At Long Last, the Help You’ve Been Waiting for is Here
An explanation of the programs and assistance available to those small business and small business-owners who have been affected by the novel Coronavirus (COVID-19) pandemic.
By: Jason S. Ross, Esq., LL.M. (in Taxation)
Over the past several months, the World has helplessly watched as the Coronavirus (COVID-19) pandemic gradually spread across the globe greatly affecting daily ways of life, while bringing many small business operations to a screeching halt. In response to the dramatic economic impact the COVID-19 pandemic has caused in the United States, several pieces of legislation have been passed to provide much needed assistance to those small businesses and small business owners affected by COVID-19. While this posting is intended to provide information pertaining to some of this recent legislation developed to support small businesses and small business owners, this posting is not to be construed or interpreted as legal advice. Should you have any specific questions or are interested in obtaining any of the assistance discussed herein, please contact the law offices of Bauer, Gutierrez, & Borbon, PLLC, as our attorneys and staff are ready and able to assist.
The Coronavirus Aid, Relief, and Economic Security Act (the CARES Act)
The CARES Act, a $2.2 trillion stimulus package providing aid for individuals, States, small businesses, and businesses impacted by the Coronavirus pandemic was passed by the Senate on March 25, 2020, and thereafter passed by the House of Representatives and signed into law by the President on March 27, 2020. The CARES Act contains multiple avenues of relief which are now available to small businesses and small business owners through programs administered by the Small Business Administration (SBA).
I. Paycheck Protection Program
Also authorized under the CARES Act was the Paycheck Protection Program which makes loans of up to $10 million available to certain qualified small businesses. These loans are intended to be forgivable if the borrower maintains employees and otherwise complies with the CARES Act.
NOTE: An applicant may receive an EIDL Loan and loans under other programs (such as the Paycheck Protection Program) as long as the basis for the loans/costs being paid with each are different (no “double-dipping”).
Under the terms and provisions of the CARES Act, a qualified small business for purposes of the Paycheck Protection Program are business that:
- Do not have more than 500 employees or the maximum number of employees specified in the current SBA size standards, whichever is greater; or
- If the business has more than one location and has more than 500 employees, does not have more than 500 employees at any one location and the business’ primary NAICS code starts with “72” (Accommodation and Food Service); or
- Is a franchisee holding a franchise listed on the SBA’s registry of approved franchise agreements; or
- Has received financing from a Small Business Investment Corporation
Also, it is important to note that both sole proprietorships and self-employed individuals may qualify under this program. The CARES Act makes certain nonprofit organizations (must be tax-exempt under Section 501(c)(3) of the Internal Revenue Code), qualified veterans organizations and certain Tribal business concerns also eligible.
Under the Paycheck Protection Program, the maximum amount of the loan is set by formula (average monthly payroll prior to the COVID-19 pandemic times 2.5 plus the amount of any other debt approved for refinancing, including any debt incurred as a result of COVID-19 under the EIDL Program), subject to a maximum of $10 million. Loans provided under the Paycheck Protection Program are at a maximum interest rate of 4% per annum, with a maximum maturity of 10 years. Further, lenders must defer payments under the loan for at least 6 months and up to 1 year, and lenders cannot have any prepayment penalties on the loans. Also guarantee loans fees which would ordinarily have to be paid by the borrow upon the funding of the loan are to be waived.
Additionally, for loans under the Paycheck Protection Program, no collateral or personal guarantee is required for a covered loan. Loans are nonrecourse to the borrower.
In addition to waiving any guaranty that might otherwise be required by the Small Business Act, the CARES Act specifically provides each loan is nonrecourse to the shareholders, members, and partners of the borrower. Furthermore, to qualify for a loan under the Paycheck Protection Program there is no “credit elsewhere test” (i.e. borrower does not have to demonstrate it was unable to secure financing elsewhere before qualifying for SBA financing).
In order the expedite the application and closing process for loans under the Paycheck Protection Program, loans are allowed to be made by SBA-approved lenders that have delegated authority to make the loans without approval from the SBA, this “no SBA Authorization” is required for each individual loan. In reviewing the application, a lender has to evaluate whether the borrower was in business on February 15, 2020 and had employees and paid salaries and taxes or had independent contractors and filed 1099-MISC for them.
In order to qualify for a loan under the Paycheck Protection Program, and applicant is required to certify that:
- Current uncertain economic times make the loan request necessary to support ongoing operations;
- Funds will be used to keep workers and make payroll, mortgage payments, lease payments and utility payments; and
- The Applicant does not already have an application pending for other payroll assistance under the CARES Act.
NOTE: A loan under the Paycheck Protection Program makes the borrower ineligible for the Employee Retention Tax Credit made available under the CARES Act. This only applies to the Employee Retention Tax Credit in the CARES Act and does not apply to any credits available under the Families First Coronavirus Response Act (FFCRA) (such as the paid sick leave tax credit) or other credits available under the CARES Act.
How does “Loan Forgiveness” work under the Paycheck Protection Program?
Under the CARES Act, small business loan borrowers will be eligible for loan forgiveness, both for new loans under the Paycheck Protection Program and for existing 7(a) loans.
For borrowers under the Paycheck Protection Program, the loan forgiveness will equal the amount spent by the borrower in the 8-week period after the loan origination date on the following items (not to exceed the original principal amount of the loan):
- payroll costs (not to exceed $100,000 of annualized compensation per employee);
- payments of interest incurred on any mortgage obligation existing prior to February 15, 2020;
- payment of rent on any lease in force prior to February 15, 2020; and
- payment on any utility for which service began before February 15, 2020.
*** The amount forgiven is NOT considered taxable income to the borrower. ***
The amount forgiven will be reduced proportionally by any reduction in the number of employees retained as compared to the prior year. The proportional reduction in loan forgiveness also applies to reductions in the pay of any employee where the pay reduction exceeds 25% of the employee’s prior year compensation. A borrower will not be penalized by a reduction in the amount forgiven for termination of an employee made between February 15, 2020 and April 26, 2020, as long as the employee is rehired by June 30, 2020.
Any amount outstanding after considering the amount forgiven will be repayable over a term not to exceed 10 years.
When the borrower applies to the lender for loan forgiveness they must do so with proper supporting documentation.
For borrowers with existing 7(a) or microloan program loans, the SBA will pay principal, interest, and any associated loan fees for a 6-month period starting on the loan’s next payment due date. Payment on loans that are on deferment will begin with the first payment after the deferment period. Please note that this relief will not include loans made under the Paycheck Protection Program.
What can a Prospective Borrower do now to facilitate “Loan Forgiveness”?
In order to seek and qualify for loan forgiveness, an eligible borrow must submit an application to the lender that originated the covered loan which includes:
- documentation verifying the number of full-time equivalent employees on payroll and pay rates for the applicable periods, including payroll tax filings; and state income, payroll, and unemployment insurance filings; and
- documentation verifying payments on mortgage obligations, lease obligations, and utilities, including cancelled checks, payment receipts, transcripts of accounts, or other documents.
Under the CARES Act, the SBA must issue regulations within 15 days of its enactment without regard to notice and comment requirements. Therefore, it is possible that lenders could begin taking loan applications as soon as mid-April. To be proactive, the law offices of Bauer, Gutierrez, & Borbon, PLLC are suggesting that all clients and/or perspective clients who are prospective borrowers act accordingly to ensure that all necessary documentation is in order to apply for a loan under the Paycheck Protection Program, and further take all necessary steps to ensure the largest amount of loan forgiveness possible, such as rehiring all employees which may have been previously terminated on or before the rehiring deadline of June 30, 2020.
II. Small Business Administration (SBA) Economic Injury Disaster Loan (EIDL) Program
The CARES Act made several important changes to the EIDL Program under Section 7(b) of the Small Business Act, including changing the size limits for considerations as a “small business concern,” making more entities eligible for assistance through programs administered by the SBA.
EDIL Loans are available to small business in a declared disaster area (which as of January 31, 2020, incudes all 50 states, Puerto Rico, Guam and the North Mariana Islands) to cover economic injury (e.g., loss of revenue) resulting from a disaster (e.g., the COVID-19 pandemic).
- EDIL Loans will provide access to working capital loans of up to a $2 million to qualifying small businesses and nonprofits and carry an interest rate of 3.75% for small businesses and 2.75% for nonprofits and have a maximum term of 30 years.
- Funds available to these small businesses and nonprofits can be used to pay fixed debts (i.e., rent, utilities, etc.), payroll, accounts payable, rent, and other bills that cannot be paid because of the pandemic’s impact on the business.
- Loans over $200,000 must be guaranteed by any owner of the business having a 20% or greater interest in the business applying.
- The CARES Act removed the previous requirement for EIDL Loans that the borrower not be able to secure credit elsewhere, and as long as the borrower has been in business and was in operation as of January 31, 2020, they are eligible to apply.
- Applicants may request and expedited disbursement that is to be paid within 3 days of the request being made. The advance may not exceed $10,000, and must be used for authorized costs, but is otherwise not repayable if the EIDL Loan is not approved.
Application Process for Accessing an EIDL Loan through the SBA
Should an Agent be Employed?
EIDL Loans are processed directly through the SBA and the SBA does not require an Applicant to engage the services of any Agent to prepare and/or file an application or close a loan. While an Applicant is not required to engage the services of an Agent, the Applicant may choose to do so to ensure the Loan application is completed properly and timely.
Compensation paid to an Agent for the preparation and/or filing of a loan application, must bear a necessary and reasonable relationship to the services actually performed, and cannot be contingent on loan approval. Furthermore, compensation paid to an Agent must be disclosed on the SBA loan application (SBA Form 159D). Should the amount paid to the Agent be determined unreasonable, the Agent must cancel the compensation, or refund to the Applicant any portion the Applicant already paid over the amount that is determined to be reasonable.
How to apply for an EIDL Loan?
The application process of an EIDL Loan through the SBA requires registration, completion of the application, and submission of required support documentation (i.e., Federal Tax Returns, business financial statements, etc.).
- Complete the registration (Click here to Register)
- Complete the Loan Application (Loan Application (SBA Form 5) and associated forms can be found HERE on the SBA Website)
- Per the current version of the SBA Form 5, Business Loan Application, the applicant(s) must submit the following required support documentation:
- Copies of the applicant’s 3 most recent Federal Income Tax Returns, including all schedules. If the business has not filed 3 years of Federal Tax Returns, then it must submit all returns that have been filed.
- Completed IRS Form 8821, Tax Information Authorization.
- Completed IRS Form 4506T, Tax Information Authorization for each applicant, each principal owning 20% or more of the applicant business, each general partner or managing member; and, for any owner who has greater than 50% ownership in an affiliate business. Affiliates include, but are not limited to, business parents, subsidiaries, and/or other businesses with common ownership or management . Note: Sole-Proprietors need only submit the IRS Form 8821. The SBA will contact you if it needs any additional information.
- Personal Financial Statement (SBA Form 413) completed, signed, and dated by the applicant, each principal owning 20% or more of the applicant business, and each general partner or managing member.
- Schedule of Liabilities listing all fixed debts (SBA Form 2202 may be used).
Other additional information may be requested and necessary to process an EDIL Loan Application, and if requested must be provided within 7 days of such request being made. In order to be proactive and avoid delay in loan processing, it is suggested that the following be provided along with the other required support documentation.
- Complete copy, including all schedules, of the most recent Federal income tax return for each principal owning 20% or more, each general partner or managing member, and each affiliate when any owner has more than 50% ownership in the affiliate business. Affiliates include, but are not limited to, business parents, subsidiaries, and/or other businesses with common ownership or management.
- If the most recent Federal Income Tax Returns has not been filed, a year-end profit-and-loss statement and balance sheet for that tax year.
- A current year-to-date profit-and-loss statement
- If applying for physical damage, a Verification of Business Property (SBA Form 739A). If insurance covers all or a part of this loss (regardless of the current status of your claim), the name and telephone number of your agent and/or claims adjuster, the policy number and the name of the insurance company.
- If applying for economic injury, Economic Injury Disaster Loan Supporting Information (SBA Form P-019) and Additional Filing Requirements (SBA Form 1368) providing monthly sales figures will generally be required when requesting an increase in the amount of economic injury.
After an applicant fully and completely submits an application, the SBA states that the “typical timeline for approval is 2-3 weeks and disbursement can take up to 5 days.” These timelines are dependent on volume and given the attractiveness of these loans and current economic climate that the COVID-19 pandemic has created, the law offices of Bauer, Gutierrez, & Borbon, PLLC are suggesting that all clients and/or perspective clients act quickly and diligently to ensure they receive the funds they need as expediently as possible.
III. Florida Small Business Emergency Bridge Loan Program
While the majority of the financial assistance to small businesses and small business owners is available through Federal programs such as the CARES Act and the Families First Coronavirus Response Act (FFCRA), Florida Governor Ron DeSantis is also helping Florida’s small businesses by activating the Florida Small Business Emergency Bridge Loan Program on March 16, 2020.
The Florida Small Business Emergency Bridge Loan Program is managed by the Department of Economic Opportunity and will provide short-term, interest-free loans to small businesses that experienced economic injury from Coronavirus COVID-19. Businesses interested in applying must do so before the application period ends on May 8, 2020. Businesses can apply at https://floridadisaster.biz/ and can find more information about the Florida Small Business Emergency Bridge Loan Program HERE.
Qualification for a Florida Small Business Emergency Bridge Loan Program
To qualify for a Florida Small Business Emergency Bridge Loan Program, business must meet the following eligibility criteria:
- Be a for-profit, privately held small business that maintains a place of business in the state of Florida.
- Be located in a designated disaster area (per Executive Order 20-52 all 67 counties statewide are included).
- Be established prior to March 9, 2020, the date of the designated disaster.
- Be able to demonstrate economic injury as a result of the designated disaster. The need for the loan and use of proceeds must be directly related to the economic injury caused by the designated disaster.
- Qualified small business applicants must be an employer business with 2 to 100 employees.
The following list of business types are not eligible for assistance because of the activities they conduct:
- Businesses deriving more than one-third of gross annual revenue from legal gambling activities;
- Businesses engaged in any illegal activity;
- Businesses that present live performances of an indecent sexual nature or derive directly or indirectly more 2.5% of gross revenue through the sale of products or services, or the presentation of any depictions or displays, of an indecent sexual nature;
- Businesses that have a primary purpose of facilitating polyamorous relationships;
- Massage parlors;
- Hot tub facilities; and
- Escort services.
Loan Terms under the Florida Small Business Emergency Bridge Loan Program
Under the Florida Small Business Emergency Bridge Loan Program, qualified and eligible small businesses can receive bridge loans of up to $50,000 per eligible small business. Loans of up to $100,000 may be made in special cases as warranted by the need of the eligible small business.
The loan terms and corresponding interest rates will be interest-free for the loan term 1 year. Following the 1 year, if the loan is not repaid, the loan will assume an interest rate of 12% per annum on the unpaid balance thereafter, until the loan balance is repaid in full. Loan default is subject to a normal commercial collection process.
Only one loan may be made per eligible business. All previous bridge loans received MUST be paid in full.
Loan Requirements under the Florida Small Business Emergency Bridge Loan Program
Under the terms set forth for the Florida Small Business Emergency Bridge Loan Program, loans will be made to individuals who, individually or collectively, own at least 51% of the equity of the business.
When applying for a loan under the Emergency Bridge Loan Program, a borrower will be required to sign an agreement that the proceeds of the loan will be used only for purposes of maintaining or restarting the business in the designated area. Use of proceeds to pay off debts already incurred for qualifying business maintenance or restart purposes may be authorized on a case-by-case basis. Furthermore, a borrower will be required to certify that the proceeds of insurance claims, other loans applied for or to be applied for, or other financial assistance will be used to repay the loan.
Application Process for a Florida Small Business Emergency Bridge Loan Program
The application for a Florida Small Business Emergency Bridge Loan Program is now available on the Florida Small Business Emergency Bridge Loan program website and is included herein for convenience (Click Here). Further information regarding the application process and required materials is also contained on their website.
Upon the closing of a loan, loan proceeds will be delivered to the loan recipient for immediate access and use.
IV. Federal Income Tax Filing and Payment Deadline Extension
On March 21, 2020, the Treasury Department and the Internal Revenue Service provided special tax filing and payment relief to individuals and businesses in response to the COVID-19 pandemic.
The IRS provided that the filing deadline for tax returns (2019 Income Tax Returns) has been extended from April 15, 2020, to July 15, 2020. The relief of this extended tax filing date applies to all individual returns, trusts, and corporations. Furthermore, this relief is automatic and taxpayers do not need to file any additional forms or call the IRS to qualify.
The IRS urges taxpayers who are owed a refund to file as quickly as possible. For those who can’t file by the July 15, 2020 deadline, the IRS reminds individual taxpayers that everyone is eligible to request an extension to file their return.
Estimated Tax Payment for First Quarter of 2020
Under the relief provided by the Treasury Department and the Internal Revenue Service it was also stated that estimated tax payments for the first quarter of 2020 (which are ordinarily due on April 15, 2020), while still payable, will not begin to accrue penalties and interest on any remaining unpaid balances until July 16, 2020. You will automatically avoid interest and penalties on the taxes paid by July 15th.
V. Federal Individual Income Tax Credits and Rebates
Under the CARES Act, the legislation provides immediate tax relief (and economic stimulus) for individuals by providing a credit of $1,200 for individuals and $2,400 in the case of a joint return. There is also an additional credit of $500 per dependent. This credit is reduced if your adjusted gross income exceeds $75,000.00. This credit is presumed to have been paid and earned from a previous year and the bill instructs the Treasury Secretary to expedite advance refunds to eligible taxpayers. In short, this credit is the immediate rebate intended to put funds into the hands of taxpayers. Treasury Secretary, Steven Mnuchin, has set a goal of getting the first payments out the week of April 6, 2020, but many believe this target date may get pushed back to later in April.
If you have already filed a 2019 tax return, the Internal Revenue Service will use the direct deposit information on your 2019 return to send your payment to your bank account. If you did not provide the IRS with your direct deposit details or you closed that account, then the IRS will mail you a check. For those who have yet to file a 2019 tax return, the IRS will see if you have filed a 2018 tax return and use that information to determine whether you meet the qualifications for a credit and to locate your bank details or mailing address.
Further, under this provision of the bill also provides for comprehensive changes to net operating loss carryforward and carryback rules.
VI. Some Other Relief Provided
Under the CARES Act, the law provides that in addition to state unemployment benefits, the federal government will contribute an additional $600 per week to eligible individuals. The law also expands unemployment benefits for individuals that may have exhausted their unemployment benefits prior to the COVID-19 pandemic.
For businesses that elect not to apply for a Payroll Protection Program loan, the law provides for a tax credit equal to fifty percent (50%) of the qualified wages. The law also provides for a delay in the payment of payroll taxes until December 31, 2021, and December 31, 2022.
Distressed Sectors of the Economy
The bill makes accommodation for sectors of the economy particularly devastated by the pandemic. Specifically, $208,000,000,000.00 are being made available for bridge loans. Passenger air carriers are eligible for $50,000,000,000. Cargo air carriers are eligible for $8,000,000,000. The remaining $150,000,000,000 are available for other eligible businesses.
Procedures for applying for these loans are expected to be published within 10 days. These loans are available for business that employ between 500 and 10,000 employees.
Interest rates are no higher than 2% per annum. These loans are subject to numerous conditions, like limitations on highly compensated individuals, stock buybacks, and guarantees regarding the restoration or preservation of a workforce.
Under the CARES Act, the bill suspends federal student loan payments for three (3) months. During that time interest will not accrue and payments are presumed to have been made for the purpose of computing loan forgiveness.
At the law offices of Bauer, Gutierrez, & Borbon, PLLC, we pride ourselves in offering dynamic, creative, efficient, and cost-efficient services and solutions to individuals and businesses of any size. Particularly for small businesses and small business owners, we hope you find this information useful. Our law firm is monitoring the government’s response to the COVID-19 pandemic and will provide updates and additional information as the same becomes available. Should you have any questions, or desire assistance in applying for any of the relief detailed herein, please feel free to contact our offices and we will be more than happy to assist you with any of your needs so that we can all overcome these difficult times together.