On
March 27, Congress passed the Coronavirus Aid, Relief, and Economic Security
Act (also known as the “CARES Act”). The purpose of the Act, as stated, is to
“[p]rovid[e] emergency assistance and health care response for individuals,
families and businesses affected by the 2020 coronavirus pandemic.” This
monumental, $2-billion-dollar stimulus package, is the largest disaster relief
package in U.S. history and has provisions which will have a large-scale impact
on businesses and individuals alike. For small businesses, Title I of the Act,
named the “Keeping American Workers Paid and Employed Act,” is vitally
important as it provides crucial avenues whereby small businesses can seek
low-interest, and partially forgivable federal loans to help ease the tensions
brought on by this pandemic.
Under this section of the CARES Act, during the “covered
period” – which is February 15, 2020 through June 30, 2020 – small businesses,
non-profit organizations, veterans organizations, or Tribal businesses are
eligible for a “paycheck protection loan” if : (1) the business employs not
more than 500 employees; or (2) if applicable, the business has the size
standard in number of employees established by the Small Business
Administration for the industry in which the business, non-profit, veterans
organization, or Tribal business operates. Importantly, too, individuals who
operate under a sole-proprietorship, as an independent contractor, or as
“eligible self-employed individuals” are also eligible to receive a loan under
the CARES Act. However sole-proprietors, independent contractors, and
self-employed individuals must submit documentation, such as payroll tax
filings reported on 1099-MISC, and income and expenses, to be eligible.
Additionally, “[a]ny business [] that employs not more than 500 people per
physical location of the business [] and that is assigned a North American Industry
Classification System code beginning with 72 at the time of dispersal [of the
loan] shall be eligible to receive a [] loan.”
Looking
at the provisions of the CARES Act, it becomes clear that Congress specifically
designed this law to be wide in its availability. Whether a small business with
one or multiple locations, non-profit, veteran’s organization, sole-proprietor,
independent contractor, or self-employed, there is potential to receive a loan
under this Act. If a business meets the minimum requirements for eligibility,
the question then becomes, how much can the business receive? Per the Act, the maximum loan amount is the
lesser of the sum of the product obtained by multiplying the average total
monthly payments made for payroll costs during the 1-year period before the
date on which the loan is made, by 2.5; and the sum of the outstanding amount
of a preexisting SBA loan which was made during the period beginning on January
31, 2020 and ending on the date on which a covered loan (meaning loans made
during the “covered period,” as described above) are made to be refinanced
under the covered loan. Under the above scenario, for seasonal employers, the
number is the average total monthly payments for the twelve-week period
beginning February 15, 2019, or at the election of the applicant, beginning
March 1, 2019 and ending June 30, 2019, multiplied by 2.5. If the requesting
business was not operating from February 15, 2019 through June 30, 2019, the
maximum loan amount is the product of the average total monthly payments for
payroll costs incurred during the period beginning on January 1, 2020 and
ending on February 29, 2020, by 2.5. Alternatively, no loan given under this
Act can exceed $10,000,000.
Next, if you are eligible for a loan and do, in fact,
receive the loan, what can the loan be used for? Under the Act, the allowable
uses for a covered loan are: payroll costs; costs related to the continuation
of group health care benefits during periods of paid sick leave, medical, or
family leave, and insurance premiums; employee salaries, commissions, or
similar compensations; payment of interest on any mortgage obligation; rent;
utilities; and interest on any other debt obligations that were incurred before
the “covered period.” Interestingly, the loan cannot be applied towards pre-payments
or payments of principal on an existing mortgage. Interestingly, also, there is
no requirement that the applicant submit his or herself to a personal guarantee
for the loan, or submit any collateral to obtain the loan. However, in order to
be eligible, an applicant for a loan under this section must make a “good faith
certification – (I) that the uncertainty of current economic conditions makes
necessary the loan request to support the ongoing operations of the []
recipient; (II) acknowledging that funds will be used to retain workers and
maintain payroll or make mortgage payments, lease payments, and utility
payments; (III) that the [] recipient does not have an application pending for
a loan under this subsection for the same purpose and duplicative of amounts
applied for or received under a covered loan; and (IV) during the period
beginning on February 15, 2020 and ending on December 31, 2020, that the []
recipient has not received amounts under this subsection for the same purpose
and duplicative of amounts applied for or received under a covered loan.”
A great benefit of these loans, in addition to interest
rates not to exceed four percent (4%), is their eligibility for at least
partial forgiveness. A business receiving a “covered loan” is eligible to have
the indebtedness on a “covered loan” forgiven in an amount equal to the costs
of payroll, payments made on interest of mortgage obligations, payment of rent,
and payment of utilities, so long as those payments were made during the
“covered period.” However, there are limitations on the amount forgiven and the
amount forgiven can be reduced in the event of layoffs and/or salary reductions
in excess of twenty-five percent (25%). Additionally, those seeking loan
forgiveness need to submit the following to the lender servicing the loan: (1) documentation
verifying the number of full-time employees on payroll and pay rates during the
covered period; (2) documentation, including cancelled checks, payment
receipts, transcripts of accounts, or other documents verifying payments on
covered mortgages, payments on covered leases, and covered utilities; (3) a
certification from a representative of the business stating that the
information submitted is true and correct and that the amount of forgiveness
requested was used for the purposes eligible for forgiveness; and (4) any other
documentation the Administrator determines necessary.
Lastly, under the Act, a small business can apply to the
SBA for a “Emergency EIDL Grant.” From January 31, 2020 through December 31,
2020, small businesses and other entities eligible, who apply for loans under
the Act, can request that the SBA provide an advance on the loan requested.
This advance cannot exceed $10,000, and can be used to provide paid sick leave
to employees unable to work due to the direct effect of the coronavirus;
maintain payroll to retain employees during business disruptions or substantial
slowdowns; meet increased costs to obtain materials unavailable due to
interrupted supply chains; make rent or mortgage payments; and repay
obligations that cannot be met due to revenue losses. While this amount
functions as a grant (in that it does not need to be repaid) even if the
business is denied a loan under the Act, if the business is approved for a
“covered loan,” the amount of the advance will be reduced from any loan
forgiveness requested by the business on the “covered loan.”
The unique situation brought on by the COVID-19 pandemic
has changed the lives of every person in the United States. It has also made
times difficult and lean for many small businesses around the country. In these
hard times, it is important for small businesses to be in a position where they
are not forced to go out of business. This is important not only for the U.S.
economy, but also, and perhaps more vital, for the communities in which these
small businesses operate. The steps taken by Congress with the passing of the
CARES Act, and the resources allocated through it, provide a foundation for the
survival of the small business and an avenue through these troubled times. David Schlosser (david@themillerlawfirmpa.flywheelsites.com) is an attorney with The Miller Law Firm,
P.A. Please give us a call if you have
any questions about the CARES Act or to schedule a small business consultation (The
Miller Law Firm, P.A. – 864-527-0413.)
