Small Business Survival: financial relief available under The CARES Act and the DC Small Business Recovery Microgrant Program
On March 24, 2020, D.C. Mayor Muriel Bowser followed the Maryland and Virginia Governors' example in issuing an order to close "non-essential" businesses through April 24 to address the coronavirus pandemic. As a consequence, local employers have faced unprecedented layoffs and existential disruption to their businesses.
To alleviate the economic impact of these closures, the Senate unanimously passed an historic, 880-page, $2 trillion dollar stimulus package, providing $349 billion dollars in financial assistance to small businesses during this shut-down period. The proposed legislation, now under consideration by the House of Representatives, is entitled the "Coronavirus Aid, Relief, and Economic Security Act," or the "CARES Act."
Under the CARES Act, employers of no more than 500 employees at any one location, including franchisees, independent contractors, sole proprietors, self-employed individuals, and certain hotels and food service establishments, may be eligible for a loan from the federal government.
The maximum loan amount is generally calculated as 2.5 times the amount of the employer's average monthly payroll obligation in the 12 month period preceding the loan application. Special provisions apply for seasonal employers and other small businesses that fall outside of this general method of calculation. The proposed law provides for up to a 4% interest rate, but mandates a 6-12 month deferral period for collection of both principal and interest. The loan is "nonrecourse" unless the borrower uses the loan proceeds for an unauthorized purpose.
Importantly, the loans are to be processed through local private lenders. In evaluating an applicant's eligibility, the lender may only consider whether the borrower was in operation on February 15, 2020, and had employees for whom the borrower paid salaries and payroll taxes, or independent contractors. The typical SBA fees and approval requirements are waived, including considerations of credit risk and personal guarantees. Each of these provisions is intended to facilitate faster loan processing and disbursement of funds to the small businesses in need.
The legislation authorizes the loan proceeds to be used only toward payroll and employee compensation, group health care benefits, mortgage interest obligations (excepting prepayment), lease, and utility payments during the covered period of February 15, 2020 through June 30, 2020, in addition to interest on any other debt obligations incurred before February 15, 2020.
Of note, Section 1106(b) of the proposed law provides for loan forgiveness. Borrowing employers may be eligible for loan forgiveness in the amount of payroll, mortgage interest, rent, and utility payments made during the 8-week period beginning on the date of the loan origination. The amount forgiven is considered "canceled indebtedness" and is excluded from gross income for tax purposes. The Act provides that loan forgiveness may be reduced by an amount based on employee layoffs or cuts in employee compensation by more than 25%. In order to qualify for loan forgiveness, the borrower must provide documentation of the payments made and verification of the borrower's number of employees and rates of pay.
Other key provisions that may provide relief for small business owners are below:
- Economic Injury Disaster Loans ("EIDL"). The CARES Act relaxes and waives many of the approval requirements for an SBA EIDL loan, and allocates $10 billion dollars to a fund for the SBA to provide emergency grants to small business owners. These grants provide an advance on a loan of up to $10,000, which the SBA must distribute within three days. The money may be used to pay for employees’ COVID-19-related sick leave, mortgage or rent, and other overhead expenses. The grants would be awarded on a first come, first served basis until the $10 billion fund is exhausted. Applicants would not have to repay the grant money even if they are denied the EIDL loan.
- Loan forgiveness for small business loans. Under the Act, employers may be eligible for tax-free debt forgiveness of a portion of their federal small business loans spent on payroll, sick leave, family leave and overhead expenses between February 15, 2020 and June 6, 2020, in addition to other debt obligations incurred prior to February 15, 2020.
- Additional SBA loan payments. The SBA may pay the principal, interest and any fees currently owing on 7(a) and 504 loans, for a 6-month period.
- Retirement account withdrawals. An individual may withdraw up to $100,000 from his or her retirement account penalty-free if the individual, or his or her spouse or dependent, is diagnosed with SARS-CoV-2 or COVID-19, or can otherwise show that they have experienced adverse financial consequences as a result of the virus. Borrowers are relieved of the 10% early withdrawal penalty so long as the distributions are repaid within 3 years. Individuals who currently have a loan outstanding from their retirement plan with a repayment due from the date of enactment of the Act through December 31, 2020, can delay their loan repayments for up to one year.
- Deferred Social Security tax. Employers and self-employed individuals may defer payment of their employer share of the Social Security tax until December 31, 2020. The deferred amounts would be paid over the following two years, with half of the amount required to be paid by in 2021, and the other half in 2022.
The House of Representatives is expected to vote on the CARES Act on Friday, March 27th. A copy of the proposed CARES Act is attached.
Also of note, Mayor Muriel Bowser announced a $25 million dollar grant program for small businesses, called the DC Small Business Recovery Microgrant Program. Under this program, the District will provide grants of up to $25,000 in financial support to small businesses for employee compensation, rent, and other operating costs and overhead expenses.
These microgrants will be available to businesses, non-profits, independent contractors, and self-employed individuals, but are not available to franchises. The application can be accessed here: https://coronavirus.dc.gov/recovery-business.
The deadline to apply is March 31, 2020. Applicants must have their 2017 and 2018 tax returns, a P&L statement for 2019, and a schedule of liabilities. To qualify, applicants must have a physical location in the District of Columbia and a current business license and must show a 25% loss in revenue due to COVID-19.
Antonoplos & Associates understands the uncertainty and risk that COVID-19 has caused to small business owners and self-employed individuals, and we can help you get through this time of crisis. Our attorneys are available to provide legal services remotely through video conferencing and telephone.
Valerie Edwards is a partner with Antonoplos & Associates. To speak with Ms. Edwards regarding the CARES Act feel free to contact her at 202-803-5676 or Valerie@Antonlegal.com.