The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), the largest emergency spending measure in U.S. history, has been passed by both houses of Congress and was signed into law by President Trump on March 27, 2020, in response to the Coronavirus (COVID-19) pandemic.

Attorneys at Tarter Krinsky & Drogin LLP have been analyzing the new law, reviewing its relevant provisions, and are ready to advise clients on what impact the CARES Act may have on their businesses and whether those businesses may be eligible for assistance.

The information below is an overview of certain provisions of the CARES Act that we believe may be of particular interest to clients. We are ready to assist clients in assessing the details of these provisions as well as the CARES Act in its entirety.

Readers are advised that the CARES Act instructs the applicable government agencies to issue guidance within a prescribed period (generally between 10 and 30 days from enactment) and as such please be advised that all information is subject to the issuance of final guidance.

Funds to Continue Your Operation and Keep Your Employees
(Title I – Keeping American Workers Paid and Employed Act)

Who Is Eligible?

Businesses with 500 or less employees are eligible, though some larger companies may also be eligible. Self-employed individuals are also eligible. The funds will be in the form of loans, portions of which need not be repaid and will become in essence grants.

What Can I Use The Funds For?

You are allowed to use the funds to pay for certain expenses incurred from February 15, 2020, through June 30, 2020, including the following:

• payroll costs for employees including salary, commission and health care benefits (payroll costs exclude individual employee compensation above $100,000 on an annualized basis)
• rent;
• utilities; and mortgage interest and interest on debt incurred before February 15, 2020.

How Much Can I Borrow?

You can borrow up to 2.5 times your company’s average monthly payroll costs or $10,000,000, whichever is less.

How Much Would Be Forgiven?

The total amount you actually incur or pay for the expenses specified above during the eight-week period commencing from the origination of the loan can be forgiven. subject to the following:

• The amount forgiven could be reduced if your company reduces employee headcount or the salary of employees who make less than $100,000perannum.
  • If you reduce your employee headcount, the amount forgiven is reduced in proportion to the headcount reduction.
  • If you reduce your employee’s salary, the amount forgiven is reduced by any salary reduction over 25%.

What Happens If There Is An Unforgiven Balance?

Repayment of any unforgiven balance will have a maximum loan term of ten years and a maximum interest rate of 4%. Repayment could be deferred for up to one year.

How Do I Apply?

You may apply at participating banks (we await further guidance on participating banks) or through the Small Business Administration’s website. You will need to certify that the loan request is necessary due to the uncertainty of current economic conditions. You will not need to personally guarantee the loan. The specific application details are being worked out by the relevant federal agencies and are expected to be issued by April 11, 2020.

Employment-Related Tax Credits
(Title II – Assistance for American Workers, Families and Business)

If you are not eligible for the above, you may nevertheless obtain certain tax credits that are aimed at assisting businesses with retaining their employees.

What are Employee Retention Tax Credits and Who Is Eligible?

Employers may obtain a refundable credit against Social Security tax liability equal to 50% of the first $10,000 (i.e., a $5,000 credit) in wages per employee. Employers must have carried on a trade or business during 2020 and satisfy one of the following tests:

• Have business operations fully or partially suspended operations due to orders from a governmental entity limiting commerce, travel, or group meetings; or
• Experience a year-over-year (comparing calendar quarters) reduction in gross receipts of at least 50% with eligibility continuing until gross receipts exceed 80% year-over-year.

For employers with more than 100 full-time employees, only employees who are currently not providing services for the employer due to COVID-19 causes are eligible for the credit. For employers with 100 or fewer employees, all employees’ wages may be counted. The employee retention credit is effective for wages paid after March 12, 2020, and before January 1, 2021.

Can I Delay Payment of My Payroll Tax?

The CARES Act provides for special delayed payment relief for a portion of certain payroll taxes generally for 2020 but does not provide permanent reduction or forgiveness of such liability. Specifically, the CARES Act provides for the delayed payment of the 6.2% employer portion of Social Security tax on employee wages, but not the 1.45% employer portion of Medicare tax. For payments that would normally be due after March 27, 2020, 50% of those payments are now due on December 31, 2021, and the other 50% due on December 31, 2022.

Assistance to Severely Distressed Economic Sectors
(Title IV – Coronavirus Economic Stabilization Act)

In addition to the above, the CARES Act also provides $500 billion to aid economic sectors and governmental localities particularly hit hard by COVID-19. The aid will be in the form of loans, loan guarantees and direct investments.

How is the $500 Billion Allocated?

The $500 billion is allocated as follows:

• $25 billion in loans and loan guarantees for air carriers;
• $4 billion in loans and loan guarantees for cargo air carriers;
• $17 billion in loans and loan guarantees for businesses critical to maintaining national security; and
• $454 billion for loans, loan guarantees, and investments in support of facilities established by the Federal Reserve to support lending to eligible businesses, states, and municipalities.

Loans and Loan Guarantee Criteria

The CARES Act gives the Treasury Secretary discretion to make loans and loan guarantees for a duration no longer than five years and at an interest rate not less than prevailing market rates prior to the COVID-19 outbreak. The loans cannot be forgiven.
In order to be eligible for a loan, a business must be U.S.-domiciled and its employees must be predominately located in the United States. The business also must show that alternative financing is not reasonably available.

For 12 months after the expiration of the loan or loan guarantee, the business will be prohibited from buying back its company stock, paying dividends or making other capital distributions and reducing its workforce by more than 10%.

Main Street Lending Program

The CARES Act encourages the Federal Reserve to establish a facility that supports lending to small and mid-size businesses.

Mid-Size Business and Non-Profit Lending Programs

The CARES Act instructs the Treasury Secretary to ensure that businesses and non-profit organizations between 500 and 10,000 employees have access to a specific loan facility with an interest rate not higher than 2% per year and no payments due for the first six months. In order to qualify, the eligible borrower must self-certify, among other things, that:

• the loan is necessary to support the borrower’s ongoing operations;
• the borrower will retain 90% of its workforce until September 30, 2020;
• the borrower intends to restore at least 90% of its workforce that existed as of February 1, 2020, and restore all compensation and benefits to the borrower’s workers not more than 4 months after termination of the emergency; and
• the borrower will not outsource or offshore jobs for a period of time ending two years after repayment of the loan.

Executive Compensation Restrictions

For an eligible borrower to participate in any of the CARES Act funding programs, the borrower must agree to cap all employee compensation (including salary, stock, and bonuses) for a period ending one year after the loan is repaid. Employees receiving more than $425,000 per year cannot receive more compensation than they received in 2019 or severance pay or other benefits upon termination that exceed twice the 2019 compensation amount. Officers or employees receiving more than $3 million per year cannot receive total compensation in excess of $3 million and 50% of the excess over $3 million.

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Please note that the CARES Act became effective recently on March 27, 2020. The information is based on the text of the CARES Act and is subject to the final regulations issued by the applicable federal agency that is tasked with implementation.