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CARES Act Client Alert – April 3, 2020

By Jonathan M. Lazarow, Commercial

On March 31st the Treasury department released its first set of guidelines pertaining to the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). This guidance clears up some of the ambiguity pertaining to the new legislation designed to provide at least some limited relief from the economic implications of the COVID-19 outbreak. Many businesses can take advantage of the CARES Act’s Paycheck Protection Program. The Treasury guidance documents differ in several minor respects from the unadorned statutory language, the press, and other reports that pre-date the guidance documents may not fully-reflect the manner in which the Treasury intends to administer the program.

The basics are unchanged. The CARES Act allocates $349 billion for small businesses to obtain forgivable loans of up to $10 million for use with payroll, rent, utilities, and mortgage interest expenses. The loans are to support payroll and associated costs, and these designated fixed costs, for an eight-week period. The application period ends on June 30, 2020. Qualified lenders are to begin accepting applications on Friday, April 3.

In order to be eligible for full loan forgiveness, the business must maintain the number of employees (determined as FTEs, or Full-Time Equivalents) and not reduce the wages of any employee who earns less than $100,000 by more than 25% compared with their last full-time quarter of employment. For those companies who have already made such reductions, the Act allows the business until June 30, 2020, to rehire or restore the wages to pre-reduction levels to still qualify for forgiveness.

Some key details include:

  • Loans are non-recourse, do not require personal guaranty or collateral, and interest rates shall be fixed at 1%, which is substantially lower than the Act’s maximum of 4.0%;
  • Payments are deferred for six (6) months, but interest will accrue. Any portion of the loan that is not forgiven will be payable two years from when the loan was made. There is no prepayment penalty; 
  • Essentially all businesses with 500 or fewer employees are eligible, including nonprofits under 501(c)(3), veterans organizations, Tribal business concerns, sole proprietorships, self-employed individuals, and independent contractors. Some businesses with more than 500 employees may qualify, such as those in the restaurant and hospitality industry (NAICS Code 72), and the affiliation rules are relaxed for franchises that are included in the SBA’s Franchise Directory;
  • Under the guidance, the permissible loan amount is calculated as 2 months of the average monthly payroll costs plus 25% of that amount. By way of example, if the business’ average payroll is $100,000.00, two times the average payroll is $200,000, 25% of that amount is $50,000, thus the maximum loan amount is $250,000.00.
  • Any individual loan is capped at $10 million;
  • Monthly payroll costs include: 
    • Salary, wage, commissions, or tips (capped at $100,000.00 on an annualized basis for each employee). By way of an example if an employee’s wage is $150,000.00 then the employer may count $100,000.00 towards the average monthly payroll. 
    • Employee benefits including costs for vacation, parental, family, medical, or sick leave; an allowance for separation or dismissal; payments required for the provisions of group health care benefits including insurance premiums; and payment of any retirement benefit;
    • State and local taxes assessed on compensation (but not FICA); and
    • For a sole proprietor or independent contractor: wages, commissions, income, or net earnings from self-employment, capped at $100,000 on an annualized basis for each employee.
    • Payroll costs do not include amounts spent by an employer in complying with the new Mandatory Paid Sick Leave law or Expanded FMLA child-care eligibility since those amounts are accounted for separately by way of tax credits to the employer.

There are a number of certifications required for eligibility. For example, borrowers must certify that:

  • Per the application, current economic uncertainty makes this loan request necessary to support its ongoing operations;
  • Funds will be used to retain workers and maintain payroll or make mortgage, lease, and utility payments (and provide appropriate documentation);
  • The applicant does not have any other application pending under this program for the same purpose, and that from February 15, 2020, until December 31, 2020, the applicant has not received duplicative amounts under this program.

Loans will be completely forgiven if they are used for payroll and designated fixed expenses:

  • Loans are forgiven (including accrued interest on the amount that is forgiven) and excluded from gross income in an amount that equals the payments towards payroll costs, interest payments on mortgages, rent, and utility payments. Employers will have to provide documents demonstrating the funds were properly used;  
  • Forgiveness amounts will be reduced based on any reduction in employee numbers (FTEs) as compared to one of two test periods, one in early 2020 and one in 2019;
  • Forgiveness amounts will be reduced by the amount any employee earns over 25% less during the eight weeks of the program than during (on a pro-rata basis) than employee’s last full quarter of employment; and
  • There is relief from forgiveness reduction penalties for employers who rehire employees or make up for wage reductions by June 30, 2020. 

We are all experiencing these difficult times and this relief package is designed to help keep your workforce intact. We have assembled a team dedicated to the Act and familiar with its provisions. If you would like any further information or would like assistance in obtaining one of these loans, please contact Ran Randolph, Dustin DeVore, or Jonathan Lazarow


The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2020.