As Virginians continue to deal with COVID-19 and the Governor’s Executive Order, ceasing most operations through April 24, 2020, small businesses are doing their best to plan for their uncertain futures. Most of this planning will be focused on how businesses can take advantage of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, signed into law this week. The CARES Act supplements SBA economic disaster loans and two programs passed earlier this month, involving paid sick leave and family leave.
While many are excited about the amount of money the government put behind the CARES Act, its text did not provide much clarity for the future. To start, the Act will require compliance from expanded (or new) government agencies, financial institutions, and not to mention the individuals and businesses applying for loans. There will certainly be growing pains as our nation starts this process and even those most informed are struggling to attend webinars and review fact sheets digesting the complex legislation. This article will shed some light on the main avenues for relief provided in the CARES Act so small businesses can better consider their next steps.
Increased Borrowing Capacity & Guarantees. The legislation includes the Paycheck Protection Program (“PPP”), which provides interruption loan relief for small businesses for the period of March 1, 2020 to December 31, 2020. During that time any business concern (including sole proprietors and independent contractors) or non-profit with less than 500 employees is eligible to receive a section 7(a) loan for a maximum amount of 2.5x its monthly overhead (up to $10 million). The business can count payments for payroll, mortgage, rent, and any other debt for the preceding year in its overhead calculation. Likewise, recipients can apply proceeds to normally allowable uses for a section 7(a) loan, payroll support, healthcare benefits, employee salaries, mortgage, rent, utilities, and any other debt obligations for the preceding year. Caps on express loans were increased to $1 million for the time being. The Act also provides for government guarantees on 7(a) loans, incentivizing lenders to make these loans, despite a murky financial future.
Loan Forgiveness & Deferral. Recipients of 7(a) loans will be eligible for forgiveness of indebtedness for the cost of maintaining payroll continuity. Forgiveness will be capped at the sum of the total payroll costs (up to $100,000 for any one employee); and payments made on previous obligations. In order to incentivize retention and consistent pay, the total amount of forgiveness is reduced based upon the ratio of employees retained (taking into account salary cuts), before and after the covered period. Lenders will also be required to provide complete payment deferment relief for one year for businesses in operation March 1, 2020, who already had an SBA loan approved or pending.
Tax Deferment & Modifications. For corporations, the due date for installment payments on estimated income tax was extended to October 15, 2020. Additionally, 50% of employment payroll taxes for employers and 50% of SECA taxes for the self-employed, will not be due until December 31, 2021. The Act also temporarily amends various tax code provisions regarding limitations on taxable income, losses, corporate liabilities, and business interests. If you do not know what these terms mean, consult one of our tax attorneys.
What does it all mean for my business? In essence, businesses considering whether or not to take advantage of these loans need to assess their current financial situation, project overhead and calculate their potential forgiveness. While it may make sense for some to retain employees, keeping operations afloat until proceeds are available; for others, a furlough may be more attractive, rehiring employees when proceeds are available – hopefully before June 30, 2020. Unfortunately, due to the unpredictable nature of the pandemic, business owners will incur risk either way. That being said, applicants are financially incentivized to borrow the amount most precisely matching their payroll expense for the period – which is usually the most prudent practice anyhow.
Timing. According to the U.S. Treasury Department, the PPP should be ready for business owners by Friday. As a practical matter, application guidance and processing systems might not be available for several weeks, according to an SBA lending expert. Some believe the program will be operable by April 15, 2020, while other commercial lending sources have indicated off the record that it is anyone’s guess as to when these applications will be ready. Most banks are setting up new departments specifically tailored to SBA lending, so the best practice is to remain informed and in contact with your lender, seeking professional advice whenever possible. In the meantime, the Treasury Department has posted the application on its CARES Act Resource Page, allowing diligent businesses to prepare their documentation ahead of time for potentially same-day loan evaluation from an SBA approved lender.
Consult with an Experienced Small Business Attorney. Whether you have a question about operating your business, applying for a Small Business Loan or just want to know what options you have we are here to provide advice and help you. If you are interested in obtaining legal advice for your business, please reach out to one of our business attorneys at Surovell Isaacs & Levy PLC by calling us at 703-570-6392 or email to TBlaser@SurovellFirm.com.