SBA and Treasury Announce Mobilization for Paycheck Protection Act, Signaling Swift Steps Toward CARES Act Relief
On March 31, SBA Administrator Jovita Carranza and Treasury Secretary Steven T. Mnuchin announced that the SBA and Treasury Department have initiated a "robust" mobilization effort of banks and other lending institutions to provide small businesses with $349 billion in much-needed capital pursuant to the Paycheck Protection Program, established by the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"). The CARES Act, the largest stimulus package in U.S. history, was signed into law by President Trump on March 27, 2020. The Paycheck Protection Program (the "Program"), established by the CARES Act, will provide relief to small businesses in an effort to help them sustain their businesses and keep workers employed.
The Program will provide small business forgivable job retention loans of up to 2.5 times an employer’s average monthly payroll to cover payroll, rent or mortgage payments,and certain other expenses to keep workers employed. According to Secretary Mnuchin, the Program is expected to be up and running by April 3 so that businesses can swiftly take advantage of the funds by going to a participating SBA 7(a) lender, bank, or credit union, applying for a loan, and receiving approval the same day. Approximately 1,800 lenders are already approved to issue the loans, and applications for the emergency loans can begin as early as this week.
Eligible businesses include (1) those that meet the existing SBA definition of “small business concern” and (2) any business concern, nonprofit, veterans organization, or tribal business concern that employs not more than the greater of: (a) 500 employees or (b) if applicable, the number of employees listed in the size standard established by SBA for the industry in which the business operates. The business also must have been in business on February 15, 2020 and have had employees or paid independent contractors on that date. The Program also eases SBA’s traditionally stringent affiliation rules with three new affiliation waivers for: (i) businesses assigned a NAICS code beginning with 72 (Accommodation and Food Services); (ii) businesses operating a franchise within the SBA Franchise Directory; and (iii) businesses that receive financial assistance from a Small Business Investment Company. Moreover, businesses assigned a NAIC code beginning with 72 at the time of disbursal may still qualify if they have less than 500 employees at each physical location.
The March 31 guidance reinforced some of the Program's provisions laid out in the CARES Act, and also provided additional clarification. Currently:
- The maximum loan amount is $10 million but capped at 2.5 average monthly payroll;
- The loan will be forgiven as long as the loan is used for payroll costs, interest payments on mortgages, rent, utilities, and interest on debts over the 8 week period after the loan is made (though the March 31 guidance indicated that due to likely high subscription, it is anticipated that not more than 25% of the forgiven amount may be for non-payroll costs), and employee and compensation levels are maintained;
- The forgiven loan amounts are not taxable to the borrower;
All loans under the Program will have the following features:
- Interest of 0.5%
- Maturity of 2 years/li>
- First payment deferred for six months/li>
- 100% guaranteed by the SBA/li>
- No collateral/li>
- No personal guarantees/li>
- No borrower or lender fees payable to the SBA/li>
"Payroll costs" are defined broadly under the Program, and include:
(a) employee salaries, wages, commissions, or tips (capped at $100,000 on an annualized basis for each employee);
(b) payment for vacation, parental, family, medical or sick leave;
(c) severance payments;
(d) group health insurance;
(e) retirement plan contributions;
(f) state and local taxes assessed on such compensation.
Payroll costs should also include payments to independent contractors. However, initial guidance from the SBA creates confusion as to whether the SBA will ignore the statutory language and not allow taxpayers to include payments to independent contractors in "payroll costs."
Payroll costs do not include: (a) compensation for employees who earn over $100,000 per year; (b) federal tax withholdings; (c) compensation for non-US residents; and (d) sick leave and family leave provided by Families First Coronavirus Response Act (FFCRA) for which there are already tax credits.
For additional information highlighting important practical concerns for prospective borrowers, including steps prospective borrowers should take now, how realistic loan forgiveness may be and concerns regarding the timing of obtaining a loan, see our Client Alerts here and here.
Other Provisions in the $2 Trillion CARES Act Assist Employers and Employees Experiencing Economic Fallout from COVID-19
As part of the government's effort to keep the economy afloat, the CARES Act provides other relief to employers and employees who have been hit by the battered economy.
Tax Credit for Worker Retention
To encourage employers to retain workers during the COVID-19 pandemic, Section 2301 of the CARES Act provides a tax credit to employers subject to a closure due to COVID-19. Section 2301 provides a payroll tax credit equal to 50% of the wages paid by employers to employees for each calendar quarter during the COVID-19 crisis. The credit applies to, and is limited to, the first $10,000 of compensation, including health benefits, paid to an employee. The credit applies to wages paid from March 13, 2020 through December 31, 2020, and is allowed against the employer’s share of social security taxes (the 6.2% tax borne by employers on wages up to the social security wage base) and Railroad Retirement Act (RRA) tax. If the retention credit exceeds the employer's social security or RRA tax liability for the quarter, the excess may be refunded to the employer.
Employers are eligible for the credit if they are:
- an employer with business operations in 2020 that are partially or fully suspended due to a government order limiting commerce, travel, or group meetings as a result of COVID-19 ("Suspension"); or
- an employer with business gross receipts in a calendar quarter in 2020 that are less than 50% of the business gross receipts for the same calendar quarter in 2019 ("Gross Receipts Decline"). Under this test, the employer remains eligible until the employer's gross receipts are 80% of the gross receipts the employer earned for the same quarter in the prior calendar year. The gross receipts test is governed by IRC Section 448(c), which evaluates gross receipts on an aggregated basis, and combines parents and subsidiaries, brother and sister entities, combined groups, and affiliated service groups under the rules of IRC Section 52(a) and (b) and IRC Section 414(m) and (o).
A tax-exempt organization described in IRC Section 501(c) and exempt from tax under IRC Section 501(a) is an eligible employer if it is engaged in a trade or business and undergoes a Suspension (but not a Gross Receipts Decline). Governmental employers and any employer that receives a Paycheck Protection Program loan are not eligible for the retention credit. In addition, an employer that is an "essential" business exempt from an order requiring businesses to suspend operations or a business that is able to continue substantial operations through telecommuting will not likely be eligible under the Suspension test, but may qualify under the Gross Receipts Decline test.
The credit is based on "qualified wages" paid to the employee. For employers with greater than 100 full-time employees in 2019, "qualified wages" are wages paid to the extent the employee is not performing services due to the circumstances of a Suspension or Gross Receipts Decline. For employers with 100 or fewer full-time employees in 2019, qualified wages are any wages paid during a Suspension or Gross Receipts Decline, including where the employee continued to provide services. In addition:
- Qualified wages taken into account for calculating the credit are limited to $10,000 per employee for all calendar quarters. Because the payroll tax credit is equal to 50% of the wages paid by employers to employees, the maximum amount of credit attributable to any employee is $5,000.
- Qualified wages include the pre-tax portion of payments by the employer to provide and maintain a group health plan, generally allocated pro rata among employees and pro rata on the basis of periods of coverage relative to periods to which such wages relate. Additional guidance for allocating such health plan expenses may be provided by the Secretary of the Treasury.
- Qualified wages do not include any wages paid as qualified sick leave or qualified family leave under the FFCRA and the employment provisions within FFCRA.
- Qualified wages with respect to an employee may not exceed the amount the employee would have been paid for working an equivalent duration during the 30 days immediately preceding such period.
An employer may offset without penalty on a dollar for dollar basis against the employer's applicable employment taxes the amount of the credit the employer is eligible to deduct. If this deduction exceeds the employer's liability for applicable withholding taxes, the employer is eligible for a tax refund in the excess amount.
An employer receiving a SBA 7(a) Small Business Interruption Loan under the Paycheck Protection Program is ineligible for the credit.
Section 2301 of the Act directs the Treasury to issue forms, instructions, regulations, and guidance to allow the advance payment of the credit, recapture of the credit if an employer receives a Small Business Interruption Loan, application of the credit to third party payors, and application of the 50% business gross receipts test if the employer was not carrying on business in 2019. We will keep you updated as further guidance is developed.
Claiming Tax Credits and Refunds
The IRS has issued Form 7200 and instructions for Form 7200 to allow employees to claim an advance payment of tax credits when income and payroll taxes from employee pay are not sufficient to cover FFCRA and employee retention credits. The forms provide insight into the process, available credits, and documentation that will be required to substantiate credit claims.
As the instructions explain:
- When employers pay their employees, they're required to withhold federal income tax and the employees' share of social security and Medicare taxes. Employers are required to deposit these taxes, along with their employer share of social security and Medicare taxes, with the IRS and file employment tax returns (Form(s) 941, 943, 944, or CT-1) with the IRS.
- Eligible employers who pay qualified sick and family leave wages or qualified wages eligible for the employee retention credit should retain an amount of the employment taxes equal to the amount of qualified sick and family leave wages (plus certain related health plan expenses and the employer's share of the Medicare taxes on the qualified leave wages) and their employee retention credit, rather than depositing these amounts with the IRS. The employment taxes that are available for the credits include withheld federal income tax, the employee share of social security and Medicare taxes, and the employer share of social security and Medicare taxes with respect to all employees.
- If there aren't sufficient employment taxes to cover the cost of qualified sick and family leave wages (plus the qualified health expenses and the employer share of Medicare tax on the qualified leave wages) and the employee retention credit, employers can file Form 7200 to request an advance payment from the IRS.
Employers may file Form 7200 to seek the advance credits anticipated for a quarter at any time before the end of the month following the quarter in which you paid the qualified wages. If necessary, employers can file Form 7200 several times during each quarter.
As for recordkeeping, the instructions says that employers should keep all records of employment taxes for at least 4 years. For Form 7200 purposes, such records should include:
- Documentation to show how you figured the amount of qualified sick and family leave wages eligible for the credit.
- Documentation to show how you figured the amount of the employee retention credit.
- Documentation to show how you figured the amount of qualified health plan expenses that you allocated to wages.
- Documentation to show how you determined that the employees were qualified to receive sick and family leave wages, including any additional information set out in Frequently Asked Questions or other guidance on IRS.gov.
- Documentation to show your eligibility for the employee retention credit based on suspension of operations or significant decline in gross receipts.
- Copies of completed Form(s) 7200 you filed with the IRS.
The IRS also published a detailed FAQ addressing the COVID-19-related tax credits available here.
Deferral of Employer Payroll Taxes
In an effort to provide taxpayers with liquidity, Section 2302 of the Act allows employers, including self-employed individuals, to delay the payment due date for the employer's share of social security and RRA taxes, for the period from enactment until December 31, 2020. Fifty percent of these taxes will be due on December 31, 2021, with the remaining 50% due on December 31, 2022. Deposit penalties will not apply due to the delayed payment.
The deferral provision applies only to the employer's share of social security tax. It does not apply to the employer's Medicare taxes, nor to the employee's share of social security or Medicare taxes. In addition, this provision does not apply to any taxpayer who receives loan forgiveness with respect to a Paycheck Protection Program loan.
The retention credit and the payroll tax deferral together will allow employers to reduce this year's social security tax and defer any remaining liability to 2021 and 2022. Employers will need to consider whether they plan on obtaining a Small Business Act loan available through the Paycheck Protection Program, because obtaining an SBA loan will impact the employer's ability to utilize the deferral and retention credits.
Pandemic Unemployment Assistance
Section 2102 of the Act also creates a temporary pandemic unemployment system program for individuals who are unemployed, partially unemployed, unable to work or unavailable to work because of COVID-19 related reasons. These employees must not be eligible for regular compensation or extended benefits, including those individuals who have exhausted all rights to regular unemployment or extended benefits under state or federal law. Self-employed individuals and independent contractors are eligible under this provision. This section is in effect from January 27, 2020 through December 31, 2020. An individual may only receive unemployment compensation under this section for a maximum of 39 weeks.
In order to qualify, the individual must certify that he or she is otherwise able to work and available for work within the meaning of applicable state law, but is unemployed, partially unemployed, or unable or unavailable to work because:
- the individual was diagnosed with COVID-19 or is seeking a medical diagnosis
- a member of the individual's household has been diagnosed with COVID-19
- the individual is providing care to a family member of member in the individual’s household who is diagnosed with COVID-19
- a child or another person in the individual's household cannot attend child care or another facility for care that is closed as a direct result of COVID-19
- the individual is unable to reach his or her place of employment due to a quarantine requirement
- the individual can reach his or her place of employment but has been instructed to self-quarantine
- the individual was scheduled to start employment but cannot reach his or her new place of employment or no longer has the new employment available due to COVID-19
- the individual has become the bread winner or major support for the household because the head of the household has died as a direct result of COVID-19
- the individual was required to quit his or her job due to COVID-19
- the individual's place of employment is closed due to COVID-19, or
- the individual meets other criteria established by the Department of Labor
If the individual is self-employed, is seeking part-time employment, does not have sufficient work history, or otherwise would not qualify for unemployment benefits under another state unemployment program, then the individual can also qualify for unemployment benefits as long as the individual meets one of the requirements in the bullets above. However, practically speaking, many self-employed persons will become unemployed because their work has "dried-up," and it may not be possible for such self-employed persons to satisfy one of the requirements in the bullets above. Hopefully, the Department of Labor will establish additional criteria for such self-employed persons to qualify for unemployment benefits.
This section does not apply to employees who can telework for pay. It also does not apply to employees who are receiving paid sick leave or any other type of paid leave benefit. Employees will receive the weekly benefit amount calculated under state law in the state in which they are employed (including any addition in benefits as a result of the state's raise of the amount of weekly benefits while the employee is receiving benefits under this section).
In addition, under Section 2104 (Emergency Increase in Unemployment Compensation Benefits), eligible individuals will receive an additional $600 per week, through July 31, 2020, on top of the amount the employee is entitled to based on the weekly benefit amount calculated under state law. For instance, under Illinois state law, the maximum weekly unemployment benefit for an individual (without dependents) is $484. If an Illinois employee is eligible under Sections 2102 and 2104, the employee would be eligible for $1084 in weekly unemployment benefits.
Section 2105 waives any waiting periods required by state law (typically one week). The federal government will provide funding to states choosing to waive the waiting period in order to pay recipients immediately. Specifically, if a state waives the one-week waiting period, the state will be fully reimbursed by the federal government for that week of benefits paid out to workers plus the administrative expenses necessary for processing those payments. In addition, under Section 2107, after state unemployment insurance benefits are exhausted (usually 26 weeks), individuals who remain unemployed are eligible for an additional 13 weeks of state unemployment benefits at the state rate, plus the additional $600 per week.
Short Term Compensation Programs
In another attempt to provide incentive for employers to retain employees instead of laying them off, the Act extends federal financial support for states that have or create "short-time compensation" programs, pursuant to which employers reduce employee hours instead of laying off workers. The employees with reduced hours receive a pro-rated unemployment benefit.
Section 2108 of the Act provides funding for those states with already existing short-time compensation programs, providing that the federal government will fully fund the amount of short-time compensation paid under a state's short-time compensation program. The amount of benefits payable to an individual is limited to 26 times the amount of regular compensation payable under the state's unemployment benefits program. Under Section 2109, for states that do not have a short-time compensation program, the federal government will fully fund a state’s creation of such a program through an agreement with the federal government. If a state enters into such an agreement, and a short-term compensation program is enacted, employers must pay to the state one-half the amount of short-time compensation paid by the state to the individual employee. Section 2110 of the Act promises to lessen the administrative burden on states for implementing such programs by allowing a state to apply for grants to cover administration costs. In addition, Section 2111 provides that the Department of Labor will provide model legislation for the states, as well as technical assistance, audits and oversight.
Two of the provisions of the Act impose certain limits on executive compensation paid by businesses that receive loans, loan assistance, or other financial assistance. Section 4003 of the Act provides $500 billion to the U.S. Treasury's Exchange Stabilization Fund for loans, loan guarantees, and investments in the Federal Reserve’s lending facilities to support states, municipalities, and "eligible businesses," including air carriers and US businesses that have not received "adequate economic relief" in the form of other loans or loan guarantees.
As a condition of receiving a loan or loan guarantee under the Act, under Section 4004 an eligible business must agree that it will comply with two conditions for a period (the "covered period") beginning on the date the loan is outstanding, and for the 12 month period following repayment of the loan:
- No officer or employee of the business who received aggregate base salary, bonuses, awards of stock, and other financial benefits ("total compensation") that exceeded $425,000 in calendar year 2019 may receive total compensation exceeding such calendar year 2019 compensation over any consecutive 12 months of the covered period, or severance benefits exceeding more than two times such calendar year 2019 compensation; and
- To the extent any officer or employee of the business had total compensation that exceeded $3 million in calendar year 2019, then during any consecutive 12 months of the covered period, such employee or officer may not receive total compensation that exceeds the sum of $3 million, plus 50% of the excess over $3 million of the total compensation received by the officer or employee in calendar year 2019.
Tax Free Payments for Student Loans
Under the Act, employers are now permitted to pay employees up to $5,250 per year on a tax-free basis for student loan debt expenses incurred while employed with an employer maintaining a written program pursuant to IRC Section 127 (a separate written plan of an employer for the exclusive benefit of his employees to provide such employees with educational assistance). Section 2206 of the Act amends IRC Section 127 to provide that payments up to $5,250 made before January 1, 2021 by an employer, either to the employee or to a lender of principal and/or interest on qualified education loans, will not be taxable to the employee. Employees may receive either a loan payment or a deduction on interest paid on such debt, but not both.