What The Stimulus Package Means For Small Businesses

The adverse economic impacts of the COVID-19 pandemic are mounting daily, and we’re all adapting to meet these new challenges. Small businesses have been hit hard and their struggles are compounding when they try to sort through the new laws being passed at the state and federal levels. The lawyers at Reno & Zahm have been closely following the new stimulus package being debated right now in Washington, paying particular attention to those provisions intended to help small businesses. Companies with 500 or fewer workers employed roughly 59.9 million people in the U.S. in 2019—that’s 47% of the country's workforce. Their survival is imperative not only to the future of those workers, but to the entire economy as well.

One of the most anticipated forms of assistance in the new legislation is the $349 billion loan program for small businesses, which includes a forgiveness component for employers who retain their employees or rehire them within a certain period of time. This article focuses on that aspect of the legislation. However, as you read this, please keep in mind that the stimulus package is not yet law. It was passed by the Senate, but has yet to be passed by the House and signed into law by the President. As of this writing, the House vote is expected Friday, March 27, 2020, and the President is reportedly ready to sign as soon as it hits his desk.

We’re keeping a close eye on it. Here’s what we know so far.

On the evening of March 25, 2020, the U.S. Senate passed a Coronavirus stimulus package called the “Coronavirus Aid, Relief, and Economic Security Act” or “CARES Act.” Among other things, The CARES Act provides for what are essentially grants in the form of SBA loans with a forgiveness feature. The applicable law relating to these loans within the CARES Act is being called the “Keeping American Workers Paid and Employed Act.”

Under the Act, SBA loans are being made available to qualifying small businesses. The specified requirements are:

1. the business was in operation on February 15, 2020;

2. the business had employees for whom the business paid salaries or payroll taxes;

3. the business paid independent contractors, as reported on Form 1099-MISC; and

4. that the business qualifies as a small business concern (the SBA publishes an eligibility table used to determine if your business qualifies as “small business concern”).

The loan funds may only be used for seven (7) specific purposes. Those permitted uses are:

1. payroll costs (as defined below);

2. costs related to continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;

3. employee salaries, commissions or similar compensation;

4. payment of mortgage interest;

5. rent;

6. utilities; and

7. interest on other debt obligations incurred prior to February 15, 2020.

Under the Act, the term “payroll costs” is defined as the sum of payments of any compensation with respect to employees that is:

1. salary, wage, commission or similar compensation;

2. payment of cash tip or equivalent;

3. payment for vacation, parental, family, medical or sick leave;

4. allowance for dismissal or separation;

5. payment required for the provision of group health benefits, including insurance premiums;

6. payment of any retirement benefit; and

7. payment of State or local tax assessed on the compensation of employees.

The term “payroll costs” does not include:

1. compensation of an individual employee in excess of an annual salary of $100,000;

2. Federal FICA and Payroll Taxes;

3. Compensation of employees whose principal residence is outside the US;

4. Qualified sick leave for which credit is allowed under FFCRA; and

5. Qualified family leave for which a credit is allowed under the Families First Coronavirus Response Act (“FFCRA”).

The amount that each business can receive is determined by multiplying the average total monthly payroll costs incurred in the one (1) year period preceding the date of the loan by 2.5 (subject to a cap of $10,000,000).

When an existing SBA loan is in place, the existing SBA loan can be refinanced using the new loan. The balance on the existing SBA loan is added to the amount otherwise available, as calculated above.

The key feature of these SBA loans is that the lender is obligated to forgive the amounts expended by the borrower during the 8-weeks following the origination of the loan for:

1. payroll costs;

2. payments of interest on any mortgage obligation incurred before February 15, 2020;

3. payments on any covered rent obligation; and

4. utility payments for services beginning before February 15, 2020.

The amount to be forgiven is subject to a cap equal to the principal amount of the loan. In theory then, the entire amount of the loan could be forgiven if it’s all used during that initial 8-week period for the foregoing purposes.

The amount of loan forgiveness is reduced by multiplying the amount the borrower would otherwise be entitled to have forgiven by the quotient obtained by dividing the average number of full-time equivalent employees per month employed by the borrower during the 8-week period following the date of the origination of the loan by either (at the election of the borrower):

1. the average number of full-time equivalent employees per month employed by the borrower during the period of February 15, 2019 to June 30, 2019; or

2. the average number of full-time equivalent employees per month employed by the borrower during the period of January 1, 2020 to February 29, 2020.

In other words, if you had a total of 20 full-time equivalent employees during the period of January 1, 2020 to February 29, 2020, and after receiving the loan you only employ 10 full-time employees during the 8-week period, the amount that would be forgiven would be one-half of the amount expended for payroll, mortgage interest, rent, and utilities during that 8-week period.

Additionally, reduction in salaries will affect the amount of forgiveness. The amount of forgiveness is reduced by any reduction in salary in excess of 25% of the total salary or wages during the most recent full quarter during which the employee was employed prior to the 8-week period used for calculating loan forgiveness. This provision only applies to employees earning less than $100,000.00 per year.

These reductions in forgiveness do not apply to employees who were laid off between February 15, 2020 and the date that is 30-days following the enactment of the CARES Act, or to reductions in salaries made during the same period, so long as the affected employees are re-hired (or their wages are restored to their prior level) by June 30, 2020.

The attorneys at Reno & Zahm LLP continue to monitor the legislative process and will provide regular updates on this and other aspects of the stimulus package. Please contact us with any questions. We are here to help you make it through these challenging times.

The blog published by Reno & Zahm LLP is available for informational purposes only and is not considered legal advice on any subject matter. By viewing blog posts, the reader understands there is no attorney-client relationship between the reader and the blog publisher. The blog should not be used as a substitute for legal advice from a licensed professional attorney, and readers are urged to consult legal counsel on any specific legal questions concerning a specific situation.