At Trevett Cristo we know this a challenging time for all of our clients, both individuals and companies. We have received inquiries from many of our clients concerning the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The attorneys at Trevett Cristo have been working to staying abreast of all the changes coming out of Washington and Albany. Below is a summary of some of the more pertinent portions of the CARES act. We understand that the law itself is substantial. If you need specific guidance on any particular section of the act, please don’t hesitate to contact us.

Paycheck Protection Program Loans

The CARES Act expands the Small Business Administration’s (SBA) 7(a) loan program to permit the issuance of $349 billion in loans to small businesses affected by the COVID-19 pandemic as part of the “paycheck protection program” (PPP).

Businesses with 500 or fewer employees who otherwise meet eligibility requirements may obtain a “covered loan.” A covered loan can be used for payroll costs, interest on pre-existing mortgage obligations, rent, utilities and interest on other outstanding debts. Payroll costs include: salary, wages, commissions or similar compensation; payment of cash tips or equivalents; payment of vacation, parental, family, medical or sick leave; dismissal or separation payments; payments required for the provision of group health care benefits, including insurance premiums; payment of retirement benefits; and payment of state and local taxes assessed on employee compensation.

The maximum loan amount is the lesser of $10,000,000 or 2.5 times the employer’s average monthly payroll costs (excluding individual salaries to the extent they exceed $100,000 per year) in the preceding twelve months. Payments of interest, principal and fees are deferred for at least six months but no longer than one year.

PPP loans issued from February 15, 2020 to June 30, 2020 will be eligible for forgiveness in an amount equal to that spent by the borrower during the 8 weeks after the loan’s origination date on: payroll costs; interest on mortgages issued prior to February 15, 2020; rent payments for leases in force prior to February 15, 2020; and utility payments for service in force prior to February 15, 2020.

However, the forgiveness provisions of the PPP can be difficult if a company terminates the employment of any of its work force during the covered period. In that regard, the dollar amount forgiven will be reduced in proportion to the percentage difference between the average number of full-time employees per month during the covered period and either: (1) the average number of full-time employees per month from February 15, 2019 through June 30, 2019; or (2) the average number of full-time employees per month from January 1, 2020 through February 29, 2020. The borrower can choose which of these metrics should be used.

The amount forgiven will also be reduced by the dollar amount of any reduction in salary exceeding 25% for any employee whose annualized pay rate (in all pay periods in 2019) was $100,000 or less. A borrower can reduce the effect of such a cut-back in forgiveness if it re-hires employees and/or eliminates the reductions in compensation by June 30, 2020.

To the extent a PPP loan is forgiven, the amount of the forgiveness will not be included in the borrower’s gross income for tax purposes.

Any portion of the loan not forgiven would have a maximum term of 10 years, and an interest rate capped at 4%. There is no pre-payment penalty. Importantly, interest on the loan will not be forgiven and must be repaid by the borrower.

Tax Matters:

The CARES Act also provides for the delay of estimated tax payments for corporations in certain circumstances. It also provides for the deferral of 50% of certain employer payroll taxes until December 31, 2021, and deferral of the remaining 50% until December 31, 2022.
Through December 31, 2020, employers may also provide employees with a student loan repayment benefit of up to $5,250 annually, that can be used for principal and interest. Such disbursements are not taxable to the employee.

The CARES Act also allows some businesses to take net operating losses earned in 2018, 2019 or 2020 and carry back those losses five years.

Bankruptcy Matters:

The CARES Act modifies Chapter 11 of the Bankruptcy Code for certain businesses bankruptcy protection during reorganization. The Code already provides a streamlined reorganization process for small businesses with aggregate debts of $2.73 million, but CARES increases that limit to $7.5 million for Chapter 11 bankruptcies commenced after March 27, 2020.

Further, for any case started within one year after the enactment of the CARES Act, any federal COVID-19 relief payments are excluded from the calculation of the debtor’s monthly income. There are caveats and qualifications to this aspect of the Act.

As with all acts of congress there are particular qualifications and potential pitfalls of the CARES Act, some of which will not be fully known for some time. In addition there are other aspects of the law from which a company may benefit such as an Employee Retention Credit and the Payroll Tax Deferral plan. If you or your company have any questions about the CARES Act, or any aspect of your business including debt relief, financing, real estate, tax issues or bankruptcy protection, Trevett Cristo can help. You may reach our team by calling our office at (585) 454-2181.