Understanding the CARES Act

April 2, 2020

The Kranz & Associates team has swiftly and seamlessly moved to 100% remote operations and continue our “fully ready-to-serve” state of support for our valued clients during this unprecedented time in our country and the world. We have truly been amazed at the spirit of cooperation, adaptability, and business focus that has become the core of our Kranz culture. To the hundreds of valued Kranz clients, we’ve compiled the following summary focused on sharing the most up-to-date information about the benefits provided to businesses and individuals under the recently enacted CARES Act. The information we’ve provided is based on what we know today, but as we’re all aware, things can change almost hourly. We’ll keep you updated on significant changes through our blog, as we become aware of them.

In less than a month, we’ve experienced global changes to our daily lives and the functioning of businesses in every sector. While there are weeks or perhaps months yet before we see a full recovery, signs of improvement exist. A lowering of the infection rate in certain areas, the untiring work of those in the health care and distribution industries, and uncountable acts of goodwill and service prove the resilience of our country.

Passage on Friday, March 27 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provides specific financial benefits to individuals ($560 B), companies in affected industries ($500 B), the health care and education sectors ($197 B), state and local governments ($340 B) and small businesses ($377 B). The small business provisions can be of immediate assistance to you in effectively managing your business in the months to come.

Detailed information about the CARES Act and associated Small Business Administration (SBA) programs exist online from many sources. One we think is excellent is the Small Business Owners Guide to the CARES Act

The guide provides specifics regarding the Paycheck Protection Program (PPP) established through the CARES Act and the SBA’s Economic Injury Disaster Loan (EIDL) program, comparisons between the two, qualification requirements, and directions on how to apply. This publication also explains two important tax provisions: the employee retention credit and employer payroll tax payment delay. The Washington D.C. leaders at SBA, Treasury, and Congress are delivering on the promise to get these funds into the hands of small businesses quickly. We think focusing on these programs is critical.


Paycheck Protection Program (PPP) and Economic Injury Disaster Loan (EIDL)

What differences exist in loan terms and features?

  • PPP (SBA 7(a)) Loans
    • Size guidelines: Borrower must have 500 employees or less and revenue below limits set by industry (NAISC code).
    • Affiliation rules apply except for the hospitality and food service industries. A “totality of the circumstances” test is used to determine if shareholders have sufficient control rights such that their affiliates’ employee size will be considered along with the lobbying that is underway to fix this issue for VC and PE-backed companies. If you’d like reference material prepared by the SBA and NVCA (National Venture Capital Association), please contact us.
    • The amount of loan is equal to 2.5 times the average monthly cost of applicable payroll expense categories for the one year period prior to when the loan is made. Plus an additional 25%. Modifications of this calculation are made for companies who were not in business a year ago or who have seasonal payroll fluctuations. The max loan amount is that amount or $10 million, whichever is less.
    • The interest rate has been set at .5%. Loan term of up to 10 years for the amount not forgiven.
    • No collateral or personal guarantees are required, and creditworthiness requirements have been eliminated.
    • Loans are 100% federally guaranteed.
    • Payment of principal, interest, and fees can be deferred for up to 12 months with an automatic deferral set for six months.
    • Applications are to be submitted directly to your SBA lender beginning April 3 and through June 30.
  • EIDL Loans 
    • Size guidelines are the same as for PPP loans.
    • Affiliation rules are the same as for PPP loans.
    • Applicants must have been in business for one year and have incurred a “substantial economic injury” as a direct result of a declared disaster.
    • The amount of loan is up to $2 million.
    • The interest rate is 3.75% for “small business concerns” and 2.75% for nonprofits.
    • EIDL loans cannot exceed 30 years, but the term will be determined by the borrower’s ability to repay.
    • Rules related to the personal guarantee on advances and loans of not more than $200,000 are waived for all applicants. Other creditworthiness requirements have been waived.
    • No federal Interest can be deferred for the first year, and there is no pre-payment penalty.
    • Application process will likely entail submission of a hardship letter, three most recent tax returns or year-end financial statements (unless the loan is less than $500 K), bank statements for the prior three months, and AP/AR aging reports. Forms 2202, 413, and 4506-T are required.

What can loans be used for, and what can they not be used for?

  • PPP (SBA 7(a)) Loans
    • Loans can be used for salaries, wages, commissions, cash tips or equivalent, payments for vacation, parental, family, medical and sick leave, health care insurance premiums and retirement benefits, state and local payroll taxes, compensation to independent contractors, mortgage interest, rent, utilities, and interest on any other debt that was incurred prior to February 15, 2020.
  • EIDL Loans
    • Loans can be used for working capital to carry the business until the resumption of normal operations, expenditures necessary to alleviate the specific economic injury (but not to exceed that which the business could have provided had the injury not occurred), providing sick leave to employees because of COVID-19, maintaining payroll to retain employees, paying increased costs to obtain materials unavailable from normal sources because of interrupted supply chains, making rent or mortgage payments, repaying obligations that cannot be met due to revenue losses.
    • Loans cannot be used to refinance indebtedness incurred prior to the disaster event, repair physical damages, pay tax penalties or liability for negligence or fraud, pay dividends, or disbursements to owners.

What portion of loans can be forgiven?

  • PPP (SBA 7(a)) Loans
    • Loans are eligible for forgiveness up to the amount spent by the borrower on payroll and certain non-labor items during an 8-week period beginning on the origination date of the loan and ending no later than June 30, 2020. This is important because loans funded after May 5 will not enable the borrower to have a full eight weeks of expenses applied to loan forgiveness.
    • There are certain limitations on the amount that can be forgiven. The amount eligible for forgiveness will be reduced proportionately by the number of employees laid off during the 8-week period beginning on the origination date of the loan relative to employment levels in prior periods specified in the law. The reduction also applies to salary reductions of greater than 25%.
  • EIDL Loans
    • Forgiveness is not available for these loans.

Can I still get loan forgiveness if I have already laid-off employees?

  •  Borrowers that rehire employees by June 30, 2020, that were previously laid-off will not be penalized for having a reduced payroll at the beginning of the period.

Can I still get loan forgiveness if I have already reduced salaries or wages? 

  • Borrowers that remedy reduced salaries or wages by June 30, 2020, will not be penalized for having reduced salaries or wages for one or more employees at the beginning of the period.

Can I still apply if I implement a RIF?

  • The eligibility requirements do not inquire into whether a company conducted RIFs or other employment actions. However, as discussed above, the amount of the loan that is eligible for forgiveness is reduced if RIFs are made, and employees are not rehired by June 30, 2020.

Can I apply for a PPP loan and an EIDL loan?

  • Yes, but you cannot receive an EIDL loan and a PPP loan for the same purpose. If you have already received an EIDL loan, the purpose of that loan cannot be included in your application for a PPP loan.

I don’t know if I will be eligible for a PPP loan because of affiliation rules. Should I apply? 

  • There’s no harm in applying unless you conclude that the payroll tax credit and payroll tax deferments are more (See below.) Notwithstanding the fact that the SBA may eventually issue rules waiving the application of the affiliation rules, there are cases where VC investment will not trigger the rules, and there is a sense that some lenders may be pragmatic and not inquire into affiliation status at loan origination. Be careful, however, to answer all loan application questions truthfully.

Employee Retention Credit (Section 2301)

What is this tax credit?

  • It provides a refundable credit against payroll taxes for 50% of wages paid by employers during the COVID-19 The credit is available to employers whose operations were fully or partially suspended due to a COVID-19-related shutdown order, or when gross receipts declined by more than 50 % when compared to the same quarter of 2019.

What wages are included in the credit?

  • The credit is based on qualified wages paid to the employee. For employers with greater than 100 full-time employees, qualified wages are wages paid to employees when they are not providing services due to the COVID-19 shutdown. For eligible employers with 100 or fewer full-time employees, all employee wages qualify for the credit. The credit is for the first $10,000 of compensation, including health benefits, paid to an eligible employee between March 13, 2020, through December 31, 2020.

Can I receive the retention credit if I take out a PPP loan?

  • If you take a PPP loan, you cannot also take the payroll tax credit. There is a question about whether employers can begin to claim the credit now since it will take some time to learn if they qualify for a PPP loan. The NVCA has asked the Treasury Department to permit a 60 day grace period to repay such taxes if employers elect to take the credit now and later receive a PPP loan.

Payroll Tax Deferral

What is covered?

  • The CARES Act defers the payment of payroll taxes due from the period beginning on March 27, 2020, until December 31, 2020. The 6.2% OASIS portion of payroll taxes incurred by employers is deferred. Half of the deferred taxes are due on December 31, 2021, with the remainder due on December 31, 2022.

Can I defer taxes if I take out a PPP loan?

  • The law says that you cannot defer taxes if you receive forgiveness of the PPP loan. There is a question about whether employers can begin to defer taxes now since it will take some time to learn if they qualify for a PPP loan. The NVCA has asked the Treasury Department to permit a 60-day grace period to pay such taxes if employers elect to defer now and later receive a PPP loan.

Additional Comments

    • Complete your payroll cost calculations, which will be used to calculate your loan amount (PPP) and be a component of your application for loan forgiveness (PPP).
    • Establish a mechanism for reporting of 2020 payroll costs to support a forgiveness request.
    • Establish separate bank account(s) and ledgers to capture other than payroll costs to support a forgiveness request and necessary for post lending audit to verify that funds were used appropriately and according to specifications
    • Begin building your objective written documentation of how your business has been impacted by COVID-19
    • If you have an opportunity to consult with a labor attorney, seek their assistance on whether to furlough or layoff employees if you’re leaning towards those actions. If you’re submitting a PPP loan and will be seeking forgiveness, you’ll generally be better off by furloughing employees prior to April 26 and rehiring them by June 30 to get full credit for them in your forgiveness application. There are, of course, other considerations you’ll want to consider between furloughs and layoffs. 
    • Consider speaking with business and health insurance brokers or the insurers themselves about premium or enrollment options that may work to your advantage. Business coverage may include catastrophic coverage or stop-loss provisions, and health insurers may have plans to retain furloughed employees for a time lowering your cost of deleting them from a plan and then adding them again when rehired. 
    • Reach out to lenders who’ll be the ones funding the loans as you may find lenders offering more than competitive terms, especially those entering the SBA loan theater for the first time. Although the SBA will be the conduit through which you apply for a loan, you’ll have the option of selecting a lender, and one may be more attractive to you than others.

Final Thoughts

Remember, we are here to help you. The experience of our Kranz CFOs can guide and assist you with all of the task items mentioned in the above section. Please contact us if you’re interested in a complimentary one hour CFO consultation on any of these issues. In addition, our entire team of senior accountants, managers, controllers, and analysts are ready to apply skills of their own to meet your accounting needs. With close to 25 years of supporting our clients on a remote-basis, we can do this. Together.

Daryl