Due to business closures and restrictions caused by the COVID-19 pandemic, federal, state and local governments are mobilizing to provide economic relief for businesses and individuals who are facing this unprecedented period of uncertainty. Below is a list of public and private loans, grants and financial support programs to assist small businesses.
Federal Government Action
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law to respond to individuals, families and businesses affected by the coronavirus. The provisions of the CARES Act that are targeted towards small businesses during COVID-19 closures include, but are not limited to, the following:
Employee Retention Credit.
The CARES Act provides eligible businesses, including tax-exempt organizations, but not governmental entities, a refundable credit against payroll tax liability equal to 50% of the first $10,000 in wages per employee. Eligible employers must have carried on a trade or business during 2020 and meet one of two requirements:
- Have business operations fully or partially suspended due to orders from a governmental entity limiting commerce, travel or group meetings due to COVID-19; or
- Experience a significant decline in gross receipts. A significant decline in gross receipts begins with the first calendar quarter of 2020 in which gross receipts are less than 50% of gross receipts for the same calendar quarter in 2019. The significant decline in gross receipts ends with the first calendar quarter in 2020 where gross receipts are greater than 80% of gross receipts for the same calendar quarter in 2019.
The employee retention credit is effective for wages paid after March 12, 2020, and before January 1, 2021. Employers that apply for small business loans (either EIDL or PPP) will not receive the credit.
Deferred Payroll Taxes.
The CARES Act postpones the due date for paying payroll taxes for eligible businesses that continue to employ workers through the coronavirus crisis. The deferred amount for 2020 will be payable over the next two years, with one-half due by December 31, 2021 and one-half due by December 31, 2022.
Treatment of Losses and Business Interest Expense.
Certain changes to the loss provisions made by the Tax Cuts and Jobs Act (“TCJA”) are suspended in an effort to allow companies to utilize greater losses as well as to claim refunds for certain losses. Specifically, the CARES Act:
- Suspends the TCJA’s 80% of taxable income limit on net operating loss (“NOL”) carryovers for three years, so that the limit would not apply to tax years beginning in 2018, 2019, and 2020;
- Allows NOLs arising in 2018, 2019, and 2020 to be carried back five years; and
- Suspends the limitations on excess farm losses and on the use of a pass-through business’ losses against non-business income for three years, so that the limits would not apply to tax years beginning in 2018, 2019, and 2020.
The CARES Act would temporarily increase the limitation on interest deductions imposed by the TCJA. Specifically, the Act would increase the 30% of adjusted taxable income (ATI) threshold to 50% of ATI for tax years beginning in 2019 and 2020. (Special tax year 2019 rules would apply to partnerships.) It would also allow a taxpayer to elect to use tax year 2019 ATI in lieu of tax year 2020 ATI for the purpose of calculating its tax year 2020 limitation.
Paycheck Protection Program.
Sections 1102 and 1106 of the CARES Act created a temporary loan program, the “Paycheck Protection Program” or “PPP,” to assist small businesses with the economic impact of the COVID-19 health crisis. Loans made under this program are 100% guaranteed by the SBA and the full principal amount of the loans may qualify for loan forgiveness.
Lenders authorized to make loans under the SBA’s traditional 7(a) Business Loan Program are automatically approved to make and approve PPP loans, and they may opt to participate in the program under the terms and conditions established by the Department of Treasury.
PPP Loan Terms. A summary of important loan terms is as follows:
- An Annual interest rate of 1%.
- The loan must be repaid within 2 years.
- No personal guaranty or other collateral will be required.
- All application fees are waived.v
- The monthly payments will begin six (6) months from the disbursement date.
Eligible Loan Recipients. Businesses must meet the following qualifications in order to be eligible to receive a PPP loan:
- Be a business entity or a tax-exempt non-profit organization under Section 501(c)(3) or Section 501(c)(19) of the Internal Revenue Code; or
- Be a sole proprietorship, an independent contractor, or be self-employed; and
- Have 500 or fewer employees whose principal place of residence is in the United States; and
- Been in operation on February 15, 2020 and either had employees who were paid salaries or paid independent contractors as reported on Form 1099-MISC.
Calculation of Loan Amounts.
Through interim final guidance issued by the SBA, businesses are limited in the amount of a loan they can request. Businesses may apply for up to 2.5 times the average monthly payroll costs (excluding compensation paid to employees in excess of $100,000 per year) based on the payroll costs from the prior calendar year.
Payroll costs include salary, wages, commissions, tips, paid vacation and leave time, employer costs for group health care coverage, employer-paid retirement contributions, and employer-paid state and local taxes on employee compensation. Payroll costs do not include the employer-side payroll taxes imposed on employee wages, or qualified paid sick and family leave under the Families First Act.
Loan Forgiveness. Up to 100% of the full principal amount of the loan may be forgiven, together with accrued interest, if the proceeds are used to pay for qualified expenses during the eight (8) week period following the date of disbursement of the loan. Qualified expenses include payroll costs (as defined above), interest on mortgages, rent payments and utility payments, all of which are made pursuant to agreements that were in existence before February 15, 2020. In order to receive forgiveness of the loan, only 25% of the loan proceeds can be expended on non-payroll expenses.
Reductions in the amount of forgiveness will occur for businesses that reduce the size of their workforce or cut employee wages by more than 25%. However, workers who have already been laid off but are brought back on payroll before the loan is disbursed will not count as a reduction in workforce for purposes of loan forgiveness under the PPP.
Borrowers seeking forgiveness of amounts must submit to their lender the following:
- Documentation verifying full-time equivalent employees 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.
Economic Injury Disaster Loans (“EIDL”). This is an existing loan program available through the SBA. Through the CARES Act the federal government has committed more money to the program and relaxed some of the requirements to obtain this type of loan. The CARES Act also added a provision that allows a business to request up to $10,000 of an EIDL in the form of a “loan advance,” which is effectively a grant that does not have to be repaid. According to the SBA, the amount of the grant will be $1,000 per employee for up to ten employees. The non-grant portion of the EIDL can be repaid in a term of up to 30 years at a rate of 3.75% for small businesses and 2.75% for nonprofits. Payments for the first year are deferred. No personal guaranty is required for loans under $200,000. For loans of up to $500,000, business assets can be used as collateral. For loans greater than $500,000, real estate may be used as collateral. Loan proceeds can be used to pay fixed debt, payroll, accounts payable and other bills that cannot be paid because of the disaster impact. Loan applications can be downloaded at https://www.sba.gov/funding-programs/disaster-assistance or electronically completed and submitted to https://www.sba.gov/page/disaster-loan-applications.
Businesses can apply for both PPP loans and EIDL; however, businesses may not use the funds from each loan for the same purpose and any “loan advance” portion of an EIDL will be deducted from loan forgiveness under the PPP loan. If you have used the funds of an EIDL for payroll costs, the PPP loan must be used to refinance the EIDL.
SBA Express Bridge Loans. Small businesses that currently have a business relationship with an SBA Express Lender are eligible to access up to $25,000 in loans to help overcome a temporary loss of revenue. The loan can be either a term loan or a bridge loan while a business is applying for a direct SBA Economic Injury Disaster loan.
Main Street Business Lending Program. The Federal Reserve announced plans to create a lending program to complement the SBA in providing emergency loans to small and medium businesses.
Families First Coronavirus Response Act. Prior to the passage of the CARES Act, Congress passed legislation aimed to address the immediate effects of the coronavirus. The Families First Coronavirus Response Act (“FFCRA”) was passed on March 18, 2020. The sick leave and the paid leave provisions went into effect on April 1, 2020. FFCRA provides for paid sick and leave time when an employee is unable to work due to any of the following reasons:
- Being subject to a Federal, State, or local quarantine or isolation order related to COVID-19;
- Has been advised by a health care provider to self-quarantine related to COVID-19;
- Is experiencing COVID-19 symptoms and is seeking a medical diagnosis;
- Is caring for an individual subject to an order described in (1) or self-quarantine as described in (2);
- Is caring for his or her child whose school or place of care is closed due to COVID-19 related reasons; or
- Is experiencing any other substantially-similar condition specified by the U.S. Department of Health and Human Services.
Employees who cannot work due to reasons 1 through 3 above are eligible for up to two weeks (up to 80 hours) of paid sick leave at the employee’s regular rate of pay (not to exceed $5,110 total). Employees who cannot work due to reasons 4 and 6 above are eligible for up to two weeks (up to 80 hours) of paid sick leave at a rate of two-thirds of the employee’s regular rate of pay (not to exceed $2,000). Employees who cannot work due to reason 5 above are eligible for up to twelve (12) weeks of paid sick and paid expanded family medical leave at a rate of two-thirds of the employee’s regular rate of pay (not to exceed $12,000 total).<p/
The FFCRA extends paid sick and paid leave to many workers and gives businesses a dollar-for-dollar refundable tax credit quarterly based on their Social Security payroll taxes.
State Government Action
Pennsylvania Industrial Development Authority (“PIDA”). COVID-19 Working Capital Access Program (CWCA) provides up to $100,000 in loans to small businesses with 100 or fewer full-time employees.
- All loan applications must be made through a Certified Economic Development Organization, a full list of which can be found at https://dced.pa.gov/CEDO/.
- Loan terms are three (3) years with a 12-year amortization.
- No payments will be due and payable during the first year;
- Principal and interest (if interest is applicable) will be due monthly for two (2) years; and
- A balloon payment will be due and payable at the end of the third year.
- The interest rate for the program is 0%, except for agricultural producers, in which case the interest rate is 2% fixed for the life of the loan.
An Update on Taxes
As with the federal extension, the deadline for filing personal income taxes has been extended for the Commonwealth of Pennsylvania and Lancaster County to July 15, 2020. At the state and local levels, this deadline applies to both final 2019 tax returns and payments and estimated payments for the first and second quarters of 2020.
If you have questions about this or any other business matter, please contact Grace Nguyen Bond at firstname.lastname@example.org or 717-509-7226.
**This update is provided for informational purposes only and should not be construed as legal advice or as creating an attorney-client relationship where one does not already exist. The article was published on April 27, 2020. Please be aware that the laws and regulations related to the COVID-19 pandemic are being updated rapidly. Please check back or contact us for the most up-to-date information.**