We are providing our clients with an update on the Coronavirus Aid, Relief and Economic Security Act (the “Act” or “CARES Act”) which was passed by both the House and Senate this week and signed into law by the President on March 27, 2020. The CARES Act provides for an immediate injection of $2 trillion in aid and relief for companies and employees in the U.S. during these challenging times.
The sections of the Act that will likely most fundamentally impact our venture fund and start-up company clients include the following:
Paycheck Protection Program
The Act allocates $350 billion in funds to a newly-established Paycheck Protection Program, which is intended to dovetail with the Small Business Administration’s (SBA) currently existing 7(a) loan program. Specifically, the Act expands on the 7(a) loan program to provide for business loans (“Paycheck Protection Loans”) on highly favorable terms, specifically directed to small businesses in need of operating capital and designed to forestall mass employee layoffs. Eligible borrowers under the Paycheck Protection Program include “small business concerns” (as defined under SBA regulations) with 500 or fewer employees. Paycheck Protection Loans will be administered by lenders currently authorized to make loans under the SBA’s Business Loan Program. The intent of the paycheck Protection Program is to assist small business concerns with covering their immediate operating costs related to payroll (with a $100k cap on individual salary amounts), mortgage interest or rent, leases, utilities and interest on existing debt.
- Borrowers will need to certify that they have been adversely impacted. There are no requirements for personal guarantees or collateral associated with the loan. Detailed application requirements are being developed by the SBA and guidance will be issued to participating banks.
- Loan applications must be filed prior to June 30, 2020, and will be made through online applications with a participating lender. Lenders will approve and fund these loans in order to expedite the application and approval process (these loans are 100% guaranteed by the SBA; when the loan or a portion of the loan is forgiven, the bank is repaid principal and interest by the SBA).
- The maximum loan amount under the Payroll Protection Program is 2.5 times average monthly payroll or up to $10 million. The loan will have a maximum interest rate of 4%.
- All Paycheck Protection Loans will qualify for a special loan forgiveness program under which certain costs incurred and payments made – including payroll costs, mortgage interest, rent and utilities -- over the 8-week period following the origination date of the loan are forgiven, up to the amount of the actual loan amount. The amount forgiven would be reduced proportionally by any reduction in employees retained over this period compared to the prior year and any reduction greater than 25% in employee compensation.
- Since some companies may have already laid off workers as a response to the pandemic, the program is retroactive, with the covered loan period running from Feb. 15 to June 30, 2020, which allows eligible borrowers to rehire previously laid off or furloughed employees.
- Amounts of the loan not forgiven will have a maximum maturity date of 10 years from the date the borrower applied for loan forgiveness. The amount not forgiven will continue to be 100% guaranteed by the SBA.
You should immediately email your bank representative and/or contact that person by telephone on Monday. Several banks have issued notifications over the past 24 hours to their customers regarding the Payroll Protection Loans. A few banks we contacted have already added clients on their loan application list although banks do not expect to have the online applications form ready for at least a week.
Some banks may not be able to handle these loans or may be overwhelmed by applications. Please be patient and continue to reach out to your banks. Also, keep your Reitler counsel informed as we are working with several other financial institutions that are current SBA lenders and may be an alternative resource for you.
IMPORTANT NOTE ON 500 EMPLOYEE LIMIT FOR QUALIFYING SMALL BUSINESS CONCERNS
- Small business concerns with significant venture, private equity or other fund investors should be aware of the potential impact of the “affiliation” rules under the SBA 7(a) loan program on their eligibility for a Payroll Protection Loan. Those rules currently aggregate many small fund-owned portfolio companies with other portfolio companies having overlapping fund investors, to the extent those companies are deemed to be “controlled” by such fund investors, for purposes of determining the portfolio company’s employee count, thereby potentially denying eligibility to many small businesses for loans under the Payroll Protection Program.
- Under the Payroll Protection Program, the SBA’s affiliation rules are waived for (1) certain businesses in the hospitality and food service industries (NAICS code beginning with 72) with not more than 500 employees; (2) franchise businesses with SBA franchisor identifier codes; and (3) businesses that receive financial assistance from a Small Business Investment Company.
- It is anticipated that the Treasury Department will amend the SBA affiliation regulations, or issue new regulations, in order to address this concern regarding application of the affiliation rules. We are working closely with industry groups (including the National Venture Capital Association) to clarify and possibly amend the SBA rules related to affiliation, and will keep clients informed on these important developments.
Small Business Tax Breaks
In addition to the Payroll Protection Program, the Act also provides a number of potentially significant tax benefits for businesses, including the following:
- Certain businesses are allowed a credit against payroll taxes for “qualified wages” (including amounts paid towards health insurance), not exceeding $10,000 per employee, paid to or for employees from March 13, 2020 to December 31, 2020 when the business is suspended due to a COVID-19- related shut down order or receipts declined more than 50% when compared to the applicable period in the prior year. If a business has more than 100 full-time employees, the credit is only available if the employees were not providing services and if the business has 100 employees or less, the credit is available whether or not the business remained open.
- The Act allows for deferral of the 6.2% employer Social Security taxes otherwise owed for wages paid during the remainder of 2020 (including Social Security taxes owed by self-employed individuals), with the deferred amount to be paid over the following two years, 50% by December 31, 2021 and the remaining 50% by December 31, 2022.
- Finally, the CARES Act modifies certain provisions in the 2017 Tax Cuts and Jobs Act (TCJA) tax legislation, including:
- Temporary elimination of the limitations under Section 172 of the Internal Revenue Code, restricting use of net operating loss carryforwards to 80% of taxable income, and limiting use of NOL carrybacks;
- Revisions to certain loss limitation rules imposed under the TCJA on non-corporate taxpayers;
- Favorable modification of alternative minimum tax credit rules applicable to corporate taxpayers;
- Increase in the TCJA limitation of deductibility of business interest from 30% to 50% of adjusted taxable income.