Small Business Benefits Under the CARES Act

The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed into legislation on March 27, 2020, and was intended to redress some of the economic pain our nation is suffering as a result of COVID-19.  This article will address three sections of the CARES Act aimed at helping small businesses during these difficult times:  (1) Paycheck Protection Program (PPP) Loans, (2) forgiveness of PPP Loans, and (3) the Emergency Economic Injury Disaster Loan Program and Grant.

(1)       Paycheck Protection Program Loans – Section 1102 of the CARES Act

PPP Loans fall under Section 7(a) of the Small Business Act (15 U.S.C. 636(a)).  These loans are available to businesses that have 500 or fewer employees and include small business concerns, any business concern, nonprofit organizations, veteran organizations, and particular tribal businesses.  There are exceptions to the number of employees when the standard size is set by the Administration for the industry or businesses in the food or hospitality industries with more than one location.   Also included are sole proprietorships, independent contractors, and eligible self-employed individuals. “Employee” is defined as full-time, part-time, and other basis.

The borrower can use PPP Loans for certain expenses and costs expended during the covered period between February 15, 2020, and June 30, 2020.  The covered costs and expenses consist of payroll costs, including employee salaries, commissions, and similar compensation.  There are certain exceptions to the types of compensation that are covered.  Also, the loan covers some health costs and paid leave costs, payments of interest on mortgage obligation, rent, utilities, and interest on any other debt obligations incurred before the covered period.

A PPP Loan must be made between February 15, 2020, and June 30, 2020.  The borrower is not required to show an inability to obtain credit elsewhere, provide a personal guarantee, or collateral.   The maximum amount of the loan available is a quotient of the payroll costs but cannot exceed $10,000,000. As discussed in more detail below, part of the loan can be forgiven under certain circumstances.  Finally, a borrower must make a good faith certification declaring need due to the current economic conditions, that the borrower will use the proceeds for the allowed costs and expenses discussed above, and that the applicant has not received a duplicative amount under a covered loan or does not have a duplicative application pending.

(2)       Forgiveness of PPP Loans – Section 1106 of the CARES Act

In addition to the expansion of loans under Section 7(a) of the Small Business Act to include PPP Loans, the CARES Act also provides for forgiveness of PPP Loans under certain conditions.  Further, any amount forgiven under this section is tax-exempt and not considered to be gross income.  A PPP Loan borrower can apply for forgiveness in an amount equal to certain expenses incurred within the 8-week period beginning on the date the PPP Loan originated (“covered period”).  The “expected forgiveness amount” is the amount expended during the covered period, on payroll costs, interest payments on mortgage obligations, rent, and utilities.  The mortgage obligation must have existed and the utilities must be for services that existed before February 15, 2020.  The forgiveness cannot exceed the principal amount of the financing made available under the covered loan and is subject to verification.

One big caveat to the PPP Loan forgiveness is that the amount of forgiveness will be reduced if the borrower decreases the number of employees or the amount of wages or salary more than 25% of the salary or wages.  A borrower that has already reduced its workforce or wages/salary can rehabilitate by re-hiring full-time equivalents or reinstating wages to effectively mitigate the reductions that would have otherwise reduced the amount of forgiveness.

(3)       Emergency Economic Injury Disaster Loan Program & Grant – Section 1110 of the CARES Act

The CARES Act expands the availability of loans made under Section 7(b)(2) of the Small Business Act and adds a potential $10,000 grant benefit when specific requirements are met.  The CARES Act has expanded eligible entities to include businesses with 500 or fewer employees and includes individuals, sole proprietors (with or without employees), independent contractors, cooperatives, ESOPs, and tribal businesses.  This is in addition to small business concerns, private nonprofit organizations, and small agricultural cooperatives that were already eligible for loans under Section 7(b)(2).  Lending requirements determining the ability to repay have been relaxed to be based solely on a credit score without the need for a tax return/transcript.  Instead, alternative methods for the determination of repayment ability can be used.

The maximum amount of loan available is $2,000,000, and under the new law a borrower does not have to personally guarantee loans of $200,000 or less.  The CARES Act waives the requirements of the inability to obtain credit elsewhere, or that an entity has been in business for more than one year.  However, an entity must have been in business before January 31, 2020.

One of the most significant benefits of this program is the grant.  Upon applying for the loan, an applicant can also request an advance of not more than $10,000.00, and if granted, will be paid to the applicant within three (3) days.  As long as the advance is used for specific purposes, the applicant will not be required to pay back this advance, even if the loan is denied.  The advance must be used to pay sick leave because the employee could not work due to COVID-19, maintain payroll to retain employees during disruptions and slowdowns, meet increase in costs due to supply chain interruptions, pay rent or mortgage, or repay obligations that the applicant cannot pay due to revenue losses.  One final caveat is that advances made under this program will be deducted from any PPP Loan the applicant is later awarded.

If you have any questions about how the CARES Act applies to you, or any other business- related questions, please contact Dias Law Firm, Inc.  We are happy to help.

By: Alicia D. Wrest, Esq., Of Counsel

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