The Coronavirus Aid, Relief, and Economic Security Act, commonly known as the “CARES Act” (the “Act”) was signed by President Trump on March 27, 2020.
The Act offers unprecedented benefits to help American employers during this national crisis. This article will focus on the loan forgiveness program promulgated under the Act.
In sum, the Act provides that that employers of 500 or fewer employees may borrow up to 2.5 times their average monthly payroll costs, subject to a maximum of $10,000,000, on a non-recourse basis, that is, without collateral and personal guarantees, for a period of up to ten years at the maximum interest rate of 4% per annum.
In the interest of brevity, I have excluded certain outliers or non-traditional employers such as seasonal employers, multi-office employers, and employers who were not in business during the first half of 2019.
The Act defines “Payroll Costs” as the sum of “(aa) (AA) salary, wage, commission, or similar compensation; (BB) payment of cash tip or equivalent; (CC) payment for vacation, parental, family, medical, or sick leave;(DD) allowance for dismissal or separation; (EE) payment required for the provisions of group health care benefits, including insurance premiums; (FF) payment of any retirement benefit; or (GG) payment of State or local tax assessed on the compensation of employees; and (bb) the sum of payments of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment, or similar compensation and that is in an amount that is not more than $100,000 in 1 year, as prorated for the covered period.”
Please note that Payroll Costs do not include: (a) compensation of more than $100,000 for each employee; (b) Federal Withholding and Payroll taxes, and (c) qualified sick and family leave wages under the Families First Coronavirus Response Act.
Fortunately, independent contractors, sole proprietors and self-employed individuals are eligible to receive a loan. These individuals must present documentation such as 1099 and other proof of income to confirm their eligibility.
Maximum Loan Amount
The maximum loan amount is the lesser of (a) 2.5 times the average monthly payroll costs of the Employer during the 1 year period before the date of the loan less any SBA loans already taken by the Employer from on or after January 31, 2020, which such loans may be eligible for refinancing under the Act or (b) $10,000,000.
Allowable Uses of Loan Proceeds
During the covered period (February 15, 2020 to June 30, 2020), the Employer may use proceeds from the loan for: (a) payroll costs; (b) costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums; (c) employee salaries, commissions, or similar compensations; (d) payments of interest on any mortgage obligation (which shall not include any prepayment of or payment of principal on a mortgage obligation); (e) rent (including rent under a lease agreement); (f) utilities; and (g) interest on any other debt obligations that were incurred before the covered period.
Nonrecourse; No Personal Guarantee
The Act provides that the loan will be nonrecourse, without collateral and without personal guarantees, from any individual shareholder, member, or partner of an eligible borrower, except if the proceeds are used for purposes not authorized by the Act.
Loan forgiveness is perhaps the most favorable provision of the Act. Borrowers will be eligible for tax-free forgiveness of principal due under the loan equal to the sum of the following amounts during the 8 week period following the loan closing: (a) payroll costs; (b) payments of interest on any covered mortgage obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation); (c) payments on any covered rent obligation; and (d) covered utility payments.
Forgiveness is of course predicated on the Borrower maintaining the number of full-time equivalent employees for the 8-week period that were employed during the period of February 15, 2019 to June 30, 2019 or the period of January 1, 2020 to February 29, 2020.
Any reduction of employees will result in a proportionate reduction in the forgiveness amount. The amount of forgiveness is also reduced for any salary reduction in in excess of 25% of the total salary or wages of the employee for most recent full quarter. Borrowers will be allowed to maintain their employee count by rehiring terminated or laid off employees during the period commencing February 15, 2020 to April 27, 2020.
by Damon Gamble
Damon Gamble is the Owner and Managing Partner of Gamble and Associates, a a full-service Certified Public Accounting firm that provides accounting, tax and business consulting services to high net-worth individuals, and Small Businesses such as Sole Proprietorships, Corporations, S-Corporations, Partnerships, LLCS and Trusts.
For more questions, please contact Damon at email@example.com.