What Business Owners Need to Know About the Coronavirus Aid, Relief, and Economic Security Act

April 07, 2020

Leonard Fishman

Len Fishman and Eli Perlmutter of BBH Corporate Advisory & Banking discuss the CARES Act and how it supports business owners.

Brown Brothers Harriman (BBH) continues to monitor changes to legislation and program rules as they come out. The details discussed in this article are accurate as of April 6, 2020.

On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). This $2 trillion stimulus package provides relief opportunities to help business owners and nonprofits with short-term liquidity challenges including:

Forgivable loans of up to $10 million through the Paycheck Protection Program (PPP) available to companies with up to 500 employees (full-time, part-time and from affiliates)¹
Deferrals on paying a portion of 2020 payroll taxes until 2021 and 2022
Tax code changes that create opportunities for refunds and higher deductions
Tax credits for companies that pay employees during the COVID-19 crisis

The act references a Main Street Lending Program through which the Federal Reserve could provide direct loans to small and mid-sized companies; however, specific details of this program had not been finalized as of this writing.

Please reach out to your BBH relationship team for further information or assistance in taking advantage of these opportunities.

Paycheck Protection Program Under Section 7(a) of the Small Business Act

The PPP authorizes the U.S. Small Business Administration (SBA) to offer $349 billion of loans during 2020 to small businesses and nonprofits.² To be eligible, companies must have fewer than 500 employees (full-time, part-time and from affiliates),³ comply with the SBA’s employee-based or revenue-based size standards for the applicant’s industry (up to 1,500 employees for select industries)⁴ or meet the SBA’s “alternative size standard.”⁵ Unlike other COVID-19 lending programs, there are no criteria in the PPP requiring a borrower to have suffered significant deterioration in business performance (though the loan is necessary to support ongoing operations due to uncertainty) or be unable to obtain credit on reasonable terms elsewhere. Further, there are no restrictions on dividends, executive compensation, collective bargaining or other covenants, such as those that are in the Treasury’s Exchange Stabilization Fund, which supports certain companies that are under significant strain due to COVID-19 (for example, airlines).

PPP loans are intended to help companies pay wages (including benefits and insurance), rent, mortgage interest obligations and utilities.⁶ The program authorizes loans of up to 2.5x the company’s average monthly payroll (for each employee, payroll costs are capped at $100,000 on an annualized basis)⁷ during the year prior to the loan application. Loans can be up to $10 million. Notably, the CARES Act provides for loan forgiveness for eligible expenses (at least 75% of the forgiven amount must have been used for payroll) paid during the eight-week period following the loan’s origination as well as an option to defer interest and principal payments for six months, although interest will accrue during this period. Although these loans are based on the SBA’s 7(a) loan guaranty program, the PPP introduces many unique provisions (as detailed in Exhibit A).

On March 31, 2020, the SBA and Treasury announced procedures for borrowers and lenders, indicating that small businesses and sole proprietorships can apply through SBA lenders beginning on April 3, 2020. These procedures were finalized on April 2, 2020, but continue to be updated, with new guidance being provided on April 6, 2020.⁸ Although the program is open until June 30, 2020, the Treasury advises borrowers to apply quickly because there is a funding cap and because lenders need time to process loans. SBA has made a sample form available here: https://www.sba.gov/funding-programs/loans/paycheck-protection-program-ppp. Please find an eligible nearby lender using the SBA’s Lender Match tool here: https://www.sba.gov/paycheckprotection/find.

Tax Relief for Businesses and Nonprofits

While forgivable loans under the PPP have size thresholds that exclude many businesses, the CARES Act provides tax credits and changes to the tax code with considerably wider eligibility. In large part, these measures intend to help companies keep more cash on hand that would ordinarily be paid in taxes in the short term, help them recover cash paid for taxes in prior years (see right-most column in the table that follows) and reduce their tax burden as follows:

Read image caption

Table showing tax relief options for businesses and nonprofits due to CARES Act, including tax deferrals, tax credits and new deductions, as well as whether or not these qualify for a potential tax refund or return.

Note that with new edits to legislation and program rules continuing to come out, the details discussed in this article are accurate as of April 6, 2020. We will continue to provide details as the specific provisions of the stimulus bill are released.

Read image caption

Table showing Paycheck Protection Program details, including eligibility, facility, forgivable use of funds, maturity, interest rate, guarantees, nonrecourse, payment deferral, loan forgiveness, conditions to borrowings, fees and application process.

¹ Affiliation exists when one business controls or has the power to control another or when a third party (or parties) controls or has the power to control multiple businesses.
² Tribal business concerns, veterans’ organizations and sole proprietorships are also eligible to receive aid from the PPP.
³ Affiliation exists when one business controls or has the power to control another or when a third party (or parties) controls or has the power to control multiple businesses.
⁴ See the SBA Size Standards Tool here: https://www.sba.gov/size-standards/. To confirm your NAICS code, visit https://www.naics.com/naics-identification-help/.
⁵ To meet the SBA’s “alternative standard,” a business must have a maximum tangible net worth of not more than $15 million, and the average net income after federal income taxes of the business for the two full fiscal years prior to the application date must not be more than $5 million.
⁶ Rent, mortgage and utilities must have been in force, incurred and in service prior to February 15, 2020.
⁷ Exclusion of compensation in excess of $100,000 annually applies only to cash compensation, not to noncash benefits.
⁸ Borrowers whose applications have been filed or approved are not required to update their application based on newly posted guidance. However, borrowers who previously submitted an application that has not yet been processed may revise their applications based on updated guidance.
⁹ NOL carrybacks were previously disallowed.
¹⁰ The TCJA limited utilizing NOLs to offset 80% of taxable income.
¹¹ Under the TCJA, these are limited to $250,000 for single filers and $500,000 for joint filers.
¹² The TCJA repealed the corporate AMT and provided that any unused AMT credits could be claimed as refundable credits over the four tax years beginning 2018, 2019, 2020 and 2021. The CARES Act allows for the credits to be claimed fully in the tax years beginning in 2018 and 2019.
¹³ For employers with over 100 full-time employees, qualified wages constitute wages paid when an employee is not working due to the impact of COVID-19. For employers with 100 or fewer full-time employees, whether the employer is open for business or subject to a shutdown order, all wages paid in a quarter where gross receipts are 50% less than the prior year are considered qualified wages until quarterly gross receipts reach 80% of the comparable period the prior year.
¹⁴ Could allow a taxpayer to deduct additional interest expense if 2019 adjusted taxable income is higher than it is in 2020.
¹⁵ Affiliation exists when one business controls or has the power to control another or when a third party (or parties) controls or has the power to control multiple businesses.
¹⁶ See the SBA Size Standards Tool here: https://www.sba.gov/size-standards/. To confirm your NAICS code, visit https://www.naics.com/naics-identification-help/.
¹⁷ The exclusion of compensation in excess of $100,000 annually applies only to cash compensation, not to noncash benefits, including contributions to retirement plans, payments for employee benefits and payment of state and local taxes assessed on compensation of employees.
¹⁸ Payroll excludes amounts paid to an independent contractor or sole proprietor and employees whose primary place of residence is outside of the United States.
¹⁹ SBA Express loans have accelerated turnaround time for SBA to review but only have a 50% SBA guaranty and permit a lender to use its collateral policy for loans greater than $25,000.
²⁰ Excludes wages paid for paid sick and family leave under the Families First Coronavirus Response Act, and payroll costs are capped at $100,000 on an annualized basis for each employee.
²¹ Rent, mortgage and utilities must have been in force, incurred and in service prior to February 15, 2020.

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