BHBM Tax Law Alert | Small Business Loans
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FEDERAL TAX LAW UPDATE
U.S. Senate’s Massive COVID-19 Relief Package Assists Small Businesses
On Wednesday, March 25, 2020, the United States Senate unanimously approved a $2 trillion relief package aimed at dulling the sharp economic pains many businesses and employees are experiencing as a result of the COVID-19 pandemic. The relief package expands on a previous Republican legislative proposal referred to as the CARES Act—the Coronavirus Aid, Relief, and Economic Security Act.
The relief package, which will be voted on in the United States House of Representatives on Friday, March 27, 2020, provides for direct payments to middle and lower income households, raises the maximum unemployment insurance benefit by $600 and expands the ranks of those who can apply for unemployment benefits, provides $150 billion in funding for the healthcare system and $150 billion in funding for state and local governments, and provides $350 billion in the form of loans for small businesses. Regarding small business loans, the Senate’s relief package addresses (i) small business eligibility and general loan provisions and (ii) loan forgiveness procedures, as follows:
(i) Small Business Loan Provisions
- Increases the government’s guarantee of loans made for the Paycheck Protection Program under section 7(a) of the Small Business Act to 100 percent through December 31, 2020;
- Defines eligibility for loans as a small business, 501(c)(3) nonprofit, a 501(c)(19) veteran’s organization, or Tribal business concern described in section 31(b)(2)(C) of the Small Business Act with not more than 500 employees, or the applicable size standard for the industry as provided by the U.S. Small Business Administration (“SBA”), if higher;
- Includes sole-proprietors, independent contractors, and other self-employed individuals as eligible for loans;
- Allows businesses with more than one physical location that employ no more than 500 employees per physical location in certain industries to be eligible;
- Defines the covered loan period as beginning on February 15, 2020, and ending on June 30, 2020;
- Establishes the maximum 7(a) loan amount to $10 million through December 31, 2020, and provides a formula by which the loan amount is tied to payroll costs incurred by the business to determine the size of the loan;
- Specifies that allowable uses of the loan include payroll support, such as employee salaries, paid sick or medical leave, insurance premiums, and mortgage, rent, and utility payments;
- Provides delegated authority, which is the ability for lenders to make determinations on borrower eligibility and creditworthiness without going through all of the SBA’s channels, to all current 7(a) lenders who make these loans to small businesses, and provides that same authority to lenders who join the program and make these loans;
- For eligibility purposes, requires lenders to, instead of determining repayment ability, which is not possible during this crisis, to determine whether a business was operational on February 15, 2020, and had employees for whom it paid salaries and payroll taxes, or a paid independent contractor;
- Provides a limitation on a borrower from receiving this assistance and an economic injury disaster loan through the SBA for the same purpose, but also allows borrowers who have received an economic injury disaster loan between February 15, 2020, and March 31, 2020, to receive assistance under this program through a refinancing mechanism;
- Requires eligible borrowers to make a good faith certification that the loan is necessary due to the uncertainty of current economic conditions caused by COVID-19; they will use the funds to retain workers and maintain payroll, lease, and utility payments; and are not receiving duplicative funds for the same uses from another SBA program;
- Waives collateral and personal guarantee requirements under this program;
- Outlines the treatment of any portion of a loan that is not used for forgiveness purposes. The remaining loan balance will have a maturity of not more than 10 years, and the guarantee for that portion of the loan will remain intact;
- Sets a maximum interest rate of 4 percent;
- Ensures borrowers are not charged any prepayment fees;
- Increases the government guarantee of 7(a) loans to 100 percent through December 31, 2020, at which point guarantee percentages will return to 75 percent for loans exceeding $150,000 and 85 percent for loans equal to or less than $150,000;
- Allows complete deferment of 7(a) loan payments for at least 6 months and not more than a year, and requires the SBA to disseminate guidance to lenders on this deferment process within 30 days; and
- Increases the maximum loan for an SBA Express loan from $350,000 to $1 million through December 31, 2020, after which point the Express loan will have a maximum of $350,000.
(ii) Loan Forgiveness Provisions
- Establishes that the borrower shall be eligible for loan forgiveness equal to the amount spent by the borrower during an 8-week period after the origination date of the loan on payroll costs, interest payment on any mortgage incurred prior to February 15, 2020, payment of rent on any lease in force prior to February 15, 2020, and payment on any utility for which service began before February 15, 2020;
- Clarifies that the amount forgiven will be reduced proportionally by any reduction in employees retained compared to the prior year and reduced by the reduction in pay of any employee beyond 25 percent of their prior year compensation. Further, to encourage employers to re-hire any employees who have already been laid off due to the COVID-19 crisis, borrowers that re-hire workers previously laid off will not be penalized for having a reduced payroll at the beginning of the period;
- Allows forgiveness for additional wages paid to tipped workers;
- Provides that canceled indebtedness resulting from this section will not be included in the borrower’s taxable income.
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