CARES ACT – Practical Summary of Key Details for Small Businesses and Individuals

The centerpiece of the Coronavirus Aid, Relief and Economic Security (CARES) Act would allow small- and medium-sized businesses to receive federal loans – in some cases forgivable – to cover payroll and other expenses. The CARES act also expands unemployment benefits for workers impacted by the outbreak, while extending unemployment eligibility to many who are otherwise not regularly entitled to receive such benefits.

I. Small Business “Paycheck Protection” Loans

The most significant provision of the CARES Act for employers establishes new “paycheck protection” loans administered by the U.S. Small Business Administration (SBA) to help employers continue to cover payroll costs and other expenses during the COVID-19 crisis. The covered period for paycheck protection loans is February 15, 2020 through June 30, 2020.

II. Eligibility

These loans are available for businesses with not more than 500 employees. However, for businesses in the hospitality industry (those with a NAICS Code of 72) are eligible for a loan as long as they employ not more than 500 employees “per physical location.” For example, a restaurant franchisee with 3,000 employees (but no more than 500 employees at any one location) could qualify for the loans.

In addition, the SBA generally has eligibility guidelines (“affiliation rules”) to determine whether a business qualifies as “small.” Under these provisions of the CARES Act, these “affiliation rules” are waived for (1) NAICS Code 72 businesses that employ not more than 500 employees; (2) franchises; or (3) businesses that receive financial assistance from a small venture investment company licensed under the SBA.

Lenders will determine eligibility for the loans based on whether the business was operational as of February 15, 2020, had employees on payroll, and paid wages and payroll taxes.

III. Use of Loan Proceeds

The loans may be used for payroll costs, healthcare, rent, utilities, and other debts incurred by the business. However, the definition of “payroll” costs excludes leave payments made pursuant to the new Families First Coronavirus Response Act (FFCRA). Reimbursement for those leave payments is made through the tax credit process enacted as part of that legislation. These “paycheck protection” loans are available for other payroll expenses and other costs.

IV. Size of Loans

Loan amounts will be available based on a formula. The amounts available will be the lesser of:

• Average monthly payroll costs during the prior year x 2.5; or
• $10 million

For example, if the employer had an average monthly payroll of $500,000 over the prior year, it would be eligible for a loan of $1.25 million ($500,000 average monthly payroll times 2.5).

V. Loan Forgiveness Conditioned On Maintaining Employee Workforce

The federal government will forgive the loans in an amount equal to the amount of qualifying costs spent during an eight-week period after the origination of the loan. These qualifying costs include payroll costs (capped at $100,000 per employee), interest on secured debt obligations, and rent and utilities in place prior to February 2020.

The amount of the forgiveness for the loans will be reduced if the employer:

• Reduces its workforce during the eight-week period compared to prior periods; or
• Reduces the salary or wages paid to an employee by more than 25% during the 8-week period (compared to the most recent quarter).

In addition, any reduction in the amount of loan forgiveness will be completely avoided if the employer re-hires all employees laid off (going back to February 15, 2020), or increased their previously reduced wages, no later than June 20, 2020. These provisions are designed to provide an incentive to employers to not lay off workers (or rehire them) and instead utilize the loan amounts to pay payroll and other expenses.

VI. SBA 100% Guarantee of Paycheck Protection Loans

Paycheck protection loans are fully guaranteed by the federal government through December 31, 2020 (previously guaranteed at 85%). The standard fees under section 7 of the Small Business Act are waived and there is no requirement that the loans be personally guaranteed by the borrower. Loans will be available immediately through SBA-certified lenders, which include banks, credit unions, and other financial institutions. The SBA will also be required to streamline the process to include additional lenders into the program and to ensure that funds are dispersed to qualified businesses as soon as possible. The deadline to apply for paycheck protection loans is June 30, 2020.

VII. Unemployment Insurance Expanded Coverage and Eligibility

The CARES Act also expands unemployment assistance by creating a Pandemic Unemployment Assistance program through December 31, 2020. For weeks of unemployment, partial unemployment, or inability to work caused by COVID-19 between January 27 and December 31, the Act provides covered individuals with unemployment benefit assistance when they are not entitled to any other unemployment compensation or waiting period credit. For this, the weekly benefit amount is generally the amount determined under state law plus an additional $600 until July 31st. Although the additional $600 per week is only available for the next four months, the maximum entitlement was expanded to 39 weeks rather than the 26 weeks typical of most states.

Covered individuals under this provision generally include those who provide self-certification the individual is otherwise able to work and available to work and is unemployed, partially unemployed, or unable to work for one of the following reasons:

• The individual is diagnosed with COVID-19 or experiencing COVID-19 symptoms and seeking medical diagnosis;
• A member of the individual’s household was diagnosed with COVID-19;
• The individual is caring for a member of their family or household who was diagnosed with COVID-19;
• A child or person 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 COVID-19 public health emergency and such school/facility 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 COVID-19 public health emergency;
• The individual is unable to reach the place of employment because a health care provider advised to self-quarantine due to COVID-19 related concerns;
• 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 COVID-19 public health emergency;
• The individual became the breadwinner or major support because the head of household died from COVID-19;
• The individual has to quit as a direct result of COVID-19;
• The individual’s place of employment is closed as a direct result of COVID-19 public health emergency; or
• The individual meets additional criteria established by the Secretary of Labor.

The Act also expands unemployment to also cover those who traditionally are not eligible to receive such benefits. Specifically, this provision also covers those who are self-employed (like independent contractors), who are seeking part-time employment, who do not have sufficient work history, or otherwise would not qualify for regular unemployment or extended benefits if they meet a qualifying reason above. However, the Act excludes those who would otherwise be a covered individual if they have the ability to telework with pay or if they receive paid sick leave or other paid leave benefits.

VIII. Direct Financial Assistance To Individuals

The Act also provides financial assistance directly to certain U.S. residents. The Act generally provides a tax credit of $1,200 for individual taxpayers or $2,400 for joint taxpayers, plus $500 for each child of the taxpayer. These rebates are not taxable income for the recipients because they are a credit against tax liability.

For most U.s. residents, no action will be required to receive such a rebate. Tax returns from 2019 will generally be used to calculate these rebates, but tax returns from 2018 will be used to calculate these rebates if the individual has not filed a tax return for 2019. Those who may be eligible for a larger rebate based on their 2020 income would receive it in the 2020 tax year.

These rebates are reduced based on the taxpayer’s adjusted gross income. Specifically, the rebates are reduced by 5% per dollar of qualified income when the adjusted gross income exceeds $150,000 for joint taxpayers, $112,500 for a head of household, and $75,000 for all other taxpayers. The rebates would be completely phased out when the adjusted gross income exceeds $198,000 for joint taxpayers with no children, $146,500 for head-of-household taxpayers with one child, and $99,000 for single taxpayers.

In addition to these rebates, individuals may be able to tap into their retirement accounts due to waiver of some early withdrawal penalties for COVID-19 related purposes. Specifically, a provision in the CARES Act waives the 10% early withdrawal penalty for distributions up to $100,000 from qualified retirement accounts for COVID-19 related purposes made on or after January 1, 2020. The income attributable to such distributions may be subject to tax over three years and the taxpayer may recontribute the funds within three years without regard to that year’s cap on contributions. The Act also provides flexibility for loans from certain retirement plans for COVID-19 relief.