PROGRAMS AVAILABLE TO PROVIDE FINANCIAL ASSISTANCE TO CONTRACTORS UNDER THE CARES ACT
The Coronavirus Aid, Relief and Economic Security (CARES) Act establishes several programs to provide financial assistance to businesses and individuals affected by the COVID-19 pandemic. Some of the measures which focus on small businesses and may be valuable to contractors are summarized here.
Paycheck Protection Program
. The objective of this $349 billion program administered by the Small Business Administration (SBA) and the U.S. Treasury Department is to enable businesses with less than 500 employees to remain operational and keep employees on their payrolls by providing loans, including loans that can be 100% forgiven. To qualify for a paycheck protection loan the borrower is to make a good faith self-certification that the loan is necessary because of the economic uncertainty caused by COVID-19 and will be applied to maintain payroll and make required payments. No personal guarantee or collateral is required. Small businesses (less than 500 employees or meeting the applicable SBA industry size standard), sole proprietorships, independent contractors and self-employed individuals in business on February 15, 2020 are eligible.
The loan can be used for payroll costs (up to a $100,000 annual compensation cap per employee), health care benefits (including paid sick or medical leave and insurance premiums), rent and mortgage obligations, utility bills and interest on debt obligations incurred prior to February 15, 2020. "Payroll costs" include wages, salary, commissions, payments to independent contractors up to $100,000 annually, tips, vacation and leave pay, employee separation payments, health care benefits, retirement benefits, and state or local taxes assessed on employee compensation. "Payroll costs" do not include payroll taxes, any compensation for an employee whose principal residence is outside the US, or any qualified sick or medical leave for which a credit is received under the Families First Coronavirus Relief Act.
The Paycheck Protection Program is in effect until June 30, 2020 and loans can be made retroactive to February 15, 2020 to cover payroll or other covered expenses. The maximum loan amount is 2.5 times your average monthly "payroll costs" for the one-year period ending on the date of the loan up to $10 million. Paycheck Protection loans have a maturity of two (2) years and a fixed interest rate of 0.50%. The U.S. Treasury Department has announced that "all loan terms will be the same for everyone." All payments are deferred for six (6) months, but interest will accrue. Prepayment, borrower and lender fees are waived. Neither the government nor leaders will charge small businesses any fees.
Loans can be obtained through private qualified SBA lenders and any federally insured depository institution or federally credit union participating in the program and are 100% guaranteed by the government. Lenders may begin processing loan application on April 3, 2020. Applications can be obtained on the U.S. Treasury website.
Forgiveness of Loans
. Perhaps the most significant feature of the Paycheck Protection Program is that these loans are forgivable (on a tax-free basis) up to the sum of the payroll costs, mortgage interest or rent, and certain utility payments made by the employer during the 8-week period beginning on the date of the loan, PROVIDED that the employer does not reduce its workforce during the 8-week period (as compared to the prior year) and does not reduce the salary or wages paid to any employee who earns less than $100,000 per year by more than 25% during the 8-week period. If employers have already made staffing reductions, the Act permits a business to qualify for loan forgiveness if they re-hire the workforce back to pre-existing levels by June 30, 2020. Due to likely high subscription costs, the Treasury Department anticipates that not more than 25% of the forgiven amount may be for non-payroll costs.
Any portion of the loan which is not forgivable can be repaid over 2 years at a .50% interest rate. Some of the other generous provisions of these loans include waiver of the SBA personal guarantee requirements for loans up to $200,000, relaxed financial disclosures, and deferment of payment of principal and interest of up to one year.
Paycheck Protection Loans are available to any business with fewer than 500 employees, whether the business otherwise qualifies as a "small business" under SBA rules. The loan forgiveness feature transforms these loans into the equivalents of a grant from the government for businesses which commit to keeping the workforce employed.
Other SBA Loan Provisions
. The CARES Act also expands existing SBA loan programs. The Economic Injury Disaster Loan program is expanded to include availability to all businesses with fewer than 500 employees and to sole proprietors and ESOPs. No personal guarantees will be required for any of these loans under $200,000 made prior to December 31, 2020. In addition, a new Emergency Grant is available to allow any business which has applied for a disaster loan to receive up to $10,000, and the grant is not required to repaid even if the loan is not approved. Other provisions include forgiveness of up to six (6) months of principal, interest and fees on existing SBA Section 7(a) loans. Also, the statutory limit on SBA Express loans has been raised from $350,000 to $1 million through December 31, 2020.
Employee Retention Tax Credit
. Businesses that are forced to shut down or suspend operations due to COVID-19, but which continue to pay employees during that period, are entitled to a credit against the employer portion of Social Security payroll taxes. For wages paid after March 12, 2020 and before January 1, 2021, the credit equals 50% of "qualified wages" paid of $10,000 per employee. Therefore, the total maximum credit available is $5,000 per employee. The credit is refundable if it exceeds the business's liability for payroll taxes.
Businesses are eligible for the credit if their operations were fully or partially suspended during any calendar quarter during 2020 due to orders from an appropriate government entity resulting from COVD-19. Alternatively, businesses that remained open but had gross receipts for any quarter in 202 that were 50% of what they were for the same quarter in 2019 are eligible for the credit for each quarter until the business has a quarter in which gross receipts exceed 80% of what they were for the same quarter in the previous year.
The definition of "qualified wages" depends on whether the employer has more than 100 full-time employees. For employers with more than 100 employees, qualified wages are those paid to employees when they are not providing services due to the COVID-19 outbreak. For businesses with 100 or fewer employees, all wages qualify. In general, qualified wages includes amounts paid to maintain group health insurance.
NOTE: This credit is not available to any business which takes out a Payroll Protection Loan as described above.
Deferral of Payroll and Self-Employment Taxes
. The CARES Act allows employers to defer payment of the employer's share of the 6.2% Social Security taxes owed. Those taxes which are owed between now and December 31, 2020 may be deferred, with 50% payable by December 31, 2021 and the other 50% payable by December 31, 2022. Self-employed taxpayers can defer 50% of their self-employment taxes due for the rest of 2020 in a similar fashion.
NOTE: This deferral is not available to any business which takes out a Payroll Protection Loan as described above.
The CARES Act also contains a number of technical corrections and tax provisions which are available for businesses and business owners. If you have further questions about the provisions discussed above or any other aspect of the CARES Act, please contact Scott Calhoun at