The CARES Act Stimulus Package Guidance
Over the weekend, President Trump signed into law the CARES Act which allocates $2 trillion to relief efforts related to impact of the COVID-19 outbreak. Many individuals and businesses will benefit from the stimulus package. Below is a guidance on the Paycheck Protection Program that is designed to provide immediate short term relief to eligible small businesses, sole proprietors, independent contractors and self-employed. Many of BPE’s clients including but not limited to dentists, contractors, real estate agents/brokers, restaurants, professional service providers, and retailers all stand to benefit from this program.
As always, if you have any questions about your real estate, business, estate planning, or any other legal issue, please let us know by e-mailing managing shareholder Keith Dunnagan at kbdunnagan@bpelaw.com.
Also, remember that we do legal presentations for business and community organizations. If your group would like to schedule a presentation, please contact me to setup a date and time.
The CARES Act Stimulus Package Guidance
By: D. Keith Dunnagan, Esq.
On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act” or “the Act”), which is designed to provide relief to numerous industries adversely impacted by the current COVID-19 outbreak. A significant piece of the legislation was aimed at providing relief to small businesses, many of which have seen dramatic negative impacts related to shelter in place orders that have nearly one in three Americans remaining at home. Many businesses are being forced to make tough decisions related to furloughs, pay cuts, and layoffs, or even considering shuttering a business altogether.
This guidance will focus on the Keeping American Workers Paid and Employed Act, found in Sections 1101 – 1114 of the CARES Act. This portion of the CARES Act creates the Paycheck Protection loan program, to provide small businesses with loans to assist in covering payroll during any revenue drops related to the impacts of COVID-19. This program can provide nonrecourse loans to businesses and includes a loan forgiveness component as well. Below is an outline of the Payment Protection Program and its potential benefits for small businesses:
WHO IS ALLOWED TO PARTICIPATE IN THE PROGRAM?
- Generally, any small business, nonprofit, veterans organization or Tribal business that employs less than 500 employees OR (if applicable) the size standard in number of employees established by the SBA for the industry in which the business operates. (Sec. 1102(a)(2)(D)(i).)
- Generally, all sole proprietors, independent contractors and self-employed individuals that operate as such during the Covered Period. (Sec. 1102(a)(2)(D)(ii).) Documentation necessary to establish eligibility, including payroll tax filings, 1099-Misc, and income and expense forms as determined by the SBA and Secretary, must be provided.
WHAT IS A “COVERED LOAN” AND WHAT IS THE “COVERED PERIOD”?
- The “covered period” begins on Feb. 15, 2020 and ends on June 30, 2020 as drafted in the CARES Act. The end date could potentially be extended by future legislation. (Sec. 1102(a)(2)(A)(iii).)
- A “covered loan” is a loan made under the amendment to the SBA 7(a) program. (Sec. 1102(a)(2)(A)(ii).)
ARE THERE BORROWING LIMITS?
- Yes, there are borrowing limits under the Act. Under the Act, a borrower can obtain up to: the lesser of an amount equal to 2.5 times the average monthly payroll cost for the preceding 12 months but not more than $10,000,000. (Sec. 1102(a)(2)(E).)
HOW ARE PAYROLL COSTS DETERMINED?
“Payroll Costs” under the Act are defined as follows:
- Salary, wages, commissions or similar compensation
- Payment of cash tip
- Payment for vacation, parental, family, medical or sick leave
- Allowances for dismissal or separation
- Payments for the provision of group health benefits including insurance premiums
- Payment of State and local tax assessed on employee compensation
- Payment of retirement benefits
- For a sole proprietor, independent contractor, or self-employed individual, payroll costs would be calculated based on an amount equal to or less than $100,000 per year, as prorated for a 2.5-month period.
“Payroll Costs” for purposes of the Act does not include the portion of salary to employees that exceeds $100,000 per year as prorated for the 2.5-month period, certain withholding taxes under the IRS Code, or compensation to employees outside of the United States. If one takes advantage of the tax credits allowed under the Families First Coronavirus Response Act, those credits are not covered here (i.e., one cannot double dip by obtaining a loan under this Act and tax credit under the FFCRA). (Sec. 1102(a)(2)(A)(viii).)
The Act promises future guidance on the types of documentation that may be used to substantiate the “Payroll Costs” for purposes of determining the amount of any loan.
WHAT CAN THE LOAN PROCEEDS BE USED FOR?
Under the Act (Sec. 1102(a)(2)(F).) the loan proceeds can be used for the following expenses incurred during the Covered Period:
- Payroll costs
- Costs related to group health care benefits, sick, medical or family leave and insurance premiums
- Employee salaries, commissions or similar compensation
- Payments for mortgage interest (may not be used to prepay or make principal payments)
- Rent
- Utilities
- Interest on other debt obligations
HOW DO I QUALIFY FOR SUCH A LOAN?
In order to qualify for a loan under this program the borrower must make a good faith certification under Sec. 1102(a)(2)(G) of the following:
- The uncertainty of the current economic conditions makes necessary the loan request to support the ongoing operations of the business.
- The funds will be used to retain employees and maintain payroll or other allowed expenses.
- The borrower does not have another loan pending under this program for the same purpose.
- The borrower during the period of Feb. 15, 2020 through Dec. 31, 2020 has not received amounts for the same purpose under this program.
Unlike many other SBA loans, unavailability of other credit lines is not a prerequisite to obtaining a loan under this program.
WHAT ARE SOME OF THE MAJOR BENEFITS OF THIS PROGRAM FOR SMALL BUSINESSES?
Most business loans require a tremendous amount of documentation and often have strict recourse and guaranty provisions. It is not uncommon for banks to require business owners (i.e. individuals with more than 20% stake in the business) to provide personal guarantees for loans. These same business owners usually have to pledge some sort of collateral which may include providing a security interest in their home, and may have to waive certain surety protections, which may include waiving the right to force the lender to seek payment or exhaust collection efforts against the borrowing business before seeking payment from the owner guarantor.
The Paycheck Protection Program, however, waives many of these typical requirements, as it is designed to keep employees employed and soften the impact on the states unemployment programs. Undoubtedly, Congress was motivated by projections that suggest unemployment could go as high as 20% nationwide. Indeed, nearly 1 million new unemployment claims were made by Californians in the week preceding passage of the Act.
Some of the major benefits of this program are as follows:
- The loans made under this program are nonrecourse loans so long as the proceeds are used for an allowed use. (See above for a list of the allowed uses under the program.) (Sec. 1102(a)(2)(F)(v).)
- Lenders may not require personal guarantees for a covered loan. (Sec. 1102(a)(2)(J)(i).)
- Lenders may not require collateral for a covered loan. (Sec. 1102(a)(2)(J)(ii).)
- Loans can carry a repayment period of up to 10 years. (Sec. 1102(a)(2)(K)(ii).)
- Lenders shall be required by the SBA to provide complete payment deferment for a period of not less than 6 months but not more than 1 year. (Sec. 1102(a)(2)(M)(ii).)
- The loans cannot carry any prepayment penalties. (Sec. 1102(a)(2)(R).)
- Borrowers are eligible for debt forgiveness on a covered loan subject to limitations (described below). (Sec. 1106(b).)
- If a borrower receives loan forgiveness under this Act, the amount forgiven may not be taxed. (Sec. 1106(i).)
HOW DO I APPLY FOR DEBT FORGIVENESS UNDER THE ACT ON A COVERED LOAN?
The Act specifies an application process for a borrower to seek debt forgiveness under the Act on a covered loan under Sec. 1106(e). The borrower must submit an application to the lender that includes:
- Documentation verifying the number of full-time employees on payroll and pay rates for an 8-week period within the Covered Period.
- Payroll tax filings reported to the IRS.
- State income, payroll, and unemployment insurance filings.
- Documentation, such as cancelled checks, payment receipts, transcripts of accounts, and/or other documents verifying payments on covered mortgage obligations, covered lease obligations, or covered utility payments.
- A certification from an authorized representative attesting that the documents are true and correct and certifying that the amount of forgiveness sought was used for covered purposes.
- Any other documents the SBA may determine is necessary.
There will be more information coming forward over the next weeks as the SBA provides additional guidance on the implementation of the Paycheck Protection Program. Assuming the program is implemented as described above, it has the potential to provide immediate temporary relief for many small businesses. The Senate has directed that “…the Administrator should issue guidance to lenders and agents to ensure that the processing and disbursement of covered loans prioritizes small business concerns[.]” (Sec. 1102(a)(2)(P)(iv).)
The Paycheck Protection Program is the main mechanism created by the CARES Act to address the immediate concerns for small businesses, but the CARES Act also includes other programs including disaster relief loans and Emergency EIDL Grants. These programs will need further time to develop.
In addition, while the CARES Act does not directly speak to existing SBA loans, if you are a small business with an existing SBA loan, you should be reviewing your documents and updating your financial information including balance sheets and profit and loss statements. It may be necessary to begin working with your lender on potential payment deferment or modification options that may be available, and properly documented financials will be required to provide the necessary information to your lender.
If you are an eligible recipient looking for relief under this Act, you should consult with your attorney, accountant and banker to determine which program will be best suited for you.
——————————————————————————————————————
The attorneys of BPE Law Group, PC. have been advising our clients on real estate, business and estate planning issues for over 20 years and have assisted numerous clients in probate, business and real estate matters and have represented and advised brokers on their professional obligations as well as consumers on their rights. If you have questions concerning legal matters, give us a call at (916) 966-2260 or e-mail Keith at kbdunnagan@bpelaw.com. Our flat fee consult for new clients may get you the answers you need for the questions you have.
The information presented in this Article is not to be taken as legal advice. Every person’s situation is different. If you are facing a legal issue of any kind, get competent legal advice in your State immediately so that you can determine your best options.
Over the weekend, President Trump signed into law the CARES Act which allocates $2 trillion to relief efforts related to impact of the COVID-19 outbreak. Many individuals and businesses will benefit from the stimulus package. Below is a guidance on the Paycheck Protection Program that is designed to provide immediate short term relief to eligible small businesses, sole proprietors, independent contractors and self-employed. Many of BPE’s clients including but not limited to dentists, contractors, real estate agents/brokers, restaurants, professional service providers, and retailers all stand to benefit from this program.
As always, if you have any questions about your real estate, business, estate planning, or any other legal issue, please let us know by e-mailing managing shareholder Keith Dunnagan at kbdunnagan@bpelaw.com.
Also, remember that we do legal presentations for business and community organizations. If your group would like to schedule a presentation, please contact me to setup a date and time.
The CARES Act Stimulus Package Guidance
By: D. Keith Dunnagan, Esq.
On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act” or “the Act”), which is designed to provide relief to numerous industries adversely impacted by the current COVID-19 outbreak. A significant piece of the legislation was aimed at providing relief to small businesses, many of which have seen dramatic negative impacts related to shelter in place orders that have nearly one in three Americans remaining at home. Many businesses are being forced to make tough decisions related to furloughs, pay cuts, and layoffs, or even considering shuttering a business altogether.
This guidance will focus on the Keeping American Workers Paid and Employed Act, found in Sections 1101 – 1114 of the CARES Act. This portion of the CARES Act creates the Paycheck Protection loan program, to provide small businesses with loans to assist in covering payroll during any revenue drops related to the impacts of COVID-19. This program can provide nonrecourse loans to businesses and includes a loan forgiveness component as well. Below is an outline of the Payment Protection Program and its potential benefits for small businesses:
WHO IS ALLOWED TO PARTICIPATE IN THE PROGRAM?
- Generally, any small business, nonprofit, veterans organization or Tribal business that employs less than 500 employees OR (if applicable) the size standard in number of employees established by the SBA for the industry in which the business operates. (Sec. 1102(a)(2)(D)(i).)
- Generally, all sole proprietors, independent contractors and self-employed individuals that operate as such during the Covered Period. (Sec. 1102(a)(2)(D)(ii).) Documentation necessary to establish eligibility, including payroll tax filings, 1099-Misc, and income and expense forms as determined by the SBA and Secretary, must be provided.
WHAT IS A “COVERED LOAN” AND WHAT IS THE “COVERED PERIOD”?
- The “covered period” begins on Feb. 15, 2020 and ends on June 30, 2020 as drafted in the CARES Act. The end date could potentially be extended by future legislation. (Sec. 1102(a)(2)(A)(iii).)
- A “covered loan” is a loan made under the amendment to the SBA 7(a) program. (Sec. 1102(a)(2)(A)(ii).)
ARE THERE BORROWING LIMITS?
- Yes, there are borrowing limits under the Act. Under the Act, a borrower can obtain up to: the lesser of an amount equal to 2.5 times the average monthly payroll cost for the preceding 12 months but not more than $10,000,000. (Sec. 1102(a)(2)(E).)
HOW ARE PAYROLL COSTS DETERMINED?
“Payroll Costs” under the Act are defined as follows:
- Salary, wages, commissions or similar compensation
- Payment of cash tip
- Payment for vacation, parental, family, medical or sick leave
- Allowances for dismissal or separation
- Payments for the provision of group health benefits including insurance premiums
- Payment of State and local tax assessed on employee compensation
- Payment of retirement benefits
- For a sole proprietor, independent contractor, or self-employed individual, payroll costs would be calculated based on an amount equal to or less than $100,000 per year, as prorated for a 2.5-month period.
“Payroll Costs” for purposes of the Act does not include the portion of salary to employees that exceeds $100,000 per year as prorated for the 2.5-month period, certain withholding taxes under the IRS Code, or compensation to employees outside of the United States. If one takes advantage of the tax credits allowed under the Families First Coronavirus Response Act, those credits are not covered here (i.e., one cannot double dip by obtaining a loan under this Act and tax credit under the FFCRA). (Sec. 1102(a)(2)(A)(viii).)
The Act promises future guidance on the types of documentation that may be used to substantiate the “Payroll Costs” for purposes of determining the amount of any loan.
WHAT CAN THE LOAN PROCEEDS BE USED FOR?
Under the Act (Sec. 1102(a)(2)(F).) the loan proceeds can be used for the following expenses incurred during the Covered Period:
- Payroll costs
- Costs related to group health care benefits, sick, medical or family leave and insurance premiums
- Employee salaries, commissions or similar compensation
- Payments for mortgage interest (may not be used to prepay or make principal payments)
- Rent
- Utilities
- Interest on other debt obligations
HOW DO I QUALIFY FOR SUCH A LOAN?
In order to qualify for a loan under this program the borrower must make a good faith certification under Sec. 1102(a)(2)(G) of the following:
- The uncertainty of the current economic conditions makes necessary the loan request to support the ongoing operations of the business.
- The funds will be used to retain employees and maintain payroll or other allowed expenses.
- The borrower does not have another loan pending under this program for the same purpose.
- The borrower during the period of Feb. 15, 2020 through Dec. 31, 2020 has not received amounts for the same purpose under this program.
Unlike many other SBA loans, unavailability of other credit lines is not a prerequisite to obtaining a loan under this program.
WHAT ARE SOME OF THE MAJOR BENEFITS OF THIS PROGRAM FOR SMALL BUSINESSES?
Most business loans require a tremendous amount of documentation and often have strict recourse and guaranty provisions. It is not uncommon for banks to require business owners (i.e. individuals with more than 20% stake in the business) to provide personal guarantees for loans. These same business owners usually have to pledge some sort of collateral which may include providing a security interest in their home, and may have to waive certain surety protections, which may include waiving the right to force the lender to seek payment or exhaust collection efforts against the borrowing business before seeking payment from the owner guarantor.
The Paycheck Protection Program, however, waives many of these typical requirements, as it is designed to keep employees employed and soften the impact on the states unemployment programs. Undoubtedly, Congress was motivated by projections that suggest unemployment could go as high as 20% nationwide. Indeed, nearly 1 million new unemployment claims were made by Californians in the week preceding passage of the Act.
Some of the major benefits of this program are as follows:
- The loans made under this program are nonrecourse loans so long as the proceeds are used for an allowed use. (See above for a list of the allowed uses under the program.) (Sec. 1102(a)(2)(F)(v).)
- Lenders may not require personal guarantees for a covered loan. (Sec. 1102(a)(2)(J)(i).)
- Lenders may not require collateral for a covered loan. (Sec. 1102(a)(2)(J)(ii).)
- Loans can carry a repayment period of up to 10 years. (Sec. 1102(a)(2)(K)(ii).)
- Lenders shall be required by the SBA to provide complete payment deferment for a period of not less than 6 months but not more than 1 year. (Sec. 1102(a)(2)(M)(ii).)
- The loans cannot carry any prepayment penalties. (Sec. 1102(a)(2)(R).)
- Borrowers are eligible for debt forgiveness on a covered loan subject to limitations (described below). (Sec. 1106(b).)
- If a borrower receives loan forgiveness under this Act, the amount forgiven may not be taxed. (Sec. 1106(i).)
HOW DO I APPLY FOR DEBT FORGIVENESS UNDER THE ACT ON A COVERED LOAN?
The Act specifies an application process for a borrower to seek debt forgiveness under the Act on a covered loan under Sec. 1106(e). The borrower must submit an application to the lender that includes:
- Documentation verifying the number of full-time employees on payroll and pay rates for an 8-week period within the Covered Period.
- Payroll tax filings reported to the IRS.
- State income, payroll, and unemployment insurance filings.
- Documentation, such as cancelled checks, payment receipts, transcripts of accounts, and/or other documents verifying payments on covered mortgage obligations, covered lease obligations, or covered utility payments.
- A certification from an authorized representative attesting that the documents are true and correct and certifying that the amount of forgiveness sought was used for covered purposes.
- Any other documents the SBA may determine is necessary.
There will be more information coming forward over the next weeks as the SBA provides additional guidance on the implementation of the Paycheck Protection Program. Assuming the program is implemented as described above, it has the potential to provide immediate temporary relief for many small businesses. The Senate has directed that “…the Administrator should issue guidance to lenders and agents to ensure that the processing and disbursement of covered loans prioritizes small business concerns[.]” (Sec. 1102(a)(2)(P)(iv).)
The Paycheck Protection Program is the main mechanism created by the CARES Act to address the immediate concerns for small businesses, but the CARES Act also includes other programs including disaster relief loans and Emergency EIDL Grants. These programs will need further time to develop.
In addition, while the CARES Act does not directly speak to existing SBA loans, if you are a small business with an existing SBA loan, you should be reviewing your documents and updating your financial information including balance sheets and profit and loss statements. It may be necessary to begin working with your lender on potential payment deferment or modification options that may be available, and properly documented financials will be required to provide the necessary information to your lender.
If you are an eligible recipient looking for relief under this Act, you should consult with your attorney, accountant and banker to determine which program will be best suited for you.
——————————————————————————————————————
The attorneys of BPE Law Group, PC. have been advising our clients on real estate, business and estate planning issues for over 20 years and have assisted numerous clients in probate, business and real estate matters and have represented and advised brokers on their professional obligations as well as consumers on their rights. If you have questions concerning legal matters, give us a call at (916) 966-2260 or e-mail Keith at kbdunnagan@bpelaw.com. Our flat fee consult for new clients may get you the answers you need for the questions you have.
The information presented in this Article is not to be taken as legal advice. Every person’s situation is different. If you are facing a legal issue of any kind, get competent legal advice in your State immediately so that you can determine your best options.