On March 27th, the President signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act into law. Designed to help individuals, families, and businesses survive the financial effects of the COVID-19 pandemic, this act is a $2 trillion package, $350 billion of which is reserved for small businesses.
How Does the CARES Act Define a Small Business?
The act does not strictly define a small business, and the criteria differ depending on both the industry and the specific program within the act.
Generally, the NAICS code uses either a maximum annual revenue or a maximum annual number of employees as the threshold for defining a small business. For any given industry, the threshold for revenue could be $1 million or $30 million, and the threshold for the number of employees could be 250 or 1,500.
For the Paycheck Protection Program under the CARES Act, more companies will qualify as small businesses than per the NAICS code. For the purposes of these benefits, only the number of employees (not revenue) determines whether a company is a small business, and the employee threshold is either 500 employees or whatever is listed in the NAICS code. Additionally, companies in the accommodations and food-service industry qualify as small businesses if they have up to 500 employees at each location.
Furthermore, for loans under the Paycheck Protection Program, affiliation rules do not apply to businesses that are:
- In the accommodations or food-service industry
- Receiving financial assistance from a Small Business Investment Corporation
While small businesses will benefit from many programs within the CARES Act, they are now also required to provide two weeks of paid sick leave for employees who:
- Cannot work because of the quarantine or isolation
- Have COVID-19 symptoms
- Are taking care of someone with COVID-19 symptoms
Fortunately, the CARES Act provides tax credits to compensate employers for the cost of this leave. The following is a brief overview of other benefits provided to small businesses under the CARES Act.
Expanded Bankruptcy Benefits
The CARES Act made a few temporary but powerful changes to the Bankruptcy Code.
These changes include:
- Raising the debt threshold for Subchapter V of Chapter 11 bankruptcy from $2,725,625 to $7,500,000. Established in February of 2020 by the Small Business Reorganization Act, Subchapter V is a streamlined version of Chapter 11 bankruptcy geared toward small business owners. By nearly tripling this threshold, many more business owners can restructure their businesses rather than liquidating them through Chapter 7.
- Excluding COVID-19 related financial relief from income/disposable income calculations in Chapter 7 or 13 bankruptcy. This allows debtors to still qualify for Chapter 7 even if an emergency federal payment raises their income above the applicable threshold. For those filing Chapter 13, this exclusion allows them to keep the federal payment, rather than apply it toward their debt repayment plan.
- Allowing Chapter 13 filers to request plan modifications if COVID-19 causes financial hardship. A modification would involve extending the payment plan deadline in order to lower monthly payment amounts.
These provisions will remain in effect for one year.
The Paycheck Protection Program
The Paycheck Protection Program is perhaps the most powerful of all benefits in the act. The Small Business Association (SBA) will provide forgivable loans of up to $10 million per company to help employers maintain payroll and reduce layoffs.
Small businesses can use these loans to cover:
- Paid sick/medical/family leave (except for what is covered by the Families First Coronavirus Response Act)
- Costs of continuing group healthcare benefits
- Employee salaries (but not for an employee whose principal residence is outside of the country, or more than $100,000 for a single employee)
- Mortgage payments and other debts
These loans are forgiven if employers maintain their payroll between February 20th and June 30th. Additionally, employers will not need to pay SBA application fees or provide collateral/personal guarantees.
Economic Injury Disaster Loan Program
Per the CARES Act, this existing program is now authorized to use an additional $10 billion to assist small businesses. Qualifying small businesses can request up to $10,000 in emergency grants, which, if approved, must be distributed within three days.
Due to the CARES Act, the program no longer requires:
- That the company cannot attain credit from another source
- That the company was in business for at least a year before the pandemic
- Personal guarantees on advances/loans below $200,000
Small businesses can use the loans for:
- Fixed debts
- Accounts payable
- Employee sick leave
- Other bills the business cannot pay due to the pandemic
Small businesses cannot, however, use the loans to refinance debt incurred before the pandemic or to pay:
- Tax penalties or criminal/civil fines
- Repairs for physical damage
- Dividends/disbursements to owners/partners
- Other loans owned by the SBA or another federal agency
Before applying for a loan, you may consider evaluating your insurance policies or other programs to determine whether SBA relief could interfere with your existing agreements. You can also review your policy for business interruption coverage that would provide COVID-19 related compensation.
Additional Forms of Support
In addition to the above programs, the CARES Act contains the following provisions:
- Allowing corporations to delay estimated tax payments until October 15th, 2020
- Distributing grants to small business development centers and women’s business centers to provide education, training, and advisement regarding COVID-19 related business concerns
- Allowing both employers and the self-employed to defer employer share payment of Social Security Tax
- Eliminating the next six months’ worth of principal/interest payments for existing SBA loans
Let the Grand Law Firm Help You Take Full Advantage of the CARES Act
The benefits under the CARES Act can provide highly effective relief for small businesses, but the requirements and qualifications differ for each type of benefit. At the Grand Law Firm, our experienced legal team can help you evaluate your current situation, understand emergency legislation, and implement a plan to obtain maximum financial relief.