans (EIDL)

The CARES Act provides $562 million to ensure that the SBA has the resources to provide Economic Injury Disaster Loans (EIDL) to businesses and nonprofits that need financial support. The Coronavirus Preparedness and Response Supplemental Appropriations Act signed into law on March 6, 2020, provided funds to the SBA to offer $7 billion in EIDLs to small businesses impacted by COVID-19.

Who is eligible?

1. Companies with fewer than 500 employees and certain individual independent contractors, cooperatives, ESOPs and tribal small business concerns.
2. Suffered an economic injury
3.  Companies cannot receive a PPP loan in addition to an EIDL through the SBA for the same purposes. However, a borrower who has an EIDL unrelated to COVID-19 may apply for a PPP loan (with an option to refinance the EIDL loan into the PPP loan).

Loan Amount and Terms?

1. Loan amount up to $2 million, including the opportunity to receive up to a $10,000 advance on EIDL for emergency capital (see details of immediate grant below).
2. Interest at 3.75% for companies and 2.75% for nonprofits
3. Payment terms up to 30 years
4. Principal and interest deferment for up to four years
5. Proceeds of loan are to be used for operating expenses that could have been met had COVID-19 not occurred
6. The SBA’s Disaster Loan program traditionally has required that the applicant be unable to obtain credit elsewhere.  Under the CARES Act, the SBA is directed to waive the requirement that an applicant be unable to obtain credit elsewhere.  Additionally, the SBA is directed to waive (1) the requirement to obtain a personal guarantee on disaster loans of $200,000 or less and (2) the requirement that a business must have been operating for at least one year to receive a disaster loan.

How to apply?

1. Through the SBA online or through the mail

What is needed?

1. Copy of the 2018 company tax return.  However, the CARES Act provides that the SBA may approve an applicant based solely on such applicant’s credit score, and therefore not require the applicant to submit tax returns. This feature would be offered at the SBA’s discretion.
2. Personal financial statements of each principal owning 20% or more of business
3. Information specific to the Company business

Immediate EIDL $10,000 Grants

Understanding that more immediate assistance was needed, the CARES Act provides for, among other things, an immediate grant of up to $10,000 to small businesses and nonprofits that apply for an EIDL.  This immediate relief is designed to offer bridge protection while SBA considers the pending EIDL application.  Importantly, a recipient of such a grant will have no obligation to repay this grant if for some reason the EIDL application is subsequently denied.

Disbursements of the EIDL grant are to be made within three days following the submission of a business’s EIDL application.  Because of the timeframe involved, the CARES Act provides that SBA is required to accept a self-certification that the applicant is an eligible entity.

The advance may be used towards paid sick leave to employees, payroll, increased costs of materials, rent or mortgage payments, and repayment of other obligations that cannot be met due to revenue losses.

Squire Advice to Companies

1. Contact a Squire team member to assist in the application process and to complete a Business Continuity/Scenario Planning analysis.  If you are not a current client please click here and provide your name and contact information.  A Squire team member will contact you within 24 hours.

2. Immediately begin collecting the information needed to complete the PPP application processes. Reach out to several lenders and choose the lender that best fits your needs.

3. Go to https://www.sba.gov/disaster/apply-for-disaster-loan/index.htmland begin the application process for an EIDL loan or grant.  Reach out to several SBA certified 7(a) lenders and choose the certified lender that best first your needs.  The most active 7(a) lenders can be located at https://www.sba.gov/article/2020/mar/02/100-most-active-sba-7a-lenders

Other CARES Act benefits, which will be discussed in future Squire articles and Webinars

• Loans for companies between 500 and 10,000 employees, with low-interest rates – capped at 2% – requirements include – USA presence, employee retention, no dividends during the loan period, no debt forgiveness.
• Grants to SBA resource partners including Small Business Development Centers and Women’s Business Centers to offer education, training, and other assistance to small businesses affected by COVID-19.
• Grants for Minority Business Development Agencies
• Employee Retention Credit against employment taxes to encourage companies to retain and pay their employees during any quarter when a business operation is partially or fully suspended due to the coronavirus. This credit does not apply for businesses that receive Small Business Interruption loans.
• Employer payroll taxes will be deferred for 2020. 50% of payroll tax payments for 2020 will be due in 2021 and the other 50% in 2022.
• Expanded unemployment benefits
• One-time payments to qualified individuals
• Business operating losses for this year can be carried back for up to 5 years.

 If you have any questions for us, please don’t hesitate to reach out.