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CARES Act Questions for the Technology Industry (Updated 6/9/2020)
by Dan Eller, Carmen Calzacorta, Stephanie Berntsen, Omar Contreras, Russel Robertson, Kenneth Katzaroff
Published: June, 2020
Submission: June, 2020
Related Articles inTechnology
Latest Firm's PressSchwabe, Williamson & Wyatt Congress recently passed the economic stimulus package referred to as the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act1”), the Paycheck Protection Program and Health Care Enhancement Act (“PPPHCE Act”), and the Paycheck Protection Program Flexibility Act (“PPP Flexibility Act”). Together, the CARES Act1, PPPHCE Act, and PPP Flexibility Act are called the “CARES Act”. The CARES Act is important to certain technology businesses because it offers necessary financial relief during this unprecedented time. Understanding the available loans and grants, tax provisions, and employment considerations available under the CARES Act could have a tremendous impact on technology-related businesses as they make business-critical decisions about their workforces and the continuation of their businesses. As further information becomes available about financial relief offered under the CARES Act, we will update this post. What are the key provisions in the CARES Act that impact the technology sector? The CARES Act establishes a new temporary lending program for small businesses, extends the Economic Injury Disaster Loan (“EIDL”) program and allows for advances, amends the tax code, and includes new items relevant to unemployment insurance. The Small Business Administration’s (“SBA”) affiliation rules may restrict CARES Act appropriated funds available to technology businesses controlled by venture capital or private equity firms. Certain technology businesses, such as some online retailers, may not qualify for specific programs established by Congress through the CARES Act to support small businesses. In addition, technology-focused trade organizations exempt from taxation under Section 501(c)(6) of the Internal Revenue Code are eligible to receive EIDLs and emergency EIDL grants, but these tax-exempt trade organizations are ineligible for Paycheck Protection Program loans. CARES Act Employment Considerations The CARES Act made federal funds available to states that enter into agreements with the federal government to increase their weekly unemployment benefits and added additional funds available if states eased some of their unemployment requirements. 1. Are workers who were not typically eligible for unemployment now able to receive benefits? Yes. The CARES Act created a Pandemic Unemployment Assistance program that expands coverage to individuals who would otherwise not be qualified for benefits, including self-employed workers, independent contractors, and part-time workers. As with other recipients, these individuals must still establish that they are able and available to work but cannot because of a COVID-19 related reason. The benefits will be administered by the states, which means the states will determine eligibility, but these benefits are federally funded and will be eligible through December 31, 2020. 2. Is there an increase in benefits that workers can receive? Yes. The federal government will provide an additional $600 per week in Federal Pandemic Unemployment Compensation for those who receive unemployment benefits as of the date the state enters into an agreement with the federal government until July 31, 2020. 3. A worker has exhausted their unemployment benefits that a state provides. May they receive more? Yes. The CARES Act established Pandemic Emergency Unemployment Compensation to provide an additional 13 weeks of unemployment benefits for workers who have exhausted their state benefits, are able and available to work, but cannot work because of a COVID-19 related reason, including but not limited to quarantine, illness, or a movement restriction order. These additional 13 weeks become available as of the date the state enters into an agreement with the federal government until December 31, 2020. 4. How does the CARES Act interact with the Families First Coronavirus Response Act (“FFCRA”) for my employees? The FFCRA requires employers with fewer than 500 employees to provide up to 80 hours of emergency paid sick leave (“EPSL”) and up to 10 weeks of emergency paid Family and Medical Leave Act (“EPFMLA”) leave in certain circumstances. The CARES Act clarified the amounts that individuals would be paid under these leaves. For example, an individual who takes 80 hours of EPSL because they are seriously ill with COVID-19 symptoms and cannot perform work would be paid their regular daily rate up to a maximum of $511 per day, or $5,110 in totality. If another employee needs to stay home to care for young school-aged children and cannot perform work, that employee would be paid up to two-thirds of their regular daily rate to a maximum of $200 per day, or up to $12,000 in totality (if you combine their EPSL and EPFMLA leave). The CARES Act also clarified that an individual who was laid off on or after March 1, 2020, worked for an employer at least 30 of the last 60 calendar days before the layoff, and is rehired is eligible for EPFMLA leave. 5. Does seeking tax credits under the FFCRA for emergency sick leave and extended leave make me ineligible for a Paycheck Protection Program (“PPP”) loan? No, you may seek tax credits under the FFCRA and still apply for a PPP loan. You just cannot apply the payments you make under the FFCRA to employees for emergency sick leave or extended FMLA leave toward PPP loan forgiveness if you are seeking a tax credit for the same funds. That would be “double-dipping.” 6. Is the calculation of the number of employees for the FFCRA and PPP the same? No. For purposes of FFCRA, companies count all employees as of the time the FFCRA related leave is being requested, including full-time and part-time employees, employees on leave, temporary employees, and those employees who are jointly employed with another employer or considered part of the “single integrated employer.” Please be careful. The calculation analysis differs under the PPP. See Question 9 under the CARES Act Lending Programs Section. 7. For purposes of counting employees under the FFCRA, are all employees counted or only those employees whose principal place of residence is in the United States? The FFCRA does not require the employee’s permanent residence to be in the United States for purposes of counting. CARES Act Lending Programs Small Business Lending 1. What programs are available? The Paycheck Protection Program (“PPP”) was established and the Economic Injury Disaster Loan (“EIDL”) program was extended to certain businesses, and advances were allowed. The PPP is administered through lenders and the SBA, and it is designed to provide a direct incentive for small businesses to keep their workers on the payroll. 2. How does the PPP application process work? The PPP loans are first come, first served. For PPP, lenders began taking applications on April 3, 2020, for small businesses and sole proprietorships, and on April 10, 2020, for independent contractors and self-employed persons. Applications were suspended as of April 16, 2020, due to lack of funds. The funds were replenished as of April 24, 2020, by $310 billion, of which $250 billion is for PPP and an additional $60 billion is set aside for PPP to be issued by certain depository institutions. See Question 3A. Assuming funding is not exhausted, PPP loans will be available under the program through June 30, 2020. Some banks have been limiting applications to customers only. Eligible applicants should reach out to their bank as soon as possible. As of April 24, 2020, an additional $50 billion was allocated to EIDLs and an additional $10 billion was allocated to EIDL grants. Applications will start being accepted again on April 27, 2020; check the EIDL website for the current status. 3. Are PPP funds still available as of April 24, 2020? Yes. The PPP originally had $349 billion available, which was exhausted as of April 16, 2020. On April 24, 2020, the PPPHCE Act went into effect with an additional funding of $310 billion. 3A. What are the set-aside provisions for rural, minority, and women-owned small businesses? The purpose of the set-aside provisions is to help rural small businesses, minority small businesses, and women-owned small businesses gain access to the PPP funds. The set-aside provisions reserve certain amounts for PPP, specifically:
4. Are technology businesses eligible for the Paycheck Protection Program? First, technology businesses may be eligible under any of the following situations (see Question 8 for ineligible businesses):
The affiliation rules apply for most businesses. See Questions 5 and 6. Second, the eligible business must:
As part of the application, the business will need to supply documentation and certifications relating to these items. See Questions 15 and 16. 4A. On May 18, 2020, the SBA issued an Interim Final Rule stating that to calculate the number of employees of an entity for purposes of determining eligibility for the PPP, an entity must include all employees of its domestic and foreign affiliates, except in those limited circumstances in which the affiliation rules expressly do not apply to the entity. If the borrower used the eligibility criteria that it has 500 or fewer employees whose principal place of residence is in the United States to obtain a loan, what are the consequences to the borrower? In the Interim Final Rule, the SBA stated: … [A]s an exercise of enforcement discretion due to reasonable borrower confusion based on SBA guidance (which was later resolved through a clarifying FAQ on May 5, 2020), SBA will not find any borrower that applied for a PPP loan prior to May 5, 2020 to be ineligible based on the borrower’s exclusion of non-U.S employees from the borrower’s calculation of its employee headcount if the borrower (together with its affiliates) had no more than 500 employees whose principal place of residence is in the United States. Such borrowers shall not be deemed to have made an inaccurate certification of eligibility solely on that basis. Under no circumstances may PPP funds be used to support non-U.S. workers or operations. See Interim Final Rule on Treatment of Entities with Foreign Affiliates. 5. Who determines eligibility and applies the affiliation rules? The borrower is responsible for this analysis and must certify that it is eligible to receive a PPP loan, including that it has applied the applicable affiliation rules. Lenders are not required to make an independent determination and may rely on the borrower certification. Knowing misrepresentations or false statements, in the borrower certification or otherwise, can result in civil and criminal penalties. 6. What are the affiliation rules? In most cases, a borrower will be considered together with its affiliates for purposes of determining eligibility for the PPP. Under SBA rules, entities may be considered affiliates based on factors including stock ownership, overlapping management, and identity of interest. The Borrower Application Form, SBA Form 2483, released on April 2, 2020, requires applicants to list other businesses with which they have common management. This common management disclosure may affect the eligibility of certain venture and private equity-backed technology businesses. Applicants should use the information supplied by the SBA as they assess whether they have affiliates that should be included in their number of employees reported on SBA Form 2483. In addition to applying applicable affiliation rules, all borrowers, particularly technology businesses that are part of a private equity or hedge fund investment portfolio, must take necessary steps to ensure the accuracy of the certification set forth in the Borrower Application Form stating that “current economic uncertainty makes the loan request necessary to support the ongoing operations of the applicant.” The affiliation rules are waived for PPP for businesses in the Accommodation and Hotel Code 72, certain franchises, and certain business concerns that receive financial assistance from a company licensed under section 301 of the Small Business Investment Act. 6A. Do businesses owned by large companies or private companies, in each case, with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan? FAQ 31 issued April 23, 2020, and FAQ 37 issued April 28, 2020, answered these questions as follows: In addition to reviewing applicable affiliation rules to determine eligibility, all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application. Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification. Lenders may rely on a borrower’s certification regarding the necessity of the loan request. Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 18, 2020 will be deemed by SBA to have made the required certification in good faith. Since this determination is fact based and situational, please discuss with legal counsel. 7. Can foreign-owned U.S. subsidiaries qualify for a PPP? Maybe. Based on frequently asked questions (“FAQs”) issued on April 6, 2020, it appears that foreign-owned companies are not automatically excluded from being eligible for a PPP. Furthermore, in the Interim Final Rule posted on May 18, 2020, the SBA made clear that, to calculate the number of employees of an entity for purposes of determining eligibility for the PPP, an entity must include all employees of its domestic and foreign affiliates, except in those limited circumstances where the affiliation rules do not apply to the entity. See Question 4A. In FAQ 44 issued on May 5, 2020, the SBA stated that its affiliation rules at 13 C.F.R. 121.301(f) apply with regard to counting the employees of foreign and U.S. affiliates. Specifically, it said that: “For purposes of the PPP’s 500 or fewer employee size standard, an applicant must count all of its employees and the employees of its U.S. and foreign affiliates, absent a waiver of or an exception to the affiliation rules. 13 C.F.R. 121.301(f)(6). Business concerns seeking to qualify as a ‘small business concern’ under section 3 of the Small Business Act (15 U.S.C. 632) on the basis of the employee-based size standard must do the same[.]” 8. Are some technology businesses not eligible to participate in the Paycheck Protection Program? Yes. Because private equity firms and hedge funds are primarily engaged in passive investment or speculation, such businesses are ineligible to receive a PPP loan. Technology businesses that are part of a private equity or hedge fund portfolio of investments may also be deemed ineligible to receive PPP loans due to the SBA’s affiliation rules. See Question 6 above. Some online retailers and data processing companies are not eligible. In addition, some industries (like cannabis and some passive businesses that involve real estate, like management companies, developers, shopping centers, residential facilities, etc.) are also prohibited. Businesses that lease land for the installation of cell towers, solar panels, or wind turbines are also ineligible because the SBA classifies these business as passive. However, the business that operates the cell towers, solar panels, or wind turbines is eligible. Some activities (like legal gambling (with some limits), financial businesses, household employers, private clubs, loan packagers, etc.) are not eligible. For a list of ineligible businesses, see 13 CFR 120.110 (“What businesses are ineligible for SBA business loans?”) and the SBA’s Standard Operating Procedure (SOP) 50 10 5, Subpart B, Chapter 2, except for nonprofit organizations authorized under the CARES Act. Additional examples of ineligible businesses include:
In limited circumstances, certain businesses engaged in renting or leasing may be eligible. For example:
PPP loans may be available to tenants of commercial real estate meeting the eligibility requirements, and such loans may be forgiven under the program to the extent the funds are used to cover payroll and other qualifying costs, such as rent payments. This may indirectly benefit passive real estate businesses in the short term. Note, however, that no more than 25% of the forgiven amount may be for non-payroll costs. See Question 13. 9. What time period should borrowers use to determine their number of employees and payroll costs? For seasonal employers, what time periods determine eligibility? In general, borrowers can calculate their aggregate payroll costs for their employees who reside in the United States using data either from the previous 12 months or from calendar year 2019. For seasonal employers, the applicant may elect to use (a) the average monthly payroll for the 12-week period between February 15, 2019, or March 1, 2019, and June 30, 2019; or (b) the average total monthly payment for payroll during any consecutive 12-week period between May 1, 2019 and September 15, 2019. An applicant that was not in business from February 15, 2019, to June 30, 2019, may use the average monthly payroll costs for the period January 1, 2020, through February 29, 2020. For purposes of applying the employee based size standard, borrowers may use their average employment over the previous 12 months or from calendar year 2019, or for seasonal employers, the 12-week period between February 15, 2019, or March 1, 2019 and ending June 30, 2019. Alternatively, borrowers may elect to use the SBA’s usual calculation: the average number of employees per pay period in the 12 completed calendar months prior to the date of the loan application (or the average number of employees for each of the pay periods that the business has been operational, if the business has not been operational for 12 months). For purposes of determining whether a seasonal employer is eligible and in operation as of February 15, 2020, a lender may consider whether the seasonal employer was in operation:
10. May all employees be included in the PPP payroll cost calculation? Is there any limitation based on immigration status (such as H-2A and H-2B) or U.S. citizenship? Only employees whose “principal place of residence” is in the United States count toward eligibility and calculation of the payroll costs. PPP applicants and lenders may consider IRS regulations (26 CFR 1.121-1(b)(2)) when determining whether an individual employee’s principal place of residence is in the United States. That IRS regulation lists the following criteria:
Also, only employees who are work authorized may be counted. The regulations do not explicitly restrict PPP loans based on citizenship or immigration status. Also, some banks have reportedly restricted loans to cover only employees who are either U.S. citizens or lawful permanent residents. Further guidance is expected in this area. 11. What is the loan amount and other terms? The maximum loan amount is two and a half times the “average monthly payroll cost” (with some adjustment for seasonal employers) or $10 million. No collateral or personal guarantees are required. There is a six month deferment on payment. The interest rate is 1%, and there is a two year maturity. Only one loan per business is permitted—this means that a business should consider applying for the maximum amount. E-signature and e-consent can be used. 11A. If a seasonal employer received a PPP loan before the alternative criterion for determining the maximum loan amount for partnerships or seasonal employers became available (posted originally on April 27, 2020, and revised on April 28, 2020), can the loan amount be increased based on a revised calculation using the alternative criterion? Yes. On May 13, 2020, the Interim Final Rule – Loan Increases was issued, providing that a seasonal employer that received a PPP loan before the alternative criterion for such employers was posted on April 28, 2020, would be eligible for a higher maximum loan amount under the alternative criterion. The lender may submit an increase of the PPP loan amount, even if the loan has been fully disbursed, provided that the lender’s first SBA Form 1502 report to the SBA on the PPP loan has not been submitted. After the initial SBA Form 1502 report has been submitted to the SBA, or after the date the initial SBA Form 1502 report was required to be submitted to the SBA, the loan cannot be increased. For the alternative criterion, see Interim Final Rule – Additional Criterion For Seasonal Employers. 11B. If a partnership received a PPP loan that did not include any compensation for its partners, can the loan amount be increased to include partner compensation? Yes. On May 13, 2020, the Interim Final Rule – Loan Increases was issued, providing that a partnership that received a PPP loan that only included amounts necessary for payroll costs of the partnership’s employees and other eligible operating expenses, but did not include any amount for partner compensation, would be eligible to have the loan increased to include appropriate partner compensation. The lender may submit an increase of the PPP loan amount, even if the loan has been fully disbursed, provided that the lender’s first SBA Form 1502 report to the SBA on the PPP loan has not been submitted. After the initial SBA Form 1502 report has been submitted to the SBA, or after the date the initial SBA Form 1502 report was required to be submitted to the SBA, the loan cannot be increased. The interim final rule posted on April 14, 2020, describes how partnerships, rather than individual partners, are eligible for a PPP loan. Guidance describing how to calculate partnership PPP loan amounts and defining the self-employment income of partners was posted on April 24, 2020 (See How to Calculate Maximum Loan Amounts, Question 4.) 12. For what purposes may the technology business borrowing PPP funds use its loan? The PPP loans are primarily intended to be used to pay employee compensation and benefits during the COVID-19 crisis, including salaries, health care costs, paid leave, and state and local taxes. For purposes of determining the PPP loan amounts and calculating loan forgiveness, businesses can only include amounts for employees whose principal place of residence is inside the United States. The loans can also be used for rent payments, utility bills, mortgage interest payments, interest on other debt, and to refinance an SBA EIDL, if applicable. The lender is to make the first disbursement no later than 10 calendar days from the date of loan approval. There is also a limitation on forgiveness, in that at least 60% of the loan proceeds must be used for payroll costs and up to 40% of such amount may be used for non-payroll items. 13. What are “payroll costs”? “Payroll costs” consist of compensation to employees (whose principal place of residence is in the United States) in the form of salary, wages, commission, or similar compensation; payment for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, and retirement; payment of state and local taxes assessed on compensation of employees; and for an independent contractor or sole proprietor, wage, commission, income, or net earnings from self-employment or similar compensation. Independent contractors are not employees for purposes of PPP loan calculations, therefore independent contractors have the ability to apply for a PPP loan on their own. Please note that current guidance from the Treasury provides that a limited liability company (“LLC”) may count up to $100,000 per LLC member to the extent that member would treat the LLC’s payment as self-employment income on the member’s personal tax return. The current guidance also requires the LLC to be the applicant, not the individual who is an LLC member. Payroll costs do not include the following:
14. Can the loans be forgiven? If the loan is forgiven, what happens for federal tax purposes? Are the expenses deductible? Loans under the program are eligible for forgiveness to the extent the funds are used to cover payroll costs, rent payments, utility bills, or mortgage interest payments for the period beginning on the date of the origination of the loan and ending on the earlier of 24 weeks after the date of origination or December 31, 2020. A borrower that received a loan prior to the enactment of the PPP Flexibility Act may elect that the covered period end on the date that is 8 weeks after the date of the origination of such loan. At least 60% of the loan proceeds must be used for payroll costs and up to 40% of such amount may be used for non-payroll items. Lenders are monitoring this—they want the loans to be fully forgiven. Loan forgiveness will be reduced to the extent that loan recipients reduce their full-time employee head count or employee salaries and wages by more than 25%. To encourage employers to rehire any employees who have already been laid off due to the COVID-19 public health emergency, borrowers that rehire workers previously laid off will be given credit for forgiveness purposes. The forgiveness calculation takes the number of employees and reduced compensation into consideration. There are also various exemptions and safe harbors—see Loan Forgiveness Application, Interim Final Rule on Loan Forgiveness, and PPP Flexibility Act. 14A. Will the SBA review individual PPP loan files following the lender’s submission of the borrower’s loan forgiveness application? 14B. How will the SBA review borrowers’ required good-faith certification concerning the necessity of their loan request? In FAQ 46 dated May 13, 2020, this question was answered as follows: When submitting a PPP application, all borrowers must certify in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” SBA, in consultation with the Department of the Treasury, has determined that the following safe harbor will apply to SBA’s review of PPP loans with respect to this issue: Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith. SBA has determined that this safe harbor is appropriate because borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans. This safe harbor will also promote economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees. In addition, given the large volume of PPP loans, this approach will enable SBA to conserve its finite audit resources and focus its reviews on larger loans, where the compliance effort may yield higher returns. Importantly, borrowers with loans greater than $2 million that do not satisfy this safe harbor may still have an adequate basis for making the required good-faith certification, based on their individual circumstances in light of the language of the certification and SBA guidance. The SBA has previously stated that all PPP loans in excess of $2 million, and other PPP loans as appropriate, will be subject to its review for compliance with program requirements set forth in the PPP Interim Final Rules and in the Borrower Application Form. If the SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, the SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from the SBA, the SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning the necessity of the loan request. The SBA’s determination concerning the certification regarding the necessity of the loan request will not affect the SBA’s loan guarantee. 15. What does the application look like? The Treasury Department has posted a form of application as of April 2, 2020. Please review the application carefully. There is more information in response to Question 16. 16. What documents and certifications are required? Documents: Per the SBA, the following documents are required:
Banks are also requiring other documents, like organizational and authorization documents. Please contact the lender for additional information regarding required documents. Certifications: As of April 2, 2020, the certifications stated in the SBA Borrower Application Form are:
17. What records should I keep? We expect that those that receive PPP loans that are forgiven will be subject to audit by the SBA at some point. Keep all materials used to apply for the loan, as well as documents relating to the forgiveness amounts. It is likely the focus of the audit will be on substantiating the forgiveness amounts. 18. What other guidance is available? Additional CARES Act guidance, including more detailed information on PPP loan issues, is available at https://www.schwabe.com/industries-covid-19. The Treasury Department and SBA have issued interim final rules, applicable affiliation rules, the application, frequently asked questions, and other information. 19. What happened with the EIDLs and the advances? The changes include:
Midsized Business Lending 20. What loans would be made available to midsized manufacturers and businesses under the CARES Act? There is no process as of April 30, 2020, to apply for either a Midsize Business Loan or a Main Street Loan. However, on April 8, 2020, and April 30, 2020, the Federal Reserve took additional actions to provide for the Main Street Lending Program. Regulations are in process, but the CARES Act does not include a specific timeline for the launch of these programs.
21. What restrictions will be placed on borrowers that receive loans under the midsized businesses program, if the program is implemented?
22.What is the Main Street Lending Program? On April 9, 2020, the Federal Reserve announced that it had taken actions to ensure credit flows to small and midsized businesses with the purchase of up to $600 billion in loans through the Main Street Lending Program. The Main Street Lending Program is intended to enhance support for small and midsized businesses that were in good financial standing before the crisis by offering four-year loans to companies employing up to 15,000 workers or with revenues of less than $5 billion. On April 30, 2020, the Federal Reserve declared an expansion of the scope of the Main Street Lending Program in response to public feedback and to account for the varied financial needs of eligible businesses. The expanded Main Street Lending Program will operate through three facilities: the Main Street New Loan Facility (“MSNLF”), the Main Street Priority Loan Facility (“MSPLF”), and the Main Street Expanded Loan Facility (“MSELF”). All three facilities use the same lender and borrower eligibility criteria, and have many of the same features, including the same maturity (4 years), interest rate (LIBOR plus 3%), deferral of principal and interest for one year, and the ability of the borrower to prepay loans without penalty. Below are brief summaries of the distinct features of each loan facility.
Depending on the type of Main Street Loan, eligible banks originating Main Street Lending Program loans will retain either a 5% or 15% share, selling the remaining 95% or 85% to the Main Street facility, which will purchase up to $600 billion of loans. Firms seeking Main Street Loans must commit to make reasonable efforts to maintain payroll and retain workers. Borrowers must also follow compensation, stock repurchase, and dividend restrictions that apply to direct loan programs under the CARES Act. Businesses classified as S corporations or other tax pass through entities may make distributions to the extent such distributions are reasonably required to cover owners’ tax obligations with respect to the business’s earnings. Firms that have taken advantage of the PPP may also take out Main Street Loans. For additional information regarding borrower eligibility for Main Street Lending Program loans, see Question 22A. The Federal Reserve and the Treasury recognized that businesses vary widely in their financing needs, particularly at this time, and, as the program is being finalized, will continue to seek input from lenders, borrowers, and other stakeholders to make sure the program supports the economy as effectively and efficiently as possible while also safeguarding taxpayer funds. See the April 30, 2020 press release. On May 27, 2020, the Federal Reserve issued additional information regarding the Main Street Lending Program. On June 8, 2020, the Federal Reserve issued additional information regarding the Main Street Lending Program, including:
See the Federal Reserve Press Release. 22A. Which businesses are eligible to participate in the Main Street Lending Program? The borrower eligibility criteria are the same for each of the Main Street Lending Program facilities. A business that has received a PPP loan, or that has affiliates that have received a PPP loan, is permitted to borrow under the Main Street Lending Program provided that the borrower meets all eligibility criteria. Below is a summary of the key Main Street Lending Program borrower eligibility criteria.
A “business” must be a legally formed entity that is organized for profit as a partnership, a limited liability company, a corporation, an association, a trust, a cooperative, a joint venture with no more than 49% participation by foreign business entities, or a tribal business concern. 23. What are the differences between the Main Street Lending Program and other federal programs established in the CARES Act to aid businesses during the COVID-19 pandemic? Like the Paycheck Protection Program (“PPP”) overseen by the Small Business Administration and the Federal Reserve’s Primary Market Corporate Credit Facility (“PMCCF”), the Main Street Lending Program was established to support companies adversely affected by the COVID-19 pandemic. Each of the three federal programs aims to provide liquidity to companies of different sizes. Below is description of the types of companies each of the programs is focused on assisting.
Tax Considerations 1. What are the key tax provisions in the CARES Act that may be of interest to technology businesses? The CARES Act includes various tax provisions that may be of benefit to the technology industry. Specifically:
2. How does the NOL carryback provision work? Under the CARES Act, companies with losses from 2018, 2019, and 2020 may be able to carry those losses back five years and offset up to 100% of taxable income. That could generate tax refunds that businesses could put to use upon receipt. 3. Why should technology businesses care about the increase in the interest deduction? Under the CARES Act, the maximum amount of business interest deductions is increased from 30% of earnings before interest, taxes, depreciation, and amortization (“EBITDA”) to 50% of EBITDA. This means businesses can reduce their taxable income for 2020 and 2021 by deducting more interest expense. Although this takes longer for businesses to realize the savings, it is a net win. Businesses should note, however, that this provision sunsets starting in 2022. 4. Payroll tax deferral and employee retention credits are lumped together. Looking at them one at a time, what more do we need to understand about deferral of payroll taxes? Under the CARES Act, businesses are permitted to defer payment of the employer’s share of Social Security taxes through the end of 2020. Businesses deferring payroll taxes under this provision are permitted to pay half of the deferred amount by the end of 2021 and the remaining half by the end of 2022. All the while, no penalties or interest will accrue. So in some ways, you can view this as a short-term interest-free loan from the government. 5. What can you tell me about the employee retention tax credit? The CARES Act creates a new, temporarily refundable payroll tax credit for “eligible employers” affected by COVID-19. An eligible employer is an entity (1) whose operation is fully or partially suspended in response to governmental orders limiting commerce, travel, or group meetings or (2) that has experienced a significant decline in gross receipts, defined as a decline of 50% or more in quarterly receipts when compared to the prior year quarter. If an employer meets that definition, the credit is 50% on the first $10,000 of certain wages incurred or paid from March 13, 2020, through December 31, 2020. The credit is not available to those employers getting PPP loans.
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