Practical Guidance on the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”)
Originally posted on March 29, 2020, Updated as of April 24, 2020
On March 27, 2020 the CARES Act was enacted as a historic economic stimulus to assist U.S. businesses and individuals through the trying times of the coronavirus pandemic. Below are answers to some of the frequently asked questions about the CARES Act:
Generally speaking, what does the CARES Act do?
The CARES Act implements measures aimed at curbing the negative economic effects of the coronavirus pandemic. The newly-enacted legislation is over 880 pages long, but some of its key provisions include financial relief in the form of loans to small businesses from the Small Business Administration (“SBA”), temporary unemployment relief for certain individuals who are out of work, recovery rebates to eligible individual taxpayers, and tax relief to certain qualifying businesses.
Small Business Relief
What businesses are eligible for small business loans?
Businesses, including nonprofits, veterans organizations, Tribal business concerns, sole proprietors, independent contractors, and self-employed individuals, with fewer than 500 employees, or businesses meeting the applicable size standard set forth by the SBA for their particular industry, which were operating as of February 15, 2020 and have been negatively affected by the coronavirus outbreak are eligible to receive a loan under the new program. Eligible businesses and individuals must apply for a loan by June 30, 2020 in order to receive a loan under the program. The U.S. Department of the Treasury has issued a fact sheet for borrowers which states that eligible businesses can apply for a loan beginning on April 3, 2020, and independent contractors and self-employed individuals can apply beginning on April 10, 2020.
What loan amounts are available?
The CARES Act allocates $349 billion to the SBA for loans to eligible small businesses through private lenders. On April 24, 2020, Congress passed new legislation adding $310 billion to the program, as the original round of funding had since been depleted. Eligible businesses can receive a loan equal to 2.5 times their average monthly “payroll costs” measured based on the 1-year period before the loan is received (or shorter period for businesses which have not been operating for a year) plus any loan already received under SBA’s Disaster Loan Program that is to be refinanced as part of the new program. “Payroll costs” include (i) employee salaries, wages, commissions, and similar compensation for up to $100,000 per year for each employee, (ii) paid time off, including vacation, family or sick leave, and severance payments, (iii) group health insurance, (iv) retirement plan contributions, and (v) state and local employment taxes. Payroll costs exclude compensation in excess of $100,000 per year for individual employees, federal tax withholdings, compensation for workers who are not U.S. residents, and paid leave provided by the Families First Coronavirus Response Act. All loans are capped at $10 million.
How do I apply for a loan?
The SBA is administering the loans, which are offered through certain private lenders. Businesses should contact their local bank or credit union to see if they are participating in the loan program, or visit the SBA website for more information on how to receive a loan.
Applicants will need to submit certain information and documentation to the lender to verify eligibility and loan amount. The necessary documentation includes all documents demonstrating:
· Employee wages for the last 12-month period
· Paid time off, including vacation time, sick leave, family leave, etc.
· Withholding amounts for state and local taxes on employee compensation
· Forms 1099-MISC for independent contractors
· Employee group health insurance
· Retirement plan information, such as 401(k)s and IRAs
This will likely be a time consuming process, so businesses seeking a loan should begin gathering the necessary documentation as early as possible to meet the June 30 deadline.
Applicants will also need to make a good faith certification that:
· The applicant was in operation as of February 15, 2020
· the loan is necessary to continue operations
· the funds will be used to retain workers and maintain payroll or make mortgage, lease, and utility payments
· Documentation verifying employee numbers and applicable costs will be provided to the lender
· Information and supporting documents included with the application is true and accurate
· from February 15 until December 31, 2020, the applicant has not received and will not apply for duplicative amounts under the program
· The lender will confirm the loan amount using tax documents the applicant submitted
What are the costs and expenses towards which I can apply the loan proceeds?
Loan proceeds can be used for payroll costs, interest payments on any mortgages (but not principal), rent, utilities, and interest on debts (but not principal) incurred before February 15, 2020. However, at least 75% of the loan proceeds must be used for payroll costs.
What are the terms of the loans?
While the CARES Act delineates the minimum permitted terms of the loan, the U.S. Department of Treasury described more lenient loan terms for borrowers. Specifically, the unforgiven loan amount will bear interest at a fixed rate of 1%. The loan will mature two years from the date the loan is made. Loan payments will be deferred for 6 months. The borrower will not be required to make any personal guarantees or offer collateral as security on the loan.
Can I receive loan forgiveness?
A loan amount equal to the first eight weeks from the date of origination of the loan of payroll costs, interest (but not principal) on mortgage obligations incurred before February 15, 2020, and rent and utilities which were in place before February 15, 2020 will be forgivable, subject to a proportional reduction to the extent the borrower has terminated employees or made pay cuts in excess of 25% between February 15, 2020 and April 26, 2020. However, borrowers are given a grace period ending on June 30, 2020 to rehire employees and/or restore pay without becoming subject to a reduction on loan forgiveness.
No more than 25% of the forgiven amount may be for non-payroll costs. In other words, 75% of the forgiven amount must be for payroll costs. Any forgiven loan amount will be treated as a tax-free grant.
Borrowers can submit a request for loan forgiveness to their lender. The request should include documents verifying the number of employees, pay rates, and the potentially forgivable costs expended over the 8-week time period. The lenders will have 60 days from receipt of the request to make a decision.
As a practical matter, because payroll costs for the eight-week period beginning on the date of the loan will be forgiven, and the forgiveness amount is subject to reduction for employee terminations or pay cuts, employers may consider rehiring their employees and/or restoring their pay amounts before applying for a loan in order to maximize the forgiveness amount.
If I already received a loan under the SBA’s Disaster Loan Program, can I refinance my loan under the new program?
A loan made under the SBA’s Disaster Loan Program on or after January 31, 2020 may be refinanced as part of a covered loan under the new program. More information about the SBA’s Disaster Loan Program is available by clicking here.
Individual Unemployment Relief
I receive regular unemployment compensation under federal and/or state law. What relief is available?
For individuals who qualify for regular state and federal unemployment compensation, the CARES Act allows states to enter into agreements with the U.S. Secretary of Labor to obtain funds to provide such individuals an additional $600 per week beyond the state or federal unemployment compensation amounts, through July 31, 2020. Additionally, if an individual’s state unemployment compensation becomes exhausted and the individual remains unemployed, he or she may qualify for the extended relief described below.
I am not eligible for regular unemployment compensation. What relief is available?
For individuals who are not otherwise eligible for regular state and federal unemployment compensation, including individuals who have exhausted their regular unemployment compensation under state or federal law, the CARES Act establishes a Pandemic Unemployment Assistance program providing such individuals with the benefits that would otherwise be available under state law, plus an additional $600 per week.
To qualify for relief, the individual must certify that he or she was otherwise able and available to work, except the individual is unemployed, partially unemployed, or unable or unavailable to work because:
· the individual has been diagnosed with coronavirus or is experiencing symptoms and seeking a medical diagnosis
· a member of the individual’s household has been diagnosed with coronavirus
· the individual is providing care for a family member or a member of the individual’s household who has been diagnosed with coronavirus
· a child or other person in the household for which the individual has primary caregiving responsibility is unable to attend school or another facility that is closed as a direct result of the coronavirus emergency and such school or facility care is required for the individual to work
· the individual is unable to reach the place of employment because of a quarantine imposed as a direct result of the coronavirus emergency
· the individual is unable to reach the place of employment because the individual has been advised by a health care provider to self-quarantine due to concerns related to coronavirus
· the individual was scheduled to commence employment and does not have a job or is unable to reach the job as a direct result of the coronavirus emergency
· the individual has become the breadwinner or major support for a household because the head of the household has died as a direct result of coronavirus
· the individual has to quit his or her job as a direct result of coronavirus
· the individual’s place of employment is closed as a direct result of the coronavirus emergency
· the individual meets any additional criteria established by the Secretary of Labor
Benefits under the Pandemic Unemployment Assistance program are available for the duration of the covered individual’s period of unemployment, beginning retroactively on January 27, 2020 and ending on December 31, 2020, up to a maximum of 39 weeks.
What are the mechanics for unemployment compensation?
The funding for the CARES Act unemployment compensation comes from the federal government, but the states are responsible for administering the program, including receiving and reviewing applications and disbursing the applicable amounts.
Individual Tax Rebates
What tax relief is available for individuals?
Eligible individuals will receive a tax rebate in 2020 of $1,200 ($2,400 in the case of eligible individuals filing a joint return), plus an additional $500 for each qualifying child. The rebate will be reduced by 5% of the amount of annual income exceeding the following thresholds, as applicable: $75,000 for single taxpayers, $112,500 for heads of households, and $150,000 for joint taxpayers. As a function of this reduction formula, single taxpayers with no children and an annual income at or above $99,000 and joint taxpayers with no children and an annual income at or above $198,000 will not receive a rebate. Annual income is determined based on the taxpayer’s 2019 tax returns if they have been filed, or 2018 tax returns if they have not.
How do I receive the tax relief?
While there is no application requirement for (i) individuals who file tax returns and have done so in 2018 or 2019 or (ii) recipients of Social Security, other individuals will need to file tax returns in order to receive a rebate. Individuals who do not receive Social Security and are not required to file tax returns will need to file a simplified report for the purposes of receiving a rebate. The Internal Revenue Service will post additional information on its website regarding how to file these simplified reports. Eligible recipients will receive the proceeds in the form of a check in the mail or, if authorized, electronic deposit to the taxpayer’s bank account. The CARES Act mandates that the rebate be paid “as rapidly as possible.”
How will I know I received the rebate?
Not later than 15 days after the date on which the rebate was distributed, the CARES Act mandates that a notice be sent by mail to the taxpayer’s last known address. This notice will indicate the method by which the payment was made, the amount of the payment, and a phone number for the appropriate point of contact at the Internal Revenue Service to report any failure to receive such payment.
Is there a deadline extension for filing my 2019 tax returns?
While the CARES Act does not provide an extension on the filing deadline for 2019 tax returns, the Internal Revenue Service has granted a general deadline extension to individuals and businesses. Taxpayers now have until July 15, 2020 to file their 2019 tax returns.
Tax Relief for Businesses
What tax relief is available for businesses?
Eligible employers will receive a tax credit equal to 50% of the first $10,000 of qualified wages per eligible employee (i.e. up to $5000 per eligible employee) for each calendar quarter. This credit cannot exceed the applicable federal employment taxes owed for such calendar quarter. The credit will only apply to qualified wages paid after March 12, 2020, and before January 1, 2021.
Which businesses are eligible for the tax credit?
The tax credit will not be available to employers who receive an SBA loan under the CARES Act’s small business loan program described above. To qualify for the tax credit, an employer must have conducted trade or business in 2020, and either was required by a governmental authority to fully or partially suspend its operations due to the coronavirus pandemic, or experiences a significant decline in gross receipts. An employer is deemed to experience a significant decline in gross receipts (i) beginning
with the first calendar quarter in 2020 in which the employer’s gross receipts are less than 50% of the employer’s gross receipts for the corresponding calendar quarter in 2019 and (ii) ending with the first calendar quarter in which the employer’s gross receipts equal at least 80% of the employer’s gross receipts for the corresponding calendar quarter for the previous year.
What are qualified wages?
The definition of qualified wages for the purposes of the tax credit depends on the size of the employer. For employers that had more than 100 full-time employees on average in 2019, qualified wages are wages paid to employees during the applicable period in which they are not providing services due to circumstances related to the coronavirus outbreak. For eligible employers that had 100 or fewer full-time employees on average in 2019, qualified wages are all employee wages during the period in which the employer remains an eligible employer.
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