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: