Coronavirus Aid, Relief, and Economic Security Act (the CARES Act)

Can it benefit you and your business?

On Friday March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act), that will create an estimated $2 trillion emergency relief package that could significantly impact the U.S. economy and the financial services industry.

The CARES Act has allocated $349 billion to provide relief to certain businesses through 100% guaranteed Small Business Administration (SBA) loans, a portion of which the SBA would forgive based on the employer meeting certain criteria. The CARES Act will include certain tax relief for businesses and individuals to help provide financial assistance during the COVID-19 crisis.

Below you will find a summary of provisions in the legislation applicable to investment advisers, broker-dealers, and others in the financial services industry.

Paycheck Protection Program:

The CARES Act allocated $349 billion to the SBA to provide loans to small businesses impacted by COVID-19. The application for borrowers is available here. Eligible businesses may take out loans up to $10 million to cover payroll and other operational expenses.

• Eligibility:      
  • This program is for applicants whose principal place of residence is in the U.S. who have a small business with less than 500 employees (includes full-time, part-time and those employed on other bases, but does not include independent contractors) including private non-profit organizations described in section 501(c)(3) of the Internal Revenue Code or 501(c)(19) veterans organizations affected by coronavirus/COVID-19.
  • Sole proprietors, independent contractors, and eligible self-employed individuals are eligible for loans, subject to some documentation requirements to substantiate eligibility.
    • You must also submit such documentation as is necessary to establish eligibility such as payroll processor records, payroll tax filings, or Form 1099-MISC, or income and expenses from a sole proprietorship. For borrowers that do not have any such documentation, the borrower must provide other supporting documentation, such as bank records, sufficient to demonstrate the qualifying payroll amount.
  • Additionally, the business must have been in operation on February 15^th, 2020 and either had employees that were paid salaries or independent contractors reported on Form 1099-MISC.
  • Businesses in certain industries may have more than 500 employees if they meet the SBA’s size standards for those industries.
  • SBA regulations on entity affiliations (under 13 CFR 121.103) are waived for the covered period for business concerns, non-profits, and veterans’ organizations for:
    • Any business that receives financial assistance from a company licensed under section 301 of the Small Business Investment Act. This includes privately organized and privately managed investment firms that provide venture capital to small independent businesses.

• Borrower Eligibility Requirement: Good-faith certification that:
  • Current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant;
  • The funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments;
  • The applicant does not have any other application pending under this program for the same purpose; and
  • From February 15, 2020 until December 31, 2020 the applicant has not received duplicative amounts under this program.

• Permissible Uses
  • Payroll costs
    • Includes: compensation to employees, such as salary, wage, commissions, cash, etc.; cash tips; payment for vacation; paid leave; severance payments; payment for group health benefits, including insurance premiums; retirement benefits; state and local payroll taxes; and compensation to sole proprietors or independent contractors (including commission based compensation) up to $100,000 in 1 year, prorated for the covered period and for an independent contractor or sole proprietor, wage, commissions, income, or net earnings from self-employment or similar compensation..
    • Excludes: Individual employee compensation above $100,000 per year, prorated for the covered period; certain federal taxes; compensation to employees whose principal place of residence is outside the US; and sick and family leave wages for which credit is allowed under the Families First Act.
  • Group healthcare benefits during period of paid sick, medical or family leave and insurance premiums;
  • Salaries, commissions or similar compensation;
  • Rent/lease agreement payments;
  • Utilities; and
  • Interest on any other debt obligations incurred before the covered period.
  • If you use PPP funds for unauthorized purposes, SBA will direct you to repay those amounts. If you knowingly use the funds for unauthorized purposes, you will be subject to additional liability such as charges for fraud. If one of your shareholders, members, or partners uses PPP funds for unauthorized purposes, SBA will have recourse against the shareholder, member, or partner for the unauthorized use.

• Loan Terms
  • The maximum loan amount (capped at $10 million) is the lesser of:
    • 2.5 times the average total monthly payroll costs incurred in the one-year period before the loan is made, PLUS a loan received under the Economic Injury Disaster Loan Program; or
    • Upon request, for business that were not in existence during the period from February 15, 2019 through June 30, 2019 – 2.5 times the average monthly payroll payments from January 1, 2020 through February 29, 2020 PLUS a loan received under the Economic Injury Disaster Loan Program; or
    • $10 million.
  • Interest on the loan will be fixed at 1% and the payments of the loans shall be deferred for no less than 6 months, however interest will continue to accrue.
  • No personal guarantee requirement.
  • No collateral is required.
  • Loan maturity – 2 years
  • No prepayment fees.

• How to apply
  • You can apply through any existing SBA 7(a) lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. Other regulated lenders will be available to make these loans once they are approved and enrolled in the program. 
  • Lenders may begin processing loan applications as soon as April 3, 2020 for small businesses and sole proprietorships
  • Starting April 10, 2020 independent contractors and self-employed individuals can apply.\

• Lenders
  • All existing SBA certified lenders will be given delegated authority to process Paycheck Protection Loans.
  • All federally insured depository institutions, federally insured credit unions, and Farm Credit System institutions are eligible to participate in this program.
  • A broad set of additional lenders can begin making loans as soon as they are approved and enrolled in the program.
  • Lenders must verify the borrower (i) was in operation on February 15, 2020; (ii) had employees on the payroll, and (iii) verify the dollar amount of average monthly payroll costs.
  • Lender Compensation: Lenders may not collect fees from the applicant. Processing fees will be based on the balance of the financing outstanding at the time of final disbursement:
    • Loans $350,000 and under: 5.00%;
    • Loans gretaer than $350,000 to $2 million: 3%; and
    • Loans greater than $2 million: 1%.

• An agent is an authorized representative and can be:
  • An attorney;
  • An accountant;
  • A consultant;
  • Someone who prepares an applicant’s application for financial assistance and is employed and compensated by the applicant;
  • Someone who assists a lender with originating, disbursing, servicing, liquidating, or litigating SBA loans;
  • A loan broker; or
  • Any other individual or entity representing an applicant by conducting business with the SBA.
  • Agents will be paid out of lender fees and cannot collect any fees from the applicant. The fees for agents are as follows:
    • Loans $350,000 and under: 1.00%
    • Loans greater than $350,000 to $2 million: 0.50%
    • Loans greater than $2 million: 0.25%

• Loan Forgiveness and Payment Deferral Relief
  • Loan forgiveness is based on the business maintaining or rehiring employees and maintaining salary levels.
  • The loan will be fully forgiven if the funds are used during the 8 week period following the origination of the loan (the “covered period”) for :
    • payroll costs;
    • Interest on mortgages incurred before February 15, 2020;
    • Rent in force before February 15, 2020; and
    • Utility payments for services which began before February 15, 2020.
  • 75% of the forgiven amount must have been used for payroll costs. No more than 25% of the loan forgiveness amount may be attributable to non-payroll costs.
  • Forgiveness will be reduced if full-time headcount of employees decline or if salaries and wages decrease by more than 25% for any employee that made less than $100,000 in 2019.
    • There is relief from forgiveness reduction penalties for employers who rehire employees or make up for wage reductions by June 30, 2020. The foregoing forgiveness reduction rules will not apply to an employer between February 15, 2020 and April 26, 2020 – where
      • The employer reduces the number of full time equivalent employees (FTE) in this period and, not later than June 30, 2020, the employer has eliminated the reduction in FTEs; or
      • There is a salary reduction, as compared to February 15, 2020, during this period for one or more employees and that reduction is eliminated by June 30, 2020.
• The CARES Act clarifies that employers with tipped employees (as described in the Fair Labor Standards Act) may receive forgiveness for additional wages paid to those employees. 

• Loan Forgiveness Procedure: Borrowers seeking forgiveness of amounts must submit to their lender:
  • Documentation verifying FTE on payroll and their pay rates;
  • Documentation on covered costs/payments (e.g., documents verifying mortgage, rent, and utility payments);
  • Certification from a business representative that the documentation is true and correct and that forgiveness amounts requested were used to retain employees and make other forgiveness-eligible payments; and
  • Any other documentation the SBA may require.
  • The SBA will issue additional guidance on loan forgiveness.
  • A lender may request that the SBA purchase the expected forgiveness amount of a PPP loan or pool of PPP loans at the end of week seven of the covered period. The expected forgiveness amount is the amount of loan principal the lender reasonably expects the borrower to expend on payroll costs, covered mortgage interest, covered rent, and covered utility payments during the eight week period after loan disbursement.

Expansion of SBA Economic Injury Disaster Loan Program (EIDL)

• The covered period for this section is modified to January 31, 2020-December 31, 2020.
• Eligibility:
  • A business with 500 or fewer employees;
  • Sole proprietorships, with or without employees, and independent contractors;
  • Cooperatives with 500 or fewer employees;
  • Employee Stock Ownership Plans with 500 or fewer employees;
  • Entities that are exempt under 501(c);
  • The applicant must have an acceptable credit history;
  • Show an ability to repay the loan;
• The CARES Act makes the following additional changes to the SBA Disaster Loan program:
  • Waives rules related to personal guarantees on advances and loans of $200,000 or less for all applicants;
  • Waives the “1 year in business prior to the disaster” requirement (except the business must have been in operation on January 31, 2020);
  • Waives the requirement that the business must be located in a state or county that received an economic injury disaster declaration from the SBA;
  • Waives the requirement that an applicant be unable to find credit elsewhere; and
  • Allows lenders to approve applicants based solely on credit scores (no tax return submission required) or “alternative appropriate methods to determine an applicant’s ability to repay.”
• Entities applying for loans under the Disaster Loan Program in response to COVID-19 may, during the covered period, request an emergency advance from the SBA of up to $10,000, which does not have to be repaid, even if the loan application is later denied. The SBA is charged with verifying an applicant’s eligibility by accepting a “self-certification.” Advances are to be awarded within three days of an application.
  • A business can apply and receive this advance while still applying for the loan under the Paycheck Protection Program and if the business receives the loan under the Paycheck Protection Program it will be reduced based on the EIDL advance.
• Loans under the EIDL may be used for:
  • Providing sick leave to employees unable to work due to direct effect of COVID-19;
  • Maintaining payroll during business disruptions during slow-downs;
  • Meeting increased supply chain costs;
  • Making rent or mortgage payments; and
  • Repaying debts that cannot be paid due to lost revenue.

Unemployment Benefits

• Expanded Unemployment Insurance – $600 per week increase in benefits for up to four months and federal funding of Unemployment Insurance benefits provided to those not usually eligible for Unemployment Insurance, such as self-employed, independent contractors, and those with limited work history. The federal government is incentivizing states to repeal any “waiting week” provisions that prevent unemployed workers from getting benefits as soon as they are laid off by fully funding the first week of Unemployment Insurance for states that suspend such waiting periods.
• Additionally, the government will fund an additional 13 weeks of unemployment benefits through December 31, 2020 after workers have run out of state unemployment benefits.

Tax Provisions

• Tax Relief for Businesses
  • Under the CARES Act employers are eligible for a 50% refundable payroll tax credit on wages paid up to $10,000 during the crisis. It would be available to employers whose businesses were (i) disrupted due to virus-related shutdowns and (ii) firms experiencing a decrease in gross receipts of 50% or more compared to the same quarter last year.
    • The credit is available for employees retained but not currently working due to the crisis for firms with more than 100 employees, and for all employee wages for firms with 100 or fewer employees.
  • Employer-side Social Security payroll tax payments may be delayed until January 1, 2021. 50% owed on December 31, 2021 and the other half owed on December 31, 2022.
• Firms may take net operating losses (NOLs) earned in 2018, 2019, or 2020 and carry back those losses five years.
  • The CARES Act suspends the Tax Cut and Job’s Act’s (TCJA) 80% of taxable income limit on net operating loss (NOL) carryovers for three years, so that the limit would not apply to tax years beginning in 2018, 2019, and 2020.
• Firms with tax credit carryforwards and previous alternative minimum tax (AMT) liability can claim larger refundable tax credits than they otherwise could. 
• Limitation on Business Interest Expense: The net interest deduction limitation, which currently limits businesses’ ability to deduct interest paid on their tax returns to 30% of EBITDA has been expanded to 50% of EBITDA for 2019 and 2020.

While this alert focused on Investment Advisors, Broker Dealers, and others within financial services, it also applies to any small business concern with less than 500 employees, including private non-profit organizations described in section 501(c)(3) of the Internal Revenue Code or 501(c)(19) veterans organizations affected by coronavirus/COVID-19.