It is important to note that small businesses that receive loans and other relief under the Title I provisions may not be able to take advantage of the tax relief programs provided under Title II of the CARES Act, which are available to all eligible businesses (not only small businesses). Those tax relief provisions are covered in more detail by a separate Sidley Update.
Further, businesses may separately be entitled to relief under Title IV, which offers loans, loan guarantees and other investments to air carriers, other air transportation-related businesses, businesses critical to maintaining national security and other businesses. In particular, Title IV establishes a large credit facility for midsize and larger companies. The provisions governing the credit facility midsize and larger companies will be covered by a separate Sidley Update.
Provided below is a summary of the CARES Act Title I provisions and programs that will provide assistance to eligible small businesses and organizations.
- Paycheck Protection Program (§ 1102)
- Eligibility. The Small Business Administration (SBA) may provide loans and loan guarantees to businesses that employ no more than the greater of either (i) 500 employees or (ii) the size standard for the specific industry, as established by the SBA. § 36(D)(i). This includes both full-time and part-time employees. § 36(D)(v).
- These loans are available to small business concerns as well as any other business concern, nonprofit organization, veterans organization and tribal business concern, provided that the organization meets the size criteria. § 36(D)(i).
- The affiliation rules for franchises, as well as companies in the hospitality and restaurant industries (NAICS code 72), are temporarily waived (including for casino hotels). § 36(D)(iv). Also, companies in the hospitality and restaurant industries that employ more than 500 employees are eligible, provided they do not employ more than 500 employees per physical location. § 36(D)(iii).
- Loan Terms.
- The loan amount is based on a formula tied to payroll costs and in all cases is limited to $10 million. § 36(E).
- These loans may be used for specific purposes, including payroll costs, health benefits, employee salaries, payment of interest on a mortgage obligation, rent, utilities and interest on previously incurred debts. § 36(F).
- Interest rates on these loans are capped at 4 percent. § 36(L).
- Payment on these loans is presumptively deferred for a period of between six months and 1 year. § 36(M)(ii).
- Certification. To obtain a loan, the qualified recipient must certify, inter alia, that the loan is necessary because of the current economic uncertainty and that the funds will be used to retain workers and make necessary business payments. § 36(G).
- The recipient does not need to certify that it was unable to obtain credit elsewhere, § 36(I) and there is no personal guarantee or collateral requirements, § 36(J).
- This section authorizes loans in the total amount of $349 billion.
- Loan Forgiveness (§ 1106)
- Certain loans disbursed under § 1102, supra, may be entitled to loan forgiveness, on payments made for payroll costs, mortgage interest, rent payments and utility payments, in an amount not to exceed the principal amount. § 1106(a), (b), (d).
- The amount of loan forgiveness may be reduced if an employer has either decreased the number of its employees or the salary of its employees:
- The amount of forgiveness is reduced proportionally if the average number of full-time employees during the “covered period” (defined as an eight-week period beginning on the origination date of the loan) is less than either of the following (the borrower may elect which option to apply):
(i) the average number of full-time employees employed between February 15 and June 30, 2019, or
(ii) the average number of full-time employees employed between January 1 and February 29, 2020. § 1106(d)(2)(A).
- The amount of forgiveness is also reduced for any amount over 25 percent that an employer has lowered its employees’ salaries when compared against the most recent full quarter. § 1106(d)(3)(A).
- If an employer has reduced headcount or salaries between February 15 and April 26, 2020, the amount of forgiveness will not be affected if the employer restores the headcount and salaries to pre-existing levels before June 30, 2020.
- To be eligible for loan forgiveness, an employer must submit an application with adequate supporting documentation that includes, inter alia, payroll tax filings and a certification that the amounts were used to retain employees or to make necessary payments, such as mortgage or rent. § 1106(e).
- Subsidies for Certain Loan Payments (§ 1112)
- Certain SBA loans that were not disbursed under § 1102, supra, may be entitled to subsidies for a period of six months. § 1112(a)-(c).
- These subsidies would extend to payments for principal, interest and associated fees, which would be paid no later than 30 days after the subsequent loan payment is due. § 1112(c).
- In addition to direct subsidies, the SBA is directed to encourage lenders to provide payment deferments, when appropriate, and to extend the maturity of covered loans so as to avoid balloon payments or any requirement for increases in debt payments resulting from deferments provided during the period of the COVID-19 national emergency declaration. § 1112(b).
- The CARES Act appropriates $17 billion for these subsidies. § 1107(a)(7); § 1112(f).
- Small Business Bankruptcy and Debtor Reorganization (§ 1113)
- This section provides special bankruptcy protection for companies with less than $7.5 million in liquidated secured and unsecured debts as of the date that a bankruptcy petition is filed, not less than 50 percent of which arose from the debtor’s commercial or business activities. § 1113(a)(1).
- Such protection does not apply to (a) any member of a group of affiliated debtors who, collectively, have debt above $7.5 million; (b) any corporation subject to section 13 or 15(d) of the (Exchange Act ) or (c) any debtor that is an affiliate of an “issuer” under Section 3 of the Exchange Act.
- If a company is already under a bankruptcy plan prior to enactment of the CARES Act, that plan may be modified if the debtor is experiencing or has experienced a material financial hardship due to COVID-19. § 1113(b)(1)(C).