Insights 3/27/2020

On Friday afternoon, the U.S. House of Representatives passed the Senate version of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), and President Trump signed the legislation just a few hours later.

In addition to putting money directly in the pockets of many individuals, the CARES Act provides two new avenues for limiting your expenses. First, employers may defer their share of Social Security tax deposits (Internal Revenue Code section 3111(a)) that are due for the period beginning on the date of enactment (the date the President signs the bill) through 12/31/20. Under this plan, the payment schedule for the deferred taxes is: 50% due on or before 12/31/21, and the remaining 50% due on or before 12/31/22. Please note, though, that this deferral option is NOT available if you have taken out an SBA loan under the new forgiveness procedures (discussed below). Also note that the CLIENT has the sole responsibility to pay these deferred taxes if it directs RMI to defer payment.

The CARES Act also contains a tax credit for employee retention related to COVID-19. In particular, the credit is available to any employer (A) that was in business during 2020 and (B) with respect to any calendar quarter in which (1) it operations were fully or partially suspended under a government order due to COVID-19 or (2) it had a decline in gross receipts of at least 50% compared to the same calendar quarter in the prior year. There are additional details contained in the Act. Please note, though, that this credit is NOT available if you have taken out an SBA loan under the new forgiveness procedures (again, discussed below).

Also, and of just as much interest to RMI clients, is that part of the CARES Act that contains the Paycheck Protection Program (the “PPP”) small business interruption loans. Below is a Q & A that provides some initial information regarding that program. Keep in mind that this information is new and we anticipate administrative clarification in the coming days or weeks, depending on the speed of information from those government agencies involved.

PPP Q & A:

Who can get a loan? Businesses, including self-employed and independent contractors, nonprofits (501 C3), veterans’ organizations (501 C19), and certain others with less than 500 employees.

Where do I apply? Any federally insured depository (bank or credit union) or online through the SBA.

How much can I borrow? Up to $10 million, but not more than 2.5 times your average monthly payroll during the prior year. Certain maximum salary limits apply.

How much will be forgiven? The principle balance of the loan will be reduced by an amount equal to all expenses for payroll, utilities, and rent or mortgage interest during the 8-week period after the loan is granted. Any remaining principle balance will be amortized over a period of up to 10 years. However, the first payment will be deferred for 12 months.

How much is the interest rate? Remaining principle balance after loan forgiveness will be charged interest not to exceed 4% but will vary depending on the length of term (up to 10 years).

What documentation will I need? No guidelines have yet been published, but it is clear that you will need to establish an average monthly payroll. Other than that, however, there will be no credit underwriting, which means no tax returns, financial statements, credit reports, guarantees, etc. will be required.

Does a business have to be negatively impacted by the COVID-19 virus in order to get a loan? You will be required to attest that the COVID-19 virus has negatively impacted your business.

How long will it take to get approved? It is anticipated that when the program is fully up and running, loans will be funded the same day the application is completed.

EXAMPLE: A small business with fewer than 500 employees and an average monthly payroll of $150,000 applies for a PPP loan with its bank. After attesting that the COVID-19 virus has impacted its business operations, the business receives a loan of $375,000. Over the next 8 weeks, it is determined that the business has incurred $350,000 in eligible payroll, rent, and utilities expenses. The principle balance of the loan is reduced to $25,000 and amortized over 10 years at an interest rate not to exceed 4%. The first loan payment will not be due until 12 months after the loan was taken out. The program prohibits the SBA from charging fees to the lender or the borrower.