PPP | Fraser Blog

Michigan Department of Treasury Confirms that PPP Loan Forgiveness will Conform to Federal Treatment

On April 19, 2021, the Michigan Department of Treasury issued a notice (the “Notice”) announcing Michigan’s conformity to the federal income tax treatment of loans (“PPP Loans”) issued under the Paycheck Protection Program. The Notice also sets forth additional guidance for individual and corporate taxpayers regarding various income tax issues raised by the federal loan program.

As originally established under the CARES Act, any forgiven PPP was excluded from gross income for federal income tax purposes. However, no similar provision was enacted authorizing a deduction of the business expenses paid for by those forgiven loans. This issue was addressed in the Consolidated Appropriations Act (the “CAA”), enacted on December 27, 2020, which provided taxpayers with the ability to deduct the underlying business expenses paid for by the forgiven loan. The Notice makes clear that Michigan will conform to the manner in which the federal government is treating both PPP loan forgiveness and the deductibility of business expenses.

The Notice also provides guidance for both individual and corporate taxpayers relating to the calculation of sales factor apportionment, gross receipts, and the calculation of Total Household Resources when taking into consideration the impact of PPP loan forgiveness.

Finally, the Notice states that additional documentation substantiating a PPP loan is not required for Michigan tax return filing purposes. Taxpayers are not required to include any specific loan documentation, including proof of forgiveness or proof of expenses, with Michigan individual or corporate income tax returns. However, borrowers of PPP loans must retain sufficient documentation of their participation in the PPP loan program as part of their obligation to keep accurate and complete records necessary for an accurate determination of their tax liability.

If you have any questions about how the forgiveness of your PPP loan impacts your Michigan tax liability and the filing of your tax returns, please contact Fraser Trebilcock shareholder Paul McCord.

We have created a response team to the rapidly changing COVID-19 situation and the law and guidance that follows, so we will continue to post any new developments. You can view our COVID-19 Response Page and additional resources by following the link here. In the meantime, if you have any questions, please contact your Fraser Trebilcock attorney.

Fraser Trebilcock attorney Paul V. McCord has more than 20 years of tax litigation experience, including serving as a clerk on the U.S. Tax Court and as a judge of the Michigan Tax Tribunal. Paul has represented clients before the IRS, Michigan Department of Treasury, other state revenue departments and local units of government. He can be contacted at 517.377.0861 or pmccord@fraserlawfirm.com.

Second Stimulus Bill PPP Loan Changes and Eligibility for Second Loans

The Paycheck Protection Program (“PPP”) was created as part of the CARES Act, passed last spring, which amended the Small Business Act (“SBA”) to provide short term loans to companies with fewer than 500 employees. On December 27, 2020, President Trump signed the 2021 Consolidated Appropriations Act, which also contained a stimulus relief bill. Part of that bill was the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venue Act (the “Act”), which made changes to all PPP loans, re-opened the PPP program for new loans, and allowed certain borrowers to obtain a second PPP loan.

This article summarizes some of the key provisions of the Act that impact all PPP loans, as well as those related specifically to second PPP loans.

Existing PPP Loans

Tax Treatment: Tax deductible expenses used to generate forgiveness of PPP loans may be taken to reduce taxable income.
Covered Period Flexibility: PPP borrowers may set the length of the “Covered Period” for purposes of PPP loan forgiveness at any length between 8 and 24 weeks.
EIDL Advance Does Not Affect Forgiveness: Under the CARES Act, PPP forgiveness was reduced by the amount of any Economic Injury Disaster Loan advance received. The Act repealed this provision.
Simplified Forgiveness: A new simplified forgiveness process for PPP loans of not more than $150,000 was established, including a one-page forgiveness application.
Expanded Forgivable Uses of PPP Loan Proceeds: The Act adds four additional categories of expenses that are now eligible for forgiveness under PPP loans, including covered operations expenditures, covered property damage costs, covered supplier costs, and covered worker protection expenditures.

Second PPP Loans for Eligible Borrowers

Eligibility: In order to be eligible to receive a second PPP loan, a borrower must:
- - Have 300 employees or less;
  - Have used or will use the full amount of their first PPP loan; and
  - Demonstrate at least a 25 percent reduction in gross receipts in any quarter of 2020 relative to the same 2019 quarter.
Second PPP Loan Terms: Borrowers may receive a loan amount ($2 million or less) up to 2.5 times average monthly payroll costs in the one year prior to the loan or the calendar year. Borrowers in industries assigned to NAICS code 72 (Accommodation and Food Services) may receive loans of up to 3.5 times average monthly payrolls costs.
Loan Forgiveness: Borrowers of a second PPP Loan are eligible for loan forgiveness equal to the sum of their payroll costs, covered mortgage, rent, and utility payments, covered operations expenditures, covered property damage costs, covered supplier costs, and covered worker protection expenditures incurred during the covered period.

Conclusion

For small to medium-sized businesses in many sectors of the economy that are still hurting from the COVID-19 fallout, the additional financial relief, and simplified processes for requesting forgiveness of loans, are welcome developments. If you have any questions about the Act and its implications, please contact Fraser Trebilcock shareholder Paul McCord.

SBA Clarifies Rules Regarding PPP Loans and Changes of Ownership

In a recently issued procedural notice, the Small Business Association (“SBA”) addressed a lingering question of borrowers and lenders related to the Paycheck Protection Program (“PPP”) process: What procedures are required for changes of ownership of an entity that has received PPP funds?

The notice, issued on October 2, describes when change of ownership is considered to have occurred and what impact such change has on a PPP borrower’s responsibilities under the program.

Definition of a Change of Ownership

For the purposes of the PPP, a “change of ownership” takes place when one of the following occurs:

At least 20% of the common stock or other ownership interest of a PPP borrower (including a publicly traded entity) is sold or otherwise transferred, whether in one or more transactions, including to an affiliate or an existing owner of the entity;
The PPP borrower sells or otherwise transfers at least 50% of its assets (measured by fair market value), whether in one or more transactions; or
A PPP borrower is merged with or into another entity.

A PPP borrower must aggregate all sales and other transfers occurring since the date of approval of the PPP loan in determining whether the relevant threshold has been met.

Is a Borrower Required to Obtain SBA Consent?

If a PPP borrower fails to satisfy one of the criteria below, SBA consent is required for a change in ownership to ensure the repayment of any unforgiven PPP loan amounts.

The PPP loan has been paid in full or forgiven by the SBA.
In the case of a stock sale or merger:
(a) The sale or transfer involves less than 50% of the borrower’s stock/ownership interest; or
(b) The PPP borrower completes a forgiveness application reflecting its use of all of the PPP loan proceeds and submits it, together with any required supporting documentation, to the PPP Lender, and an interest-bearing escrow account controlled by the PPP Lender is established with funds equal to the outstanding balance of the PPP loan. After the forgiveness process (including any appeal of SBA’s decision) is completed, the escrow funds must be disbursed first to repay any remaining PPP loan balance plus interest.
In the case of an asset sale of 50% or more of the borrower’s assets, if the PPP borrower completes a forgiveness application reflecting its use of all of the PPP loan proceeds and submits it, together with any required supporting documentation, to the PPP Lender, and an interest-bearing escrow account controlled by the PPP Lender is established with funds equal to the outstanding balance of the PPP loan.

If SBA consent is required, the PPP lender is required to submit certain documents to the SBA, including documents relating to the transaction and information about the buyer and its ownership. The SBA will review and provide a decision within 60 days of receipt of a complete request.

Borrower’s Responsibilities in the Event of a Change in Ownership

The PPP borrower remains responsible for all obligations under its PPP loan in the event of change of ownership, including performance obligations under the PPP loan, certifications it made in connection with its loan application, retention of records and providing records in connection with a request from the PPP lender or the SBA, as well as other applicable PPP requirements.

In addition, before undergoing a change of ownership, a PPP borrower must notify its PPP lender in writing and provide the lender with copies of relevant documentation related to the transaction prior to closing.

Regardless of whether SBA approval is required and/or obtained, if change in ownership involves a sale of equity interest or a merger, the new owner is responsible for all obligations under the PPP loan. If the new owners use PPP funds for unauthorized purposes, the SBA will have recourse against them. If the new owner also had a PPP loan, the PPP loan funds must be segregated and properly allocated among the two borrowers.

Unanswered Questions

While the notice clarifies a great deal about change in ownership issues related to PPP loans, there remain unanswered questions. Among those questions are:

What are the consequences of failing to obtain SBA consent for a change in ownership transaction?
What rules apply for changes in ownership that occurred prior to the issuance of the notice?
What should PPP borrowers do if their PPP lenders have not yet opened application portals for seeking loan forgiveness?

We will continue to monitor and keep you abreast of new developments related to PPP forgiveness. In the meantime, if you have questions or require assistance, please contact your Fraser Trebilcock attorney.

Edward J. Castellani is an attorney and CPA who represents clients involved with alcohol beverages as a manufacturer, wholesaler, or retailer. He may be contacted at ecast@fraserlawfirm.com or 517-377-0845.

Flexibility Act Loosens Restrictions in PPP Loan Program

On Friday morning the President signed into law the Flexibility Act (the “Act”) making significant changes to the forgiveness portion of the Paycheck Protection Program (PPP). These changes will triple the time allotted for small businesses and other PPP loan recipients to spend the funds and still qualify for forgiveness of the loans.

Flexibility Act

Key changes to the PPP program brought by the Flexibility Act include:

Covered Period: PPP borrowers can choose to extend the eight-week period to 24 weeks, or they can keep the original eight-week period. This flexibility is designed to make it easier for more borrowers to reach full, or almost full, forgiveness.
Payroll Cost Percentage: The payroll expenditure requirement drops to 60% from 75% but is now a cliff, meaning that borrowers must spend at least 60% on payroll or none of the loan will be forgiven (although there is talk of a possible technical correction to this).
Employee Rehiring Date: Borrowers can use the 24-week period to restore their workforce levels and wages to the pre-pandemic levels required for full forgiveness. This must be done by Dec. 31, a change from the previous deadline of June 30.
Exemptions Based on Employee Availability: The Act includes two new exceptions allowing borrowers to achieve full PPP loan forgiveness even if they do not fully restore their workforce. The Flexibility Act allows borrowers to adjust their calculations because (1) they could not find qualified employees or (2) were unable to restore business operations to Feb. 15, 2020, levels due to COVID-19 related operating restrictions.
Loan Maturity Period: Borrowers now have five years to repay the loan instead of two. The interest rate remains at 1%.
Extended Deferral Period: Payment of principal, interest and fees are deferred until forgiveness is remitted to the lender, only if the borrower applies for forgiveness within 10 months after the last day of the covered period.
Payroll Tax Deferral: The Act allows businesses that took a PPP loan to also delay payment of their payroll taxes, which was prohibited under the CARES Act.

Loan Forgiveness Guidance

Earlier, the SBA released new guidance addressing loan forgiveness under the PPP, as well as the SBA’s loan review procedures. Some of this earlier issued guidance has now been overtaken by the passage of the Act.

Noteworthy aspects of the loan forgiveness guidance that remain intact include the following:

Payroll Costs

Reaffirms that, in general, payroll costs paid or incurred during the 8 weeks following disbursement of the loan (i.e., the “covered period”) are eligible for forgiveness, but that borrowers may also use an “alternative payroll covered period” as set forth in the instructions to the Loan Forgiveness Application, in which the borrower may opt to use a covered period beginning on the first day of the borrower’s first payroll cycle;
Confirms that payroll costs are generally incurred on the day the employee’s pay is earned (i.e., the day the employee worked) and clarifies that where employees are not performing work and are still on the borrower’s payroll, payroll costs are incurred based on the schedule established by the borrower (typically, each day the employee would have performed work);
Confirms that employee bonuses and hazard pay are eligible for payroll costs, as long as the employee’s total compensation does not exceed the $100,000 annualized cap;
Wages paid to furloughed employees during the covered period are eligible for forgiveness;
Clarifies that owner-employees and self-employed individuals are limited to “payroll compensation” no greater than the lesser of 8/52 of 2019 compensation or $15,385 per individual, and owner-employees are further capped by the amount of their 2019 employee cash compensation and employer retirement and health care contributions made on their behalf. Schedule C filers are capped by the amount of their owner compensation requirement, calculated based on 2019 net profit. And general partners are capped by the amount of their 2019 net earnings from self-employment, subject to certain reductions.

Nonpayroll Costs

Reaffirms that nonpayroll costs must be paid during the covered period or incurred during the covered period and paid on or before the next regular billing date, even if the billing date is after the covered period, but clarifies that if a borrower’s nonpayroll expenses straddle the covered and noncovered period and are paid after the covered period (e.g., a borrower’s “covered period” ends on July 26 and its electricity expenses for July are not paid until August 10), the borrower may seek partial forgiveness of the expenses incurred during the covered period but paid on the next regular billing date (e.g., electricity expenses for July 1-26 are forgivable);
Advance payments of interest on mortgage obligations are not eligible for loan forgiveness.

Forgiveness Reductions

Confirms that EIDL advances will be deducted from loan forgiveness amounts.

Head Count Reduction – Computations

Borrowers will not be penalized for voluntary resignations and schedule reductions or for-cause terminations;
Aa “full-time employee” is an employee who works 40 hours or more, on average, each week, and is given a full-time equivalent (FTE) weighted of 1.0;
In calculating the FTE of part-time employees, borrowers may either add the hours of all part-time employees and divide by 40, or elect, “for administrative convenience . . . to use a full-time equivalency of 0.5 for each part-time employee,” as long as the borrower applies the chosen method consistently.

Salary/Wage Reductions

Confirming that the 25% salary/wage reduction calculation (for employees who were not paid more than the annualized equivalent of $100,000 during any 2019 pay period) is performed on a per-employee basis and not in the aggregate.
Clarifying that borrowers will not be doubly penalized for reductions, such that the salary/wage reduction applies only to the decline in employee salary and wages not attributable to the FTE reduction.

Lenders

The SBA guidance also confirms that lenders have 60 days from receipt of a complete forgiveness application to issue a decision to the SBA, and that the lender must request payment from the SBA at the time it issues its decision to the SBA. Further the SBA is required to remit the appropriate forgiveness amount to the lender, plus any interest that accrued during that period, subject to “any SBA review of the loan or loan application.”

Loan Review Guidance – Rules for Borrowers

The SBA provided guidance clarifying various components of its loan review process including:

Clarifying that the SBA may review “any PPP loans,” at any time in its discretion, and that the SBA may consider in that review whether a borrower correctly calculated the loan amount, properly used the loan proceeds, and/or is entitled to the loan forgiveness amount sought (this presumably includes loans smaller than $2 million, notwithstanding the SBA’s previous suggestion in FAQ 46 that audits will be focused on loans of $2 million or more).
Requiring Borrowers to retain PPP documentation for at least 6 years after the date the loan is forgiven or paid in full, and the SBA must be granted these files upon request.
If the SBA believes a borrower may be ineligible for the loan or for some forgiveness amount, it will require that the lender make a written request for additional information from the borrower, and it may also request information directly from the borrower. All information provided by the borrower in response (either directly to the SBA or through the lender) will be considered in the SBA’s review.
Failure to respond to the SBA’s request for information may result in a determination that the borrower is ineligible for forgiveness or for the loan itself.
Emphasizing that the shareholders, members, or partners of a borrower that is deemed ineligible to have received a PPP loan will not be protected by “the CARES Act’s nonrecourse provision … which limits SBA’s recourse against individual shareholders, members, or partners of a PPP borrower for nonpayment of a PPP loan ‘only’ if the borrower is an eligible recipient of the loan” (emphasis added).
Borrowers have the opportunity to seek reconsideration and appeal of review decisions. Procedural rules covering this process are expected from the SBA.

This alert serves as a general summary, and does not constitute legal guidance. All statements made in this article should be verified by counsel retained specifically for that purpose. Please contact us with any specific questions.

SBA Opens Safe Harbor Certification for PPP Loans of Less than $2 Million

The SBA recently issued guidance extending an automatic safe harbor to borrowers receiving Paycheck Protection Program (PPP) loans with an original principal amount of less than $2 million. These borrowers will be assumed to have performed the required certification concerning the necessity of their loan requests in good faith, according to guidance posted by the U.S. Small Business Administration (SBA) on Wednesday, May 13, 2020.

Congress established the PPP to provide relief to small businesses during the coronavirus pandemic. PPP funds are available to small businesses that were in operation on February 15th with 500 or fewer employees. In addition, not-for-profits, veterans’ organizations, Tribal concerns, self-employed individuals, sole proprietorships, and independent contractors were eligible to apply for PPP loans. Businesses with more than 500 employees in certain industries could also apply for loans.

Perhaps the key feature of PPP loans is that they are forgivable in certain circumstances. Loan forgiveness was designed to help employers keep their employees paid and keep their businesses from succumbing to the economic hardships created by the coronavirus pandemic.

After a few well publicized examples, on April 23, 2020 the SBA cautioned that that businesses with substantial access to liquidity may not qualify for PPP loans and announced that the SBA would review all PPP loans in excess of $2 million to make sure borrowers’ self-certification for the loans was appropriate. If the SBA determines during its review that a borrower lacked an adequate basis for certifying the necessity of its loan, the SBA will seek repayment of the outstanding PPP loan balance and inform the lender that the borrower is not eligible for loan forgiveness.

According to the SBA, borrowers with loans below the $2 million threshold are less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers who obtained larger loans.

The guidance, provided as Question 46 in Treasury’s Q&As related to PPP Loans, states that borrowers with loans of more than $2 million may still have an adequate basis for making the required good-faith certification, based on their individual circumstances and the language of the certification and SBA guidance.

The SBA said the safe harbor will promote economic certainty for PPP borrowers with limited resources as they work to retain and rehire employees. The $2 million threshold also will help the SBA conserve its resources and focus its reviews on larger loans.

The IRS Says You Should Never Double-Dip Your Forgiven PPP Loan Proceeds

With stay-at-home orders and prohibitions on social gatherings still in effect, most of us are safe from those spring cookout guests with bad habits, like double-dipping their chips. The IRS recently gave loan borrowers under the CARES Act Paycheck Protection Program another reason against double-dipping. On April 30, 2020, the IRS announced that Paycheck Protection Program (PPP) loan recipients cannot deduct expenses that are paid with forgiven PPP loan proceeds.

Under the PPP provisions of the CARES Act, borrowers who pay certain covered expenses (payroll costs, benefits, rent, interest and utilities) using funds borrowed under the PPP program may have some or all of their loan forgiven. The CARES Act also modifies the general rule regarding the tax treatment of debt that is forgiven by providing that amount forgiven under the PPP program will not be included in the borrower’s taxable income.

Ordinarily, a business produces taxable income from making sales or furnishing services and is permitted to deduct from that income the expenses it incurred to produce it.

In its recent guidance, the IRS reasoned that the CARES Act exclusion from income for forgiven PPP loan amounts results in a class of tax-exempt income under the federal tax laws and regulations. The IRS concluded that, although the expenses paid by the PPP may be otherwise deductible as trade or business expenses or interest under the Internal Revenue Code, another section of the Code, intended to prevent a double tax benefit, disallows deductions sourced to tax-exempt income. As a result, borrowers will not be permitted to “double-dip” by claiming an additional tax break on money received through this program designed to provide economic assistance.

The guidance will impact tax planning for PPP loan borrowers and the overall value of the PPP loan forgiveness program.

This alert serves as a general summary, and does not constitute legal guidance. Please contact us with any specific questions.

CARES Act Offers Emergency Small Business Relief

One of the central pieces of the CARES Act is the provision of $349 billion for small businesses through federally backed loans under a modified and expanded Small Business Administration (SBA) 7(a) loan guaranty program called the Paycheck Protection Program. Congress has designed the program to make funds available to qualifying businesses quickly through approved banks and nonbank lenders.

The CARES Act is designed to provide broad and targeted lending program towards small businesses including:

Paycheck Protection Program (“PPP”) to cover payroll costs, interest costs, rent, and utilities;
Economic Injury Disaster Loan Grants to provide an ‘immediate’ advance of up to $10,000.00 of working capital to businesses that have applied for Economic Injury Disaster Loans in response to coronavirus; and
Entrepreneurial Development Programs

Paycheck Protection Program – General Loan Terms:

SBA will provide 100% federally backed loans to eligible small businesses. These PPP loans are being offered on the same terms, conditions, and processes as a loan made under the SBA’s current Business Loan Program. No collateral or personal guarantee is permitted to be required for a PPP loan. The interest rate on loans under the PPP is not to exceed 4%. There will be no subsidy recoupment fee associated with the loans and no prepayment penalty for any payments made. Additionally, the SBA has no recourse against any individual, shareholder, member, or partner of an eligible loan recipient for non-payment, unless the individual uses the loan proceeds for unauthorized purposes (see below for permitted uses).

Lenders will not require collateral or any personal guarantee as security for these loans, and the interest rate cannot exceed 4%. Additionally, prepayment penalties are not allowed. The only instance in which a lender will have recourse against any individual, shareholder, member, or partner of a borrower would be when the loan proceeds are used for an unauthorized purpose. The typical SBA requirement that borrowers not be able to obtain credit elsewhere will also be waived.

A loan made under the SBA’s Disaster Loan Program on or after January 31, 2020, may be refinanced as part of a covered loan under this new paycheck protection program as soon as these new loans are made available. The CARES Act specifically allows SBA Disaster Loan recipients with economic injury disaster loans made since January 31, 2020 for purposes other than the permitted loan uses under the PPP to receive assistance under this program.

Loan Origination:

The SBA can provide these loans directly or in cooperation with private sector lenders through agreements to participate on an immediate or deferred (guaranteed) basis. Lenders authorized to make loans under the SBA’s current Business Loan Program are automatically approved to make an approve PPP loans under this new CARES Act program. As a result these can be accessed directly through lenders and will not require SBA pre-approval. The goal is to be ready to fund loans as quickly as possible. So, the best starting place for a small business seeking one of these loans is with the business’s lender.

Additionally, the Treasury Secretary may extend this lending authority to additional private sector lenders under criteria established by Treasury (including, for instance, allowing additional lenders to originate loans).

Eligible Small Businesses:

With some exceptions, eligible recipients include those “small business concerns” currently defined under the SBA, but also include any business concern, nonprofit organization, veterans’ organization, or Tribal business if it employs not more than the greater of:

500 employees (includes full-time, part-time, and those employed on other bases); or
If applicable, the size standard in number of employees established by the SBA for the industry in which the entity operates.

There is a special eligibility rule for businesses in the hospitality and dining industries. For businesses with more than one physical location, if it employs 500 or fewer employees per location and is assigned to the “accommodation and food services” sector (Sector 72) under the North American Industry Classification System (NAICS), the business is eligible to receive a loan.

In addition to small businesses, sole-proprietors, independent contractors, and other self-employed individuals are eligible for these loans. Non-profits and churches designated as 501(c)(3) organizations may also participate in PPP borrowing, while 501(c)(6) organizations are not eligible.

Maximum Loan Amount:

The maximum loan amount is capped at $10 million and will equal to 2.5 times the business’s monthly payroll costs. Loan funds can be obtained and forgiven when used to cover payroll costs, interest on mortgage obligations, rent, and utilities. Under the PPP, businesses can re-hire employees they had initially laid off, as long as they can demonstrate to the lender that they were in business before February 15, 2020, and that the employee was formerly on the payroll.

Permitted Uses:

Loans 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.

Loan Payment Deferral Relief and Forgiveness:

The CARES Act provides that businesses that were operating on February 15, 2020 and that have a pending or approved loan application under the PPP are presumed to qualify for complete payment deferment relief (for principal, interest, and fees) for 6- months to one year. Lenders are required to provide this relief during the covered period (if secondary market investors decline to approve a lender’s deferral request, the SBA must purchase the loan).

The CARES Act’s broader loan forgiveness provision in Section 1106 provides that the debt may be forgiven (and excluded from gross income) in an amount (not to exceed the principal amount of the loan) equal to the following costs incurred and payments made during the covered period:

Payroll costs;
Interest payments on mortgages;
Rent; and
Utility payments.

Forgiveness amounts will be reduced for any employee cuts or reductions in wages.

The reduction formula for fewer employees is:

The maximum available forgiveness under the rules described above multiplied by:

The average number of full-time equivalent employees (FTEEs) per month – calculated by the average number of FTEEs for each pay period falling within a month – during the covered period divided by:

Either (at election of the borrower):

Average number of FTEEs per month employed from February 15, 2019 to June 30, 2019; or
Average number of FTEEs per month employed from January 1, 2020 until February 29, 2020;

Or, for seasonal employers:

Average number of FTEEs per month employed from February 15, 2019
until June 30, 2019.

This formula will be used to reduce forgiveness amounts, but cannot be used to increase them.

For reductions in wages, the forgiveness reduction is a straight reduction by the amount of any reduction in total salary or wages of any employee during the covered period that is in excess of 25% of the employee’s salary/wages during the employee’s most recent full quarter of employment before the covered period. “Employee” is limited, for purposes of this subparagraph only, to any employee who did not receive during any single pay period during 2019 a salary or wages at an annualized rate of pay over $100,000.

There is relief from these forgiveness reduction penalties for employers who rehire employees or make up for wage reductions by June 30, 2020. Specifically, in the following circumstances, the forgiveness reduction rules above will not apply to an employer between February 15, 2020 and 30 days following enactment of the CARES Act:

The employer reduces the number of FTEEs in this period and, not later than June 30, 2020, the employer has eliminated the reduction in FTEEs; 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 (it is unclear whether this is also intended to be limited to employees who made under $100,000 in 2019).
Employers with tipped employees (as described in the Fair Labor Standards Act) may receive forgiveness for additional wages paid to those employees. Also, emergency advances received under the expanded SBA Disaster Loan Program discussed below will be excluded from forgiveness amounts.

Business borrowers seeking forgiveness of amounts must submit to their lender:

Documentation verifying FTEE 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 Administrator may require.

Additionally, grant money will be made available to loan applicants and certain small businesses, such as:

Economic Injury Disaster Loan Grants:

Businesses who have applied for an Economic Injury Disaster Loan in response to coronavirus may, during the 2020 fiscal year, request an advance of up to $10,000 (which does not have to be repaid, even if the loan application is later denied) to provide covered leave, maintain payroll, and pay debt obligations. Advances are to be made by the lender within three days of an application for such advance.

Entrepreneurial Development Programs:

Grants and funding will be available through this program to offer training, counseling, and assistance to small businesses affected by a coronavirus. Examples of recipients will include Small Business Development Centers, Women’s Business Centers, Minority Business Centers, and resource partner associations that provide online information and training. Under this program, participants in the State Trade Expansion Program (STEP) can gain access to federal grant funds appropriated to them for fiscal years 2018 and 2019 to remain available for use through fiscal year 2021. STEP participants will also be reimbursed for events cancelled due to coronavirus, as long as the reimbursement amount does not exceed the participant’s federal grant amount.

Conclusion

The CARES Act provides much needed stimulus to individuals, businesses, and hospitals in response to the economic distress caused by the COVID-19 pandemic. The CARES Act is, however quite long and complex, and successful navigation of the Act’s provisions as well as the economic challenges facing individuals, business and the healthcare system will require thoughtful and comprehensive planning. This is a summary of a complex new law and business are encouraged not to rely on this summary alone and to seek legal counsel regarding this new law.