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| Apr 1, 2020 | Firm News


The federal government enacted the CARES Act to help small businesses through the COVID crisis. The guidance for interpreting this Act (and making informed decisions thereunder) is evolving on a daily basis. The purpose of this email is to break them down employers so that they can easily compare the potential advantages and disadvantages of the options and make informed decisions.

In general, CARES applies to employers with less than 500 individual employees (irrespective of whether they are full-time or part-time—you count the person and NOT FTEs), including eligible 501(c)(3) nonprofits. If your entity hovers near the 500-employee mark OR if your entity is one of several affiliated entities that together employ 500+ employees, you should seek legal guidance on whether the statutes apply to you and if so, how.

The goal of CARES is to help small businesses retain their workforce through:

• OPTION A: potentially forgivable “payroll protection program” loans to help cover qualified payroll expenses and/or non-forgivable SBA economic injury disaster loans


• OPTION B: a tax credit (50%) for qualified wages paid by businesses whose business is disrupted by COVID AND the deferral of the employer portion of 2020 social security taxes (50% is deferred until Dec. 31, 2021 and 50% is deferred to Dec. 31, 2022).

I. Option A Loans
a. Payroll Protection Loans (PPP)
1. How much can you borrow?
Under CARES, qualifying small businesses are eligible to borrow the lesser of:

(a) 2.5 times the average monthly “payroll costs” of the borrower incurred during the one-year period before the date of the loan
(b) $10 million.

The interest is fixed at .5% with a maturity of two years, with no prepayment penalties or fees.

2. What are qualifying “payroll costs”?
In general, “payroll costs” include:
• salary, wage, commission, or similar compensation;
• payment of cash tip or equivalent;
• payment for vacation, parental, family, medical, or sick leave;
• allowance for dismissal or separation;
• payment required for the provisions of group health care benefits, including insurance premiums;
• payment of any retirement benefit; or
• payment of State or local tax assessed on the compensation of employees.

Importantly, “payroll costs” do not include the compensation of any individual employee with an annual salary in excess of $100,000.

3. What can you use the PPP loan proceeds for?
You may use the loan proceeds for:
• Payroll costs;
• Group healthcare benefit costs and insurance premiums;
• Mortgage interest (but not prepayments or principal payments) and rent payments; and
• Interest on debt that existed as of February 15, 2020.

4. How does PPP loan forgiveness work?
To be eligible for forgiveness, you must:
• Use the loan proceeds for to pay these expenses over the 8 weeks after getting the loan.


• You must maintain your staff and payroll, including:
o your full-time employee headcount (NOTE: You have until June 30, 2020 to restore your full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020.)
o not cutting salaries and wages by more than 25% for any employee that made less than $100,000 annualized in any pay period in 2019.

5. How and when do I apply for a PPP loan?
The PPP application window opens this Friday, April 3. You must apply through an SBA-approved lender.


Contact your lender to determine if they are SBA-approved and planning to process PPP loans. If not, you may find an SBA-approved lender here.

We recommend you immediately review the SAMPLE SBA PPP loan application.

And, these are some of the types of documents you may need to apply:
• Organizational documents such as charter, certificate of formation, bylaws, and operating agreements
• W-9s
• Copies of drivers’ licenses for controlling owners
• Bookkeeping general ledger report on all entries that relate to payroll for 2019 and 2020 YTD. This includes Salaries, Wages, Commissions, Vacation Pay, Parental Leave, Family Leave, Sick Leave, Allowance for Dismissal/Separation (Severance Agreement), Group Health Care Payments/Premiums, Retirement Benefits, State & Local Tax assessed on Compensation
• 2019 tax returns or 2019 profit and loss report/balance sheet
• Recent IRS payroll tax filings (which includes number of employees)
• Reports detailing the 2019-2020 YTD compensation for each employee
• Payments made to any group health care benefits including premiums paid in 2019 and 2020 YTD

6. Helpful Link
Here is a helpful sample calculation of the CARES loan amount and forgiveness under different scenarios.

b. SBA Economic Injury Disaster Loans (EIDL)
1. What are EIDL loans?
EIDL loans are issued under the SBA’s existing disaster loan program. But the CARES Act expands the eligibility for such loans for small businesses who have been impacted by COVID-19. Qualifying businesses may take out both PPP and EIDL loans; provided, that they may not seek to borrow for the same costs twice.

EIDL loans are non-forgivable. But businesses who have taken out an EIDL loan since the COVID-19 Emergency Declaration, may be eligible to refinance their EIDL loan into a PPP loan to take advantage of the forgiveness provisions.

2. What can I borrow?
Businesses that have suffered “substantial economic injury” due to COVID-19 (as determined by the SBA) may borrow up to $2 million. EIDL loans may be used for payroll costs, costs incurred due to supply chain interruption, and obligations that cannot be met due to revenue losses.

3. What are the terms?
The interest rate on EIDL loans is 3.75% fixed for small businesses and 2.75% for nonprofits. EIDL loans have up to a 30-year term and amortization (determined on a case-by-case basis). And, the first payment is due 12 months after the loan is disbursed.

4. What about the Economic Injury Disaster Grant?
When you apply for an EIDL loan, you can also request an advance of up to $10,000 to pay allowable working capital needs. The SBA anticipates paying these advances within 3 days. The advance is like a grant. There is no requirement it be repaid, even if your application for an EIDL loan is denied; however, the advance must be deducted from any loan forgiveness amounts under a PPP loan, described above.

5. How do I apply?
You may apply here for an EIDL loan online through the SBA.

6. Are there other qualifying terms?
The CARES Act waives several traditional requirements, including that the applicant cannot obtain credit elsewhere; the applicant must personally guarantee loans of $200,000 or less; and that the applicant must have been operating for at least one year. While the CARES Act is silent on collateral, the SBA may require it if available.

7. Can I take out BOTH PPP and EIDL loans?
Yes. But, you cannot take them out “for the same purposes.” And, if you take the $10,000 EIDL grant, that amount would be subtracted from the amount forgiven under your PPP loan.

II. Option B Tax Credit/Deferment

a. “Employee Retention” tax credit
Employers whose businesses were disrupted by COVID-19 because of a “total or partial shutdown order” or if gross receipts fell by more than 50% when compared to the same quarter in 2019, may be eligible for a 50 % refundable payroll tax credit on the first $10,000 of qualified wages (including health plan expenses) paid to any employee. (So, the maximum credit for “qualified wages” paid to any single employee is $5,000.

1. What are “Qualified Wages”?
The answer depends on how many employees you averaged in 2019. If an employer averaged more than 100 full-time employees in 2019, qualified wages are the wages paid to an employee for time that the employee is not providing services. In other words, you only get a credit for employees who are furloughed or otherwise not working. If an employer had less than 100 full-time employees in 2019, qualified wages are any wages paid to any employee during the period of economic hardship.

Qualified wages must have also been paid between March 12, 2020 and December 31, 2020.

2. How do I claim the credit?
The credit is allowed against the employer portion of social security taxes. If the amount of the credit exceeds the federal employment taxes, the employer will be entitled to a refund. Employers must report their wages and credits for each calendar quarter on their federal employer income tax returns.

b. Deferral of Social Security Taxes
Employers may defer their half of Social Security taxes (but not Medicare taxes). The employer’s half of social security taxes for the period March 12, 2020 and December 31, 2020 are not required to be deposited on the regular schedule. Instead, half of those taxes would be due to be deposited on December 31, 2021, and the remaining half would be required to be deposited by December 31, 2022.

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