CARES Act Update

We have been in communication with various leaders in Washington.  We would like to thank our friends in West Texas and Washington for assisting us in accumulating this information.

Presently, there appears to be somewhat of a hold-up regarding the finalization of the CARES Act.  However, we have summarized our understanding of the items most pertinent to our client base.  Below is a brief outline of what we are anticipating.   Please forgive the following format, we generally like for our e-mails to be clear, concise, and succinct.  We plan on providing more narrative as plans are finalized.  However, the new plan is somewhat complex, and the most efficient way to present our understanding of the upcoming plan is as follows (following the detailed information is a “30,000-foot view” of the plan):    

• The loan program will cover a Covered Period beginning on March 1, 2020 and ending on December 31, 2020.
  • During the covered period, any business concern, private nonprofit organization, or public nonprofit organization which employs not more than 500 employees shall be eligible to receive a loan made through section 7 (a) of the Small Business Act.
  • The loan will be based on the lesser of the product obtained by multiplying
    • The average total monthly payments by the applicant (taxpayer) for payroll, mortgage payments, rent payments, and payments on any other debt obligations incurred during the 1 year period before the date on which the loan is made.
      • Or
    • $10,000,000
  • Allowable Uses
    • During the covered period, a recipient of a loan made under section 7(a) of the Small Business Act may use the proceeds of the loan for:
      • Payroll support, including paid sick, medical, or family leave, and costs related to the continuation of group health care benefits during those periods of leave;
      • Employee Salaries
      • Mortgage Payments
      • Rent (including rent under a lease agreement)
      • Utilities
      • Any other debt obligations that were incurred before the covered period
  • Guarantee Amount For 7(A) Loans
    • It appears that that the SBA will guarantee 100 percent of the balance of the entire loan.  This will help to relieve local banks of the possibility of loan loss.
  • Loan Forgiveness
    • We understand that the 7(a) loan forgiveness covered period shall be beginning on March 1, 2020 and ending on June 30, 2020.  Our understanding that amounts expended for the following will be forgiven:
      • Payroll costs – not to include
        • The compensation of an individual employee in excess of $33,333 during the covered period (therefore, given that the covered period is 4 months, you could pay a single employee up to $8,250 per month – i.e. $33,000/4).
        • Qualified sick leave wages for which a credit is allowed under section 7001 of the Families First Coronavirus Response Act; or
        • Qualified family leave wages for which a credit is allowed under section 7003 of the Families First Coronavirus Response Act.
    • Forgiveness – An eligible recipient shall be eligible for forgiveness of indebtedness on a covered 7(a) loan in an amount equal to the cost of maintaining payroll continuity during the covered period.
  • Treatment of Amounts Forgiven
    • The amount of loan forgiveness under this section for an eligible recipient shall not exceed the sum of:
      • The total payroll costs incurred by the eligible recipient during the covered period; and
      • The amount of payments made during the covered period on debt obligations that were incurred before the covered period.
    • Reduction Based on Reduction In Number of Employees
      • The amount of loan forgiveness under this section shall be reduced by the percentage equal t the difference obtained by subtracting –
        • The quotient obtained by dividing –
          • The average number of full-time equivalent employees per month employed by the eligible recipient during the covered period: by
            • The average number of full-time equivalent employees per month employed by the eligible recipient during the period beginning on March 1, 2019 and ending on June 30, 2019; or
            • In the case of an eligible recipient that is seasonal employer, as determined by the Administrator, the average number of full-time equivalent employees per month employed by the eligible recipient during the period beginning on March 1, 2019 and ending on June 30, 2019
        • Exception for tipped workers – An eligible recipient with tipped employees described in section 3(m)(2)(A) of the Fair Labor Standards Act of 1938 (29 U.S.C. 203(m)(2)(A) may receive forgiveness for additional wages paid to those employees.
  • Taxability – the cancellation indebtedness under this section shall be excluded from gross income for purposes of the Internal Revenue Code of 1986.

Basically all of the above explained in plain English is that qualified businesses are eligible for a new plan that will provide approximately four months of capital to ensure the continuation of their business, and the retention of their employees.  The funds will be in the form of a loan.  The portion of the loan attributable to employees will be forgiven (with some exceptions – ie if you terminated a portion of your workforce and have fewer employees than you had last year, the forgiveness will be curtailed).  The remainder of the loan will likely be termed out over a period (we have not been informed regarding a term), and the interest rate has yet to be identified (other Disaster loans are currently based on a 2.7% interest rate – it is reasonable to assume that will be similar to the proposed plan). 

Based on initial analysis, it appears that the limitations on the SBA loans that are going to be provided through this bill include having already taken an SBA loan under current disaster conditions. We know that many are already working toward these loans, but it appears that the loans provided by the CARES act will be more advantageous.

Please keep in mind nothing has been finalized, the above are not set in stone – they are a best guess based on the information that we have received by 4:00 pm today.

We have received numerous comments from our clients regarding our newsletters and certainly appreciate your feedback.  Please feel free to forward these communications to anyone you like (whether they are a client or not).  We are all Americans, we are all concerned, but we will get through this if we pull together.

The full text of the bill as it presently stands is located here. 

Steve Mnuchin is currently updating the nation via the Coronavirus Task Force press conference and has said that the SBA loan programs expect to be up and running by the end of next week with a very simple process for the loans to be made and disbursed on the same day. All FDIC member banks will be briefed on administering these loans as well per Mnuchin.