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Review of the Business Provisions in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) – U.S. Senate Bill – S. 3548

Client Updates / Mar 23, 2020

On March 19th, Senate Majority Leader Mitch McConnell Introduced the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act), intended to serve as a comprehensive stimulus package in response to the economic crisis stemming from the coronavirus pandemic. The Senate is currently negotiating the details of the bill and the House of Representatives will need to vote on the bill as well before it is sent to the President to sign it into law. While everyone understands the urgency of the situation, some major differences remain. As of Monday morning, March 23rd, Republicans and Democrats in the Senate have failed to reach an agreement as Democrats push for changes in the bill and argue that it fails to provide sufficient protections for workers. The parties are continuing to negotiate, and it is possible that by the time you read this article, the bill will be amended in several significant ways and voted on by the full Senate.

The following is a brief review of several provisions of the CARES Act which affect U.S. businesses. In addition to the provisions discussed in this article, the CARES Act also provides additional benefits to individuals as well as certain tax breaks. Furthermore, the CARES Act includes additional provisions for funding for medical purposes including the prevention, diagnosis, and treatment of COVID-19, expanding health insurance coverage for testing and prevention, as well as education provisions and labor provisions.

Small Business Interruption Loans

Small Business Loan Program

Between the covered period of March 1, 2020 to December 31, 2020, organizations with less than 500 employees are eligible to receive certain small business loans administered by the U.S. Small Business Administration (SBA) under the Small Business Act. The maximum loan amount small businesses will be eligible to receive is the lesser of (a) $10 million or (b) the total amount derived from calculating the business’s total monthly payroll, mortgage, rent and other debt obligation payments.

These loans can be used specifically to cover: (a) payroll support; (b) employee salaries; (c) mortgage payments; (d) rent); (e) utilities; and (f) any other debt obligations incurred before March 1, 2020.

The bill directs lenders to significantly relax their evaluation of loan eligibility. The only two criteria to consider are whether the borrower: (i) was in operation on March 1, 2020; and (ii) had employees for whom the borrower paid salaries and payroll taxes.

Under this bill, the SBA will either waive or reduce its fees to the maximum extent possible. Additionally, the SBA will guarantee 100% of the loans granted to eligible small business borrowers.

Importantly, the bill expands the eligibility for these loans to all small businesses that were in operation on March 1st and have applied for a loan. The presumption is that a small business that has applied for a loan has been adversely impacted by COVID-19, and the SBA will consider each small business that applies to be eligible.

Lenders who grant loans these small business loans which are guaranteed by the SBA will be required to provide complete payment deferrals for a period of not more than 1 year.

Loan Forgiveness

Between March 1, 2020 and June 30, 2020 (the “covered period”), small businesses who are recipients of SBA loans (known as “covered 7(a) loans”) will be eligible for loan forgiveness in an amount equal to the cost of maintaining payroll continuity during this covered period. The amount of loan forgiveness will be capped at (a) the total payroll costs incurred by the eligible loan recipient during the covered period and (b) the amount of payments made during the covered period on debt obligations that were incurred before the covered period. The amount of loan forgiveness a loan recipient will be eligible for will be adjusted and reduced if it reduces the number of its employees or if it reduces compensation of employees by more than 25%.

Relief for Businesses

Estimated quarterly tax payments for corporations will not be due before October 15, 2020. Additionally, employer payroll taxes incurred during the deferral period starting from the date this bill is enacted into law until January 1, 2021 will be delayed, with 50% of the amount due by December 31, 2021 and 50% of the amount due by December 31, 2022. Furthermore, one amendment that was introduced to the bill seeks to suspend all Federal payroll taxes for 2020.

Assistance to Severely Distressed Sectors of the U.S. Economy

As part of the proposed bill, the Senate introduced the Coronavirus Economic Stabilization Act of 2020 under which eligible businesses may receive loans and loan guarantees. Specifically, the bill would allocate: (1) up to $50B for passenger air carriers; (2) up to $8B for cargo air carriers; and up to $150B for other eligible businesses. Companies who receive such loans or loan guarantees will be prohibited from increasing executive compensation for certain employees for a period of two years.