CARES Act

Overview and FAQs

On March 27, 2020, President Trump signed into law the CARES Act, which is designed to address the economic and health impacts of the COVID-19 pandemic, including providing relief for small and medium-sized business that are facing unprecedented challenges at this time.

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Please find below a Q&A with respect to certain key provisions of the CARES Act with a particular focus on the Paycheck Protection Program, the centerpiece of the legislation for small and medium-sized businesses. We continue to monitor and review the additional guidance and updates that are being provided by federal agencies to assist in the understanding, implementation and administration of the various programs under the CARES Act and intend to supplement and provide updates to this Q&A as appropriate to support our clients during these challenging times.

I. Paycheck Protection Program (the “PPP”)

A. Eligibility

All eligible businesses (for profit, section 501(c)(3) nonprofits, section 501(c)(19) veterans organizations and tribal small business concerns) with less than 500 employees that were in operation on February 15, 2020 can apply for a loan. Also, businesses operating in an NAICS Code beginning with 72 (Accommodation and Food Services sector) with less than 500 employees per physical location are eligible, as well as franchises (regardless of sector or size) that have received a franchise identifier code from the SBA.

In addition, if a business has more than 500 employees but meets the applicable SBA industry-based “size standard” requirements for the NAICS code applicable to that business, then the business also meets the size eligibility standards. The SBA’s current size standards can be found here: http://www.sba.gov/document/support–table-size-standards.

Last updated on: April 6, 2020

A tax-exempt nonprofit organization described in section 501(c)(3) of the Internal Revenue Code and a tax-exempt veterans organization described in section 501(c)(19) of the Internal Revenue Code are eligible for a loan under the Paycheck Protection Program.

Last updated on: April 6, 2020

Yes, as long as the entity meets the program’s other eligibility requirements.

Last updated on: April 6, 2020

B. Loan Calculation

The loan amount is an amount up to 2.5 times employer’s average monthly payroll costs, up to a maximum loan amount of $10 million. Payroll costs are calculated based on the average monthly payroll costs incurred from the last 12 months for employees whose principal place of residence is the United States.

Last updated on: April 6, 2020

If employer is a seasonal employer (as determined by the SBA), then payroll costs are calculated based on the average monthly payments for payroll costs for the 12-week period beginning on February 15, 2019 (or, if elected by the employer, March 1, 2019) and ending on June 30, 2019.

Last updated on: April 6, 2020

Yes, so long as the business was in operation on February 15, 2020 and had employees for whom salaries and payroll taxes were paid. If employer was in business on February 15, 2020, but not in business from February 15, 2019 through June 30, 2019, then the loan amount calculation is 2.5 times the average monthly payroll costs incurred from January 1, 2020 through February 29, 2020.

Last updated on: April 6, 2020

No. An employer must use the average monthly payroll costs incurred for the last 12 months prior to the date of the loan to calculate the loan amount unless (1) the employer is a seasonal employer (as determined by the SBA) or (2) the employer was not in business from February 15, 2019 through June 30, 2019. We note that the PPL application also notes that “most Applicants will use the average monthly payroll for 2019” despite the provision of the CARES Act referring to the 12 months prior to the date of the loan.

Last updated on: April 6, 2020

Payroll costs include payments for: (1) salary, wages and commissions, (2) payment of cash tips or equivalent, (3) vacation, parental, family, medical or sick leave, (4) separation allowances, (5) group health care benefits, including insurance premiums, (6) retirement benefits, and (7) state or local taxes assessed on employee compensation.

Last updated on: April 6, 2020

Payroll costs exclude payments for: (1) compensation of an employee in excess of an annual salary of $100,000, (2) federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020, including employee’s and employer’s share of FICA and Railroad Retirement Act taxes, and income taxes required to be withheld from employees, (3) any compensation to an employee whose principal place of residence is outside the United States, and (4) qualified sick leave wages and family leave wages for which a credit is allowed under the Families First Coronavirus Response Act.

Last updated on: April 6, 2020

Only the amount that is in excess of an employee’s annualized salary of $100,000 is excluded for purposes of calculating average monthly payroll costs. We do note that the CARES Act, SBA guidance and the application form are inconsistent when describing how to calculate the $100,000 employee payroll cap. The CARES Act states that compensation of an individual employee in excess of an annual salary of $100,000 is capped, which could be read to mean that an employee whose salary is less than $100,000 has no cap with respect the employee’s non-salary benefits. On the other hand, the Treasury guidance instructs borrowers to cap salary, wages, commissions and tips at $100,000 but includes no such cap on non-cash benefits. Lastly, the application form instructs borrowers to cap all compensation at $100,000. Despite the inconsistency, lenders are likely to be careful when calculating payroll costs and we believe may instruct borrowers to cap all amounts at $100,000. We encourage employers to specifically ask their lender how it prefers to calculate this cap in order to maximize available funds.

Last updated on: April 6, 2020

C. Use of Loan Proceeds

The SBA’s proposed regulations clarify that the proceeds of a PPL may only be used for those items that would be considered “payroll costs,” costs related to continuation of group healthcare benefits during periods of covered leave, mortgage interest, rent, utility payments, interest payments on debt incurred before February 15, 2020, and refinancing an Economic Injury Disaster Loan (“EIDL”). The CARES Act also states that PPLs may be used for “other allowable purposes.” Importantly, the permitted uses are broader than the categories of uses that will entitle a borrower to forgiveness of the PPL.

Last updated on: April 6, 2020

D. Loan Forgiveness

*The Department of Treasury released the Paycheck Protection Program Loan Forgiveness Application on the evening of May 15, 2020. The PPL forgiveness application addresses several open matters under the forgiveness provisions of the CARES Act and related guidance. It is also possible that the Department of Treasury will release additional guidance, or even a revised application, similar to how they handed the application for the Paycheck Protection Loan (PPL) itself. Further, Congress has begun discussions of potential further coronavirus relief legislation, which may include provisions relating to forgiveness of Paycheck Protection Loans. There is likely to be considerable negotiation, and modification, of any proposed legislation. Further, there is uncertainty as to whether any additional legislation will pass.

We are developing reports to assist clients with calculating PPL forgiveness amounts based on the PPL forgiveness application. We also continue to monitor and review legislative and regulatory developments concerning the Paycheck Protection Program, particularly with respect to the forgiveness provisions, in order to promptly make available relevant information to support our clients during these challenging times. Clients are encouraged to discuss matters that could impact their forgiveness amounts with their advisers and PPL lender.

There are only four types of expenditures that count towards the eligible forgiveness amount:

  • payroll costs, which are calculated the same as for the PPL application,
  • interest payments on business mortgage obligations (on real or personal property) incurred before February 15, 2020 (excluding any prepayments),
  • rent or lease payments on business leases (for real or personal property) in force before February 15, 2020, and
  • utility payments for electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.

Note that the non-payroll costs are limited to up to 25% of the PPL proceeds for forgiveness purposes.

Last updated on: May 18, 2020

Under the CARES Act, the PPL proceeds must be used on qualifying expenditures within 8 weeks following the date on which the borrower receives the PPL proceeds. The PPL forgiveness application clarifies and provides additional flexibility in this regard.

Payroll Costs

Under the PPL forgiveness application, the borrower has two options for calculating the period during which payroll costs may be calculated for forgiveness purposes:

  • Covered period: the 56 day period commencing with the first day on which the PPL proceeds were received or
  • Alternative payroll covered period: If the borrower has a biweekly (or more frequent) payroll schedule, then the borrower can choose to start the 56-day period on the first day of their first full payroll period following the date on which the PPL proceeds were received. (Note that if the borrower selects the alterative payroll covered period, then the borrower must use that period for all calculations that reference the alternative payroll covered period as an option.)

The payroll costs must be paid during the covered period (or alternative payroll covered period) except that payroll costs incurred but not paid during the covered period (or alternative payroll covered period) may count towards forgiveness if they are paid on or before the next regular payroll date after the end of such period.

Payroll costs are considered “paid” on the day when the “paychecks are distributed” or when the borrower “originates an ACH transaction.” A payroll cost is considered “incurred” on the day that the employee earns the related pay.

Non-Payroll Costs

Non-payroll costs must be either (a) paid during the covered period or (b) incurred during the covered period and paid on or before the next regular billing date, even if that is after the covered period.

Note that, even if the borrower elects the alternative payroll covered period for purposes of payroll costs, the non-payroll costs still must be calculated based on the covered period.

Last updated on: May 18, 2020

Any loan proceeds that have not been used during the covered period (or alternative payroll covered period) for payroll costs or during the covered period for qualifying non-payroll costs are not eligible to be forgiven, even if they are ultimately used for a qualifying-type of expenditure.

Last updated on: May 18, 2020

A reduction in the borrower’s full-time equivalent employees (FTEEs) can result in a reduction in the forgiveness amount. Note that, as described below, the PPL forgiveness application clarifies the treatment of individuals whose employment was terminated due to lay-off, for cause, or voluntary resignation.

Reduction in Average FTEEs

Unless the safe harbor discussed below applies, the loan forgiveness amount will be reduced by the percentage by which the borrower reduced its average number of FTEEs during the covered period (or alternative payroll covered period) as compared to the average number of FTEEs during one of following periods selected by the borrower: (1) February 15, 2019 through June 30, 2019, (2) January 1, 2020 through February 29, 2020, or (3) in the case of a seasonal employer only, a consecutive twelve-week period between May 1, 2019 and September 15, 2019.

Calculation of Average FTEEs

The borrower must calculate the full-time equivalency for each employee using one of two methods for all of the borrower’s employees:

  • An exact method that divides the average number of hours paid per week (up to 40) during the covered period (or alternative payroll covered period) by 40. Because the hours worked cannot exceed 40 for purposes of this calculation, this number cannot exceed “1.0”.
  • A simple method that allocates a “1.0” for each employee who works 40 or more hours per week and a “0.5” for all other employees.

The sum of the average full-time equivalencies for each employee results in the total average FTEEs for the borrower. The PPL forgiveness application does not state how the average should be calculated for employees who were not employed by the borrower during the entire covered period (or alternative payroll covered period) or during the comparison period.

Borrowers that had a reduction in their FTEEs should consider calculating the reduction using both the exact and simple method in order to determine which method is the most beneficial.

Note that average FTEEs is based on “paid hours week” and that the average FTEE calculation does not exclude employees who earned in excess of $100,000 during any pay period in 2019. Accordingly, a reduction in hours of these employees may impact the FTEE calculation even though those employees would be excluded for purposes of calculating a reduction in total salary or wages.

Treatment of Terminated Employees

The PPL forgiveness application clearly states the following reductions in FTEEs will not reduce the borrower’s loan forgiveness:

  • Any positions for which the borrower made a good-faith, written offer to rehire an employee during the covered period (or alternative payroll covered period) for the same salary/wages and number of hours and which was rejected by the employee, which rejection must be documented.
  • Any employees who during the covered period (or alternative payroll covered period) (a) were fired for cause, (b) voluntarily resigned, or (c) voluntarily requested and received a reduction of their hours.

The PPL forgiveness application, however, is unclear as to exactly how the calculation is supposed to work in these scenarios, including when a replacement was hired. In addition, as noted above, the PPL forgiveness application is also unclear as to how the averages should be calculated for employees who were not present during the entire period.

Safe Harbor

The amount of the loan forgiveness shall be determined without regard to any reduction in average FTEEs that occurred between February 15, 2020 and April 26, 2020 if by not later than June 30, 2020, the borrower restores its FTEE levels to those in the pay period that included February 15, 2020.

Last updated on: May 18, 2020

A reduction in salary or wages of an employee can result in a reduction in the forgiveness amount.

Reduction in Salary or Wages

Unless the safe harbor discussed below applies, the loan forgiveness amount will be reduced by the amount in excess of 25 percent by which the borrower reduces an employee’s average salary or wages during the covered period (or alternative payroll covered period) as compared to the employee’s average salary or wages during the first quarter of 2020.

Calculation of Salary and Wages

If an employee received wages or salary during any single pay period in 2019 at an annualized rate of pay in an amount more than $100,000, then that employee is excluded for purposes of this calculation. As discussed in question 4, however, these employees are included for purposes of calculating average FTEEs based on the number of hours for which they were paid.

Note that this test only considers the cash compensation paid to an employee; accordingly, it differs from the payroll costs related to that employee. Specifically, the borrower may only consider gross salary, gross wages, gross tips, gross commissions, paid leave (vacation, family, medical or sick leave, not including leave covered by the Families First Coronavirus Response Act), and allowances for dismissal or separation paid to an employee.

Safe Harbor

The amount of the loan forgiveness shall be determined without regard to any reduction in the average salary or wages that occurred between February 15, 2020 and April 26, 2020 if by not later than June 30, 2020, the borrower has restored the salary or wages of that employee.

Notably, the PPL application states that the borrower must compare the average annual salary or wages of the employee as of June 30, 2020 to the average salary or wages between February 15, 2020 and April 26, 2020. It is unclear how to calculate the average annual salary or wages as of one specific date (i.e. June 30, 2020). It is further unclear exactly what steps the borrower must take to have “restored” the salary or wages by that date, e.g. must the employee have been paid at the restored rate at least once? Further, if an average as of June 30, 2020 must be used, then it may be necessary for the borrower to also provide back pay; however, additional guidance from the Department of Treasury as to the period over which the average must be calculated would be needed.

Last updated on: May 18, 2020

The PPL loan application specifies a list of documents that the borrower must provide to substantiate the forgiveness amounts. The list can be found on page 10 of the application, which is titled “Documents that Each Borrower Must Submit with its PPL Loan Forgiveness Application”.

We had already begun to prepare reports to assist our clients with the forgiveness process. Based on the information contained in the PPL forgiveness application, we are focused on finalizing the reports based on this guidance.

Last updated on: May 18, 2020

From a practical standpoint, given that various calculations, such as the safe harbor provisions for reductions in FTEEs or salaries/wages, require a comparison as of June 30, 2020, it seems that borrowers will need to wait at least until after that date to apply for forgiveness.

There are also a number of practical reasons why a borrower would want to delay forgiveness, such as:

  • Continue to defer employer payroll tax deferral. Borrowers are eligible to defer employer payroll taxes until a PPL is forgiven. Once the PPL is forgiven, the borrower must cease deferring future employer payroll taxes but is still allowed to delay payment of the taxes already deferred until the first payment is due in December 2021. As such, the longer the borrower waits to request forgiveness, the longer the borrower can continue to defer employer payroll taxes.
  • Six month PPL forbearance. If the borrower requests, the lender will forbear all payments of principal and interest on the PPL for six months. As such, this forbearance allows borrowers to utilize the employer payroll tax deferral without incurring costs under the loan. Note that lenders are required to make a decision on loan forgiveness within 60 days of the forgiveness application. Borrowers should discuss the forgiveness process with their own lender to determine the best time to apply to maximize the six month forbearance and employer payroll tax deferral periods.
  • Potential additional guidance or changes in the law. As Congress is already discussing further changes to PPL forgiveness, there may be new laws that provide a more favorable outcome to the borrower. Further, the Department of Treasury and SBA may also release guidance on forgiveness that is also beneficial to borrowers.

Last updated on: May 18, 2020

II. Economic Injury Disaster Loans (EIDL) and Emergency Economic Injury Grants

Yes. The SBA will provide EIDLs in an amount up to $2 million to eligible businesses that have suffered substantial economic damage as a result of COVID-19 and waive certain requirements on loans of less than $200,000. Up to $10,000 of an EIDL may be advanced as an emergency grant within three days to maintain payroll, meet increased costs to obtain materials not available from the original source, provide paid sick leave, make rent or mortgage payments and repay other obligations that cannot be met due revenue losses. Applicants are not required to repay any amounts of the advance; however, the advance amount will reduce the amount by which any PPL may be forgiven.

Last updated on: April 6, 2020

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