The CARES Act – The Federal Stimulus Subsidizing Payroll 

 

The Coronavirus, or COVID-19, combined with the “shelter in place” orders have made a disaster of our economy.  Businesses have contracted, curtailing or shuttering operations.  Closed schools have increased the pressure for increased paid sick leave or ineffective telecommuting.  Supply lines have been disrupted.  Consumers are panicking and hording what they consider essential consumer goods. 

On March 26th, the United States Senate passed the Coronavirus Aid, Relief, and Economic Security Act (“CARES”).  The bill House of Representatives passed the CARES Act today, March 27th.  President Trump signed the bill today as well. 

 This memorandum will focus on forgivable loans to businesses to cover payroll and other costs. 

 Paycheck Protection Loans

 What is this Loan?  A paycheck protection loan, administered by the Small Business Administration (“SBA”) is available for businesses of less than 500 employees.  This includes private or public non-profits.  CARE will also allow a business in the hospitality industry with more than 500 employees provided they do not employ more than 500 persons per physical location. 

 A borrower can receive loans equal to 2.5 times their monthly payroll, mortgage, rent and debt payment expenses up to a maximum of $10 million.  This money can be used to make payroll, pay sick leave, pay mortgage or rent and utilities, or make payments on existing debts (“Qualifying Costs”). 

 These loans are guaranteed by the federal government.  The loans do not require a personal guarantee.  Loan fees are waived. 

 Loan Forgiveness.  The federal government will forgive loans in an amount equal to the Qualifying Costs spent during an 8-week period after the loan origination date.  The amount of the loan forgiveness is not counted as taxable income. 

 Loan forgiveness will be reduced if the employer reduces its workforce during the 8-week period; or reduces wages paid to employees by more than 25 percent during the same period.  A reduction in loan forgiveness can be avoided if the business re-hires all employees laid off from February 15th, or if the business increases previously reduced wages by June 20th. 

 This paycheck protection loan is an incredible tool for business facing difficulties as a result of the COVID-19 crisis. 

Doug Larsen, [email protected] 

For a more complete analysis of tax aspects of the CARES Act, please see the blog post of my law partner, Jared Callister, under the California Tax Review blog.