COVID-19 Business Relief Funding Options
29 MARCH 2020
NOTE: RKF Global attorneys are available to help businesses of all sizes understand and implement their rights in these changing times. The following is a short summary of the State of California, Illinois and U.S. Federal relief legislation & regulation that has been recently been enacted and implemented, as well as an eligibility outline to help determine employer and employee rights.
Coronavirus Aid, Relief and Economic Security Act (“CARES”)
The Coronavirus Aid, Relief, and Economic Security (CARES) provides $2.2 trillion in relief and is the largest relief bill in U.S. history. CARES has eased eligibility for Disaster Relief funds as well as allocated $350 billion to help small businesses keep workers employed throughout the pandemic via the Paycheck Protection Program, which provides federally guaranteed loans to small businesses.
The Paycheck Protection loans may be forgiven if borrowers maintain their payrolls during the pandemic and/or restore their payrolls afterward. The federal government will shortly release the relevant details of the programs together with including the list of participating lenders. The following overview is intended to assist small businesses and self-employed individuals to chart a strategy and prepare to file for applicable relief.
Paycheck Protection Program
Paycheck Protection Program - provides up to 10 weeks of cash-flow assistance to companies with less than 500 employees, and which would be largely forgiven for companies that maintain their payrolls through the crisis. Certain businesses with more than one physical location who employ no more than 500 employees per location may be eligible for loans, but some restrictions may apply.
Net Operating Loss Provision - allows five-year carryback of net operating losses arising in 2018, 2019 or 2020.
Direct Payments to Taxpayers - of up to $1,200 for individuals, $2,400 for married couples, and $500 per dependent child, with certain income limitations.
Penalty-Free Early Withdrawal of Retirement Funds - up to $100,000, retroactive to January 1, 2020. The tax on withdrawals is spread out over 3 years.
$250 Billion Unemployment Extension - expands eligibility and offers workers an additional $600 per week for four months, on top of what state programs pay.
Payroll Tax Relief - permits employers to delay payment of their 2020 payroll taxes until 2021 and 2022.
Loan Forgiveness - borrowers will be eligible for loan forgiveness for amounts spent during the 8-week period after the loan origination date for payroll costs, interest payments on any mortgage incurred prior to February 15, 2020, rent on leases executed prior to February 15, 2020, and utility payments for utility services that began prior to February 15, 2020. Loan forgiveness is also subject to certain restrictions and limitations.
Loan Eligibility Criteria – eligibility is not assessed on applicant repayment ability, but instead whether or not the business was operational as of February 15, 2020, and paid employee or independent contractor wages. Business will not have to post collateral or sign a personal guarantee, there are no pre-payment penalties, and the interest rate is capped at 4%.
Application, Eligibility, and Requirements
SBA Loan Application Documents and Forms
A small business with fewer than 500 employees.
If you are in the accommodation and food services sector (NAICS 72), the 500-employee rule is applied on a per physical location basis.
If you are operating as a franchise or receive financial assistance from an approved Small Business investment company the normal affiliation rules do not apply.
Sole-proprietor, self-employed individual, independent contractor, or gig worker.
The 500-employee threshold includes all employees: full-time, part-time, and any other status.
Lender Application Criteria
The loan must be used to support ongoing operations.
The loan will be used to retain workers, maintain payroll, or make lease, mortgage, or utility payments.
There is no other duplicate loan covering the same expenses from February 15, 2020 to December 31, 2020.
Amount of Loan
Formula – 2.5 x the borrower’s average monthly payroll cost, not to exceed $10 million.
Payroll Cost Calculation: The sum of payments of any compensation with respect to employees that is a:
i. Salary, wage, commission, or similar compensation.
ii. Payment of cash tip or equivalent.
iii. Payment for vacation, parental, family, medical, or sick leave
iv. Allowance for dismissal or separation.
v. Payment required for the provisions of group health care benefits.
vi. Payment of any retirement benefit.
vii. Payment of state or local tax assessed on the compensation of the employee.
For Sole Proprietors, Independent Contractors, and Self-Employed Individuals:
The sum of payments of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment, or similar compensation and that is in an amount that is not more than $100,000 in one year, as pro-rated for the covered period.
Excluded from Payroll Cost Calculation:
i. Compensation of an individual employee in excess of an annual salary of $100,000, as prorated for the period February 15, to June 30, 2020.
ii. Payroll taxes, railroad retirement taxes, and income taxes.
iii. Any compensation of an employee whose principal place of residence is outside of the United States.
iv. Qualified sick leave wages for which a credit is allowed under section 7001 of the Families First Coronavirus Response Act (Public Law 116– 5 127) or qualified family leave wages for which a credit is allowed under section 7003 of the Families First Coronavirus Response Act.
A borrower is eligible for loan forgiveness equal to the amount the borrower spent on the following items during the 8-week period beginning on the date of the origination of the loan:
i. Payroll costs (using the same definition of payroll costs used to determine loan eligibility). ii. Interest on the mortgage obligation incurred in the ordinary course of business. iii. Rent on a leasing agreement. iv. Payments on utilities (electricity, gas, water, transportation, telephone, or internet). v. For borrowers with tipped employees, additional wages paid to those employees. vi. The loan forgiveness cannot exceed the principal.
Loan Forgiveness Reduction:
The amount of loan forgiveness calculated above is reduced dollar for dollar if there is a reduction in the number of employees or a reduction of greater than 25% in wages paid to employees.
Employee or Wage Restoration:
Reductions in employment or wages that occur during the period beginning on February 15, 2020, and ending 30 days after enactment of the CARES Act, shall not reduce the amount of loan forgiveness IF by June 30, 2020 the borrower eliminates the reduction in employees or reduction in wages.
Economic Injury Disaster Loan Program
The CARES Act expands eligibility for the SBA’s Economic Injury Disaster Loans (“EIDLs”). On March 5th, the SBA’s disaster loan program was extended to all small businesses affected by COVID-19. Notably, the EIDL program has become more easily available to small businesses and is easier to apply for.
In sum, the SBA’s Economic Injury Disaster Loan program provides small businesses with working capital loans of up to $2 million. The funds are provided to help small businesses overcome the temporary loss of revenue which they are experiencing as a result of the disaster. The loans may be used to pay fixed debts, payroll, accounts payable, and other bills that could have been paid had the disaster not occurred.
EIDLs are now also available to Tribal businesses, cooperatives, and ESOPs with fewer than 500 employees. They are also available to all non-profit organizations, including 501(c)(6)s, and to individuals operating as sole proprietors or independent contractors.
EIDLs can be approved by the SBA based solely on an applicant’s credit score.
EIDLs that are smaller than $200,000 can be approved without a personal guarantee.
Borrowers can receive a $10,000 emergency grant cash advance that can be forgiven if spent on paid leave, maintaining payroll, increased costs due to supply chain disruption, mortgage or lease payments or repaying obligations that cannot be met due to revenue losses.
EIDL Application, Eligibility, and Requirements
SBA Loan Application Documents and Forms
SBA Form 5
IRS Form 4506-T for business taxes
IRS Form 4506-T for personal taxes
SBA Form 413D (personal financial statement)
SBA Form 2202 Schedule of Liabilities
SBA Form P-019 EIDL Supporting Information
SBA Form 1368 EIDL Additional Filing Requirements
Most recent business tax return
For more detailed information on the below programs, please refer to the RKF Blog page or call RKF attorneys at (424)409-1550.
California Capital Access Program: Otherwise known as CalCAP, this loss reserve program is tailored for small businesses which may provide up to 100% coverage on losses as a result of certain loan defaults. Individual borrowers are limited to a maximum of $2.5 million enrolled over a 3-year period.
Disaster Relief Loan Guarantee Program: This disaster program provides 7-year loan guarantees of up to $1 million for small business borrowers in declared disaster areas. Small Businesses located in California with 1-750 employees and non-profits are eligible to apply.
Jump Start Loan Program: This program offers microloans from $500 to $10,000. It is targeted towards low-wealth entrepreneurs in declared disaster and emergency areas.
LA Microloans. Los Angeles is offering microloans to small businesses of between $5,000 and $20,000. The term goes between six months and five years. The rate is 0% for a term of between six months and one year and between 3% and 5% for loans with a term of between one year and five years. Up to $11 million in these loans will be available.
San Francisco’s Small Business Resiliency Fund: for businesses that have between 1 and 5 employees, can demonstrate a loss revenue of 25% or more, have less than $2,500,000 in gross receipts, and be engaged in activities that are regulated by the City and County of San Francisco and have a license/permit associated to that regulation
In addition to the Federal programs available, individual states have begun to unveil their own financial relief initiatives. Recently, the Illinois Department of Commerce and Economic Opportunity launched several programs to ease the impact of the coronavirus-related gathering restrictions on the hospitality industry.
The Hospitality Emergency Grant Program. Grant Funds are available to support working capital like payroll and rent, as well as job training. Bars and restaurants with valid business licenses that generated between $500K and $1M in revenue in 2019 are eligible for up to $25,000, and bars and restaurants that generated less than $500K in revenue in 2019 are eligible for up to $10,000. Hotels that generated less than $8M in revenue in 2019 are eligible for up to $50,000. Businesses will know by April 4, 2020 whether or not they have received award, and funds are expected to be received within two days of the notice of award.
Illinois Small Business Emergency Loan Fund. This loan offers low interest loans of up to $50,000 for small businesses located outside the City of Chicago with fewer than 50 workers and less than $3 million in revenue in 2019. Successful applicants will owe nothing for six months and, thereafter must make fixed payments at a below market interest rate for the remainder of a five-year loan term.
Downstate Small Business Stabilization Program. This program repurposes $20 million in Community Development Block Grant program funds to offer small businesses of up to 50 employees the opportunity to partner with their local governments to obtain grants of up to $25,000 in working capital and will be offered on a rolling basis.
What to do Next
Contact RKF Global for advice and counseling. We have been keeping a close eye on these issues and are prepared to advise our clients with timely information as this fluid situation evolves. It is likely that the supplemental legislation will be passed as the Government continues to react to the ever-increasing financial challenges businesses face as a result of the COVID-19 pandemic. We stand by ready to assist business owners assess loan eligibility, calculate the amount of loans, assist with the application process, and keep them current on all legislative changes. Please contact us by phone or email as follows:
Q: How much am I eligible to receive?
A: Loans are designed to cover two-and-a-half months of payroll. This is calculated from the average monthly payments during the last year period before the loan is issued. However, no loans may be larger than $10 million.
Q: What about loan fees and other eligibility requirements?
A: There are no borrower or lender fees for participation. Moreover, unlike other SBA loans, you are not required to prove you cannot receive credit elsewhere in order to receive funds provided under this program. Typical collateral and personal guarantee requirements are also waived under this program.
Q: When will I have to make payments?
A: There is complete deferment of loan payments for one year, so if you expect to have your loan forgiven, this loan effectively acts as a grant program
Q: What is required for loan forgiveness?
A: Borrowers are eligible for loan forgiveness equal to the amount they spend on payroll costs during the eight-week period following loan issuance. Loan forgiveness is also available for interest payments on a mortgage, payment of rent on a lease, and utility payments, as long as these costs were already in place before February 15, 2020. The amount forgiven will also be reduced proportionally by any reduction in employees retained compared to the prior year and by the reduction in pay of any employee beyond 25% of their prior year compensation. Borrowers who re-hire workers previously laid off will not be penalized for having a reduced payroll at the beginning of the period.
Critically, the forgiven portion of this loan will not be included in the borrower’s taxable income.
Q: What happens after the forgiveness period for a loan
A: Any loan amounts not forgiven are carried forward as an ongoing loan with max terms of 10 years, at 4% max interest. Principal and interest will continue to be deferred, for a total of 6 months to a year after disbursement of the loan. The clock does not start again.
Q: Can I receive more than one loan?
A: No, an entity is limited to one loan. Each loan will be registered under a Taxpayer Identification Number at SBA to prevent multiple loans going to the same entity.