Guide to Navigating COVID-19 Federal Business Relief Programs
This is a guide intended to assist small, middle market and larger businesses in navigating the landscape of federal financing programs. It consolidates all 3 Phases of the federal response into a single comprehensive tool, which we intend to update as information becomes available. This first iteration covers principally:
- EIDLs – up to $2,000,000 for small businesses, including emergency advance grants of up to $10,000
- PPP Loans – up to $10,000,000 for small to mid-size businesses
- Treasury Loan Program – targeting middle market to large businesses
- Federal Tax Relief
In response to the unprecedented disruption caused by the COVID-19 pandemic and public health efforts to fight the virus, the United States Congress has passed three national stimulus packages in an effort to provide relief to those impacted by the pandemic and to encourage stabilization of the national economy.
The most recent and largest of these packages was the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), enacted on March 27, 2020. For businesses, the CARES Act creates several programs directed at liquidity needs stemming from losses suffered as a result of this pandemic, ranging from the expansion of existing loan programs under Sections 7(a) and 7(b) of the Small Business Act to the appropriation of funds to the U.S. Treasury Federal Reserve Fund to afford additional access to corporate liquidity for businesses not able to avail themselves of SBA programs.
The United States Small Business Administration SBA) will continue administering the enhanced and expanded loan programs under Sections 7(a) and 7(b) of the Small Business Act, comprising the Small Business Loan Program and the Economic Injury Disaster Loan Program, respectively. As of March 25, 2020, all states and the District of Colombia have been declared “disaster areas,” affording eligible small businesses and nonprofits the opportunity to apply for Economic Injury Disaster Loans.
For larger businesses that do not qualify for assistance under the SBA-administered programs, Title IV of the CARES Act appropriated $500 billion to the Treasury’s Exchange Stabilization Fund to provide loans and guarantees to businesses within severely distressed sectors and to other eligible businesses, which are broadly defined to include U.S. businesses that have not otherwise received adequate economic relief under the CARES Act.
Details regarding these loan programs and other federal financial relief including tax relief are provided below. Although much remains to be learned about the implementation of the CARES Act, this information is intended to help make sense of all of the various provisions and to better understand how they may apply to your business.
We are also closely monitoring the development of a potential Phase 4 relief bill and will update this document with any new developments.
Summary of 3 Phases to Date
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ACT NAME |
FULL TEXT |
SUMMARY |
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Phase 1: Coronavirus Preparedness and Response Supplemental Appropriations Act
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H.R. 6074 |
Appropriates $8.3 billion in emergency funding for federal agencies to respond to the COVID-19 pandemic. While the majority of the domestic allocation ($6.2 billion) is directed to the Department of Health and Human Services, $20 million is set aside to the United States Small Business Administration (SBA) to support the administration of the SBA Economic Injury Disaster Loan Program. |
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Phase 2: Families First Coronavirus Response Act |
H.R. 6201 |
Provides for paid sick leave, free coronavirus testing, expanded food assistance, additional unemployment benefits, and requirements that employers provide additional protection to health care workers. |
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Phase 3: Coronavirus Aid, Relief and Economic Security Act (CARES Act) |
H.R. 748 |
Appropriates $2.2 trillion in emergency aid to address various impacts of the COVID-19 pandemic, including relief for individuals and families, hospitals, community health centers and health care providers, state and local governments, and businesses including:
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I. Small Business Relief Programs
A. EIDL Program - SBA Economic Injury Disaster Loans and Emergency Grants
The SBA has activated its existing Economic Injury Disaster Loan Program (EIDL Program) for the benefit of qualifying small businesses and nonprofits. This program operates pursuant to Section 7(b) of the Small Business Act and provides low interest long-term loans of up to $2 million to eligible small businesses within the United States and the territories. The CARES Act further implements a few key changes to this program that increase access to the program by temporarily expanding eligibility requirements, waiving personal guaranty requirements, and by providing access to emergency grants of up to $10,000 to be funded within three days of the submission of the Disaster Loan application while the application is pending.
Loan applications can be submitted through the SBA.
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Eligibility
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Small businesses, including nonprofits, that are below industry size standards determined by annual gross receipts or number of employees based on applicable industry classification. For the period of January 30, 2020-December 31, 2020, expanded eligibility to include:
Note: In contrast to the Paycheck Protection Program discussed below, there is no waiver of affiliation rules for businesses under Industry Sector 72 (Accommodation and Food Services), applicable to the hospitality and restaurant sector. |
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Loan Purpose/Use |
Provides working capital loans up to $2 million per borrower for qualified small businesses. Can be used for operating expenses, including payroll, debt service, rent, utilities, and other bills. |
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Emergency Grants |
Until December 30, 2020, an applicant for a loan can request a $10,000 emergency advance grant that should be made available to the applicant within three days of submitting its Disaster Loan application |
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Loan Terms |
Interest rates:
Term: Variable, up to 30 years Guarantee requirement: Temporary waiver of personal guarantee requirements for loans under $200,000 |
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Loan Forgiveness |
No loan forgiveness is included as part of this program, except with respect to emergency grants that do not need to be repaid, even if the business is subsequently denied for a Disaster Loan |
Eligibility
General eligibility requirements for an SBA Disaster Loan include that the business applicant have acceptable credit history, be located in a declared Disaster Area, and have suffered a working capital loss due specifically to the declared disaster, not just a downturn in the economy.
Title I, Section 1110(a) of the CARES Act has expanded eligibility for Disaster Loans, which expansion applies to loan applications for the period of January 1, 2020-December 31, 2020. To qualify for an SBA Disaster Loan under the expanded eligibility, a business must:
- Have 500 or fewer employees; or
- Be an individual who operates under a sole proprietorship, with or without employees, or as an independent contractor; or
- Be a cooperative with 500 or fewer employees; or
- Be an Employee Stock Ownership Plan with 500 or fewer employees; or
- Be a tribal business concern with 500 or fewer employees; or
- Qualify as a “small business concern” under the SBA eligibility requirements existing prior to the enactment of the CARES Act. To qualify as a small business concern, a business applicant must comply with SBA size standards determined by reference to the applicant’s industry North American Industry Classification System (NAICS) code, which is determined based on either annual gross receipts or number of employees. It is also important to note that in certain cases, employees of certain affiliates of an applicant must be included when determining eligibility.
Note: In contrast to the Paycheck Protection Program discussed below, there is no waiver of affiliation rules for businesses under Industry Sector 72 (Accommodation and Food Services), applicable to the hospitality and restaurant sector.
Loan Terms
Under the EIDL Program, an eligible small business located in a region designated by the SBA as Disaster Area can apply for up to $2 million in Section 7(b) SBA Disaster Loans. These loans can have terms up to 30 years and provide for low interest rates at 3.75% per annum for small business and 2.75% per annum for nonprofits.
In addition to temporarily expanding the eligibility requirements of this program, the CARES Act also temporarily suspended the following program requirements until December 30, 2020 for applications made in response to COVID-19:
- No personal guaranty required for Disaster Loans under $200,000
- Waiver of the requirement that the business applicant have been in business for the one-year period before the disaster
- Waiver of the requirement that the business applicant must demonstrate that they are unable to obtain credit from other sources
Use of Proceeds
Disaster Loan proceeds can be used for working capital, maintaining payroll to retain employees, including sick leave pay due to the direct effect of COVID-19, fixed debts including rent and mortgage payments, accounts payable and other expenses that the applicant could have paid had the disaster not occurred; but loan proceeds are not intended to be used to replace lost profits and cannot be used for certain purposes, including without limitation, to refinance existing debt, make payment on loans to another federal agency, to pay for tax penalty obligations, to pay dividends to stockholders or members, or to finance an expansion of the business.
Emergency Grants
The CARES Act provides that during the covered period of January 31, 2020 - December 31, 2020, the SBA is authorized to advance emergency grants of up to $10,000 to each Disaster Loan business applicant. Grant proceeds may be used for the same purposes as the Disaster Loan. The grants are to be funded to the business applicable within three days after submission of its loan application to the SBA. While Disaster Loans are not subject to loan forgiveness, these emergency grants do not have to be repaid, even if the applicant is ultimately denied a loan under the EIDL program, or if the applicant subsequently obtains a loan under the CARE Act’s Paycheck Protection Program (described below). Please note, however, that the Cares Act provides that if the business instead obtains a loan under the Paycheck Protection Program, the amount of the emergency grant shall be reduced from the loan forgiveness amount of the Paycheck Protection Program loan.
How to Apply
Eligible small businesses and nonprofits can apply directly to the SBA by clicking here:
When applying for the loan through the SBA, applicants should be prepared to provide the following, although additional information may be requested by the SBA to process the loan application:
- Completed SBA loan application (Form 5)
- Tax Information Authorization (IRS Form 4506Y), for the business applicant and for:
- Each owner with 20% or more ownership interest
- Each general partner or managing member, regardless of ownership percentage
- Each owner who owns more than 50% of an affiliate business
- A complete copy of the most recent federal income tax return (prior years may also be requested)
- Schedule of Liabilities (SBA Form 2202)
- Personal Financial Statement (SBA Form 413)
- Most recent year-end balance sheet and income statement
- Current YTD balance sheet and income statement as of most recent month-end
Coordination with Other Relief
A borrower of an SBA Disaster Loan is eligible to participate in other SBA programs, including those under the CARES Act, but there must be no duplication in the uses of funds.
B. PPP Loans - Payroll Protection Program
For small businesses that need capital to retain employees, Title I, Section 1102 of the CARES Act creates the Paycheck Protection Program (PPP) to provide cash assistance in the form of loans for 2.5X average monthly payroll of the applicant over a 12 month period up to a maximum $10 million through June 30, 2020. Different calculation guidelines apply for seasonal employers. The amount of the loan is available to be forgiven for businesses that retain employees and maintain salary levels over the eight-week period following receipt of the loan proceeds, the loans of up to eight weeks of payroll costs are eligible to be forgiven in full, and loan payments deferred for six months. The program is retroactive to February 15, 2020, allowing businesses to reactivate workers laid off before the PPP was created. An Interim Final Rule was issued on April 2, 2020 providing further guidance with respect to the implementation of the PPP, and lenders are able to accept applications beginning on April 3, 2020. A fact sheet is also available for borrowers: Click here for the April 2 Interim Final Rule and here for the the PPP fact sheet.
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Eligibility
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Businesses, including nonprofits, with up to 500 employees; individuals operating under a sole proprietorship or as an independent contractor, and businesses that are “small business concerns”, defined as meeting industry size standards determined on annual gross receipts or number of employees based on applicable industry classification. Affiliation rules have been waived for hospitality and food services businesses with up to 500 employees per location and certain businesses operating as franchises, |
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Loan Amounts/Uses |
Provides forgivable loans up to $10 million per borrower for payroll, rent, utilities, and debt service, calcuated based on the applicant's payroll costs. Retroactive to February 15, 2020. At least 75% of the loan amount must be used for payroll costs. |
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Loan Forgiveness |
If the borrower maintains its payroll and salaries, the loan will be forgiven to the extent of payroll costs, mortgage interest, rent, and utility payments during the eight-week covered period; provided, however, not more than 25% of the loan forgiveness amount may be attributable to non-payroll costs. |
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Terms/Rates |
Payments accrue interest but are deferred for six months. For any loan amount not forgiven, loans are repaid on a two-year term at a 1% interest rate. |
Eligibility
The CARES Act expands eligibility for these loans to businesses that are not ordinarily eligible for the SBA 7(a) program. A business qualifies for the PPP if it:
- Has up to 500 employees (includes 501(c)(3) nonprofits or 501(c)(19) veterans organizations, and tribal business concerns);
- Is a sole proprietorship or an independent contractor (and certain self-employed individuals may be eligible to receive a loan);
- Is a tribal business concern with up to 500 employees; or
- Has more than 500 employees, but meets the SBA size standards that are determined by reference to the applicant’s industry NAICS code. Each industry classification has either a maximum number of employees or a maximum amount of annual receipts (averaged over a three-year period). An applicant must have no greater that the applicable maximum in order to be eligible. Note that under SBA affiliation rules, certain affiliates of an applicant must be included in calculating eligibility.
In addition, affiliation rules are waived for a business that:
- Has 500 or fewer employees per physical location, and is assigned a NAICS code beginning with 72 (Accommodation & Food Services, including hotels);
- Operates as a franchise that is assigned a franchise identifier code by the SBA; or
- Receives financial assistance from a Small Business Investment Company.
Loan Amount
PPP loans are capped at the lesser of $10 million or 250% of the business’s average monthly payroll costs (as described below) for the year prior to the date of the loan (or January 1, 2020 to February 29, 2020), if the business was not operating during the same period of 2019). Seasonal businesses can elect to calculate average monthly payroll costs over the 12-week period beginning February 15, 2019, or March 1, 2019 to June 30, 2019.
Loan Terms
Loan payments will be deferred for 6 months, but will accrue interest. For loan amounts that are not forgiven, the loan term will be 2 years with an interest rate of 1%. No collateral or personal guaranty is required, and borrowers do not need to demonstrate that they cannot obtain credit elsewhere.
Use of Proceeds
Loan proceeds may be used for:
- Payroll costs, including:
- Salary, wage, commission, or similar compensation and payment of cash tip or equivalent, subject to the limitations discussed below
- Payment for vacation, parental, family, medical, or sick leave
- Costs related to the provision of group health care benefits (including insurance premiums)
- Allowance for dismissal of separation
- Retirement benefit payments
- State or local tax payments assessed on employee compensation
- Costs related to continuation of group health care benefits (including insurance premiums)
- Costs related to paid sick, medical, or family leave
- Individual employee compensation up to $100,000 per year, prorated for the covered period
- Mortgage interest
- Rent
- Utilities
- Interest on other debt obligations incurred before the covered period
Proceeds may not be used for any other purpose if the business is seeking forgiveness, including for:
- Compensation in excess of $100,000 for any individual employee (on an annual basis) prorated for the covered period
- Taxes imposed or withheld under chapters 21, 22, and 24 of the IRC
- Compensation of employees who reside outside the U.S.
- Sick and family leave for which a credit is allowed pursuant to sections 7001 and 7003 of the Phase II stimulus package.
Even with the publication of the Interim Final Rule, there continues to be a lack of clarity regarding the application of the $100,000 per employee compensation limit. The question is whether the limit applies to wages and salary or to total compensation, including benefits and state unemployment tax. Anecdotally, in the absence of effective guidance many of our clients are applying the $100,000 limit to wages and salary only.
It is also critical to understand that the Interim Final Rule issued now provides that at least 75% of loan proceeds must be used for payroll costs, and that such usage parameters are no longer only linked to the amount of loan forgiveness available. Additionally, if funds are used by a borrower for unauthorized purposes, the SBA will direct repayment of these amounts and such knowing unauthorized use will subject the borrower to additional liability, which may include charges for fraud. If a shareholder, member or partner uses funds for unauthorized purposes, the SBA will have recourse against such shareholder, member or partner with respect to the same.
Coordination with Other Relief
The borrower of a PPP loan is eligible to participate in other SBA programs, but there must be no duplication in the uses of funds.
The employee retention tax credit, discussed below, is not available to a borrower under the a PPP.
Loan Forgiveness
Title I, Section 1106 of the CARES Act provides for forgiveness of PPP loans to be administered through the lender. The forgiveness amount can be up to the sum of the following amounts paid out of loan proceeds during the eight-week covered period:
- Payroll costs
- Mortgage interest
- Rent
- Utility payments
The Interim Final Rule provides that no more than 25% of the loan forgiveness amount may be attributable to non-payroll costs.. While the Act provides that borrowers are eligible for forgiveness in an amount equal to the sum of payroll costs and any payments of mortgage interest, rent and utilities, the SBA has determined that the non-payroll portion of the forgivable loan amount should be limited to effectuate the core purposes of the statute and ensure that finite program resources are devoted primarily to payroll. We will monitor any further evolution of the guidance from SBA.
The amount forgiven will be reduced:
- Proportionately, if the average number of full-time equivalent employees per month during the eight-week covered period is lower than the average number of such employees during the period from February 15, 2019, to June 30, 2019; or January 1, 2020, to February 29, 2020, at the borrower’s election or, for a seasonal employer, the period from February 15, 2019, to June 30, 2019.
- By the amount of any reduction in total salary or wages of an employee that exceeds 25% of the employee’s total salary or wages during the most recent full quarter for any employee who did not receive wages or salary at an annualized rate of more than $100,000 during 2019.
How to Apply
Borrowers will obtain PPP loans from existing SBA 7(a) lenders, and the Department of the Treasury is authorized to approve additional lenders. The SBA application form is available here. Note that most lenders are accepting applications only from existing clients.
C. Small Business Debt Relief Program
For businesses with existing SBA loans including 7(a), 504, and microloans, and businesses that take out new loans under these programs within six months of the enactment date of the CARES Act, Title I, Section 1112 of the CARES Act provides that payments of principal, interest, and fees will be covered by SBA for six months.
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Eligibility |
Borrowers with 7(a), 504, or microloans. PPP and EIDL loans are not eligible. |
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Payment Relief |
SBA will cover all loan payments for six months, including principal, interest, and associated fees, beginning on the next payment due date. Loans that are currently deferred will be subsidized for the six month period beginning after deferment. |
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New Loans |
The payment relief will also apply to new loans made within six months following the enactment of the CARES Act. |
D. Business Counseling
Title I, Section 1106 of the CARES Act provides additional funding for local Small Business Development Centers and Women’s Business Centers to provide counseling and training to small businesses for COVID-19 related concerns, and facilitates the creation of an online resource consolidating resources and information for small businesses.
II. Relief for Larger Businesses
A. Loans and Guarantees for Severely Distressed Sectors
Title IV of the CARES Act appropriates $500 billion to the U.S. Treasury’s Exchange Stabilization Fund to provide liquidity to support lending programs to certain identified distressed industry sectors and to states and local municipalities and U.S. businesses that have suffered losses related to COVID-19, but have not otherwise received adequate economic relief in the form of loan or guarantees otherwise available under the CARES Act, including under the Paycheck Protection Program. Given that most other programs available target eligible small businesses, Title IV is expected to be the mechanism that provides support to midsized and large businesses.
Of the $500 billion appropriated, funds will be available as follows:
- $46 billion for direct loans through the Treasury Department to the aviation industry and to businesses critical to the maintenance of national security.
- $454 billion (and any other amounts remaining from direct lending) for loans and guarantees to support Federal Reserve programs and facilities to be established to provide liquidity to businesses, nonprofits and state and local governments that meet eligibility requirements.
Of critical importance to many businesses will be the specific directive that the Secretary of the Treasury implement a program or facility that provides financing to banks and other lenders to make direct loans to eligible midsized businesses, including non-profits if practicable, with between 500-10,000 employees, which direct loans having an annualized interest rate not higher than 2% per annum, with no principal or interest payments during the initial 6 months of the loan term (referred to as the “Program for Midsized Businesses”).
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Eligibility
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States, municipalities, or eligible businesses seeking relief due to losses incurred as result of COVID-19. “Eligible business” is defined as:
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Purpose/Use |
To provide liquidity to eligible businesses, states and municipalities related to losses incurred due to COVID-19. No other specific use limitation. |
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Loan Terms |
Loan amounts: No limitation on individual loan amounts. Interest rate: Generally rates to be set at the discretion of the treasury secretary, subject to some variation as detailed below. Term:
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Loan Forgiveness |
No loan forgiveness is included as part of this program. |
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Other Restrictions/Requirements |
All loans authorized by Article IV of the CARES Act are subject to various restrictions, which vary among borrowers. Borrowers under the Program for Midsized Businesses are required to make extensive certifications detailed below. |
Eligibility
To be eligible for a loan authorized under Title IV, the borrower must be a state, municipality, or an eligible business. An “eligible business” is defined as an air carrier (including commercial air carriers, cargo carrier, businesses certified and approved to perform inspection, replacement and repair), and ticket agents or a U.S. business that has not otherwise received adequate economic relief in the form of loans or loan guarantees provided under the CARES Act.
As with all loans from the Federal Reserve, credit may only be extended to businesses created or organized in the U.S., or under the laws of the U.S., and that have significant operations in and majority of employees based in the U.S. Additionally, no loan or loan guarantee is available to any business that is 20% owned or controlled by the president, vice president, the head of an executive department or a member of Congress and/or family members of the same.
Loan Terms and Rates
The U.S. treasury secretary is afforded broad discretion to make loans and guarantees, including determining the rate for the obligations. In general, any loans made pursuant to Title IV shall be at a rate determined by the treasury secretary taking into account the risk and the current average yield on outstanding marketable obligations of the U.S. of comparable maturity, although with respect to air carrier loans there may be some flexibility given the sufficiency of security provided.
It is notable however, that with respect to provisions of the Act seeking to provide relief to midsized businesses, it is suggested that rate of direct loans from banks and lenders would have an annualized rate no greater 2%, with payments of principal and interest suspended for the initial six months.
Loan Duration
With respect to direct loans or loan guarantees to air carriers and national security related businesses loan duration should be as short as practicable, and shall not to exceed five years.
In contrast, the Act does not detail any parameters for loan duration with respect to any other loans or guarantees by and through the Federal Reserve with respect to the $454 billion appropriation targeting midsized businesses, including loans under the Program for Midsized Businesses.
Other Notable Program Restrictions/Requirements
Applicable to all Title IV Loans
- All borrowers must agree that until the end of the 12-month period following repayment of a direct loan, it may not:
- Repurchase its own equity securities or that of its parent (if listed on the national security exchange)
- Pay dividends or make other capital distributions on its common stock, except that under the Program for Midsized Businesses such payments and distributions may only be prohibited while the loan is outstanding. Further guidance from the U.S. Treasury is needed to clarify.
- Substantial restrictions applicable to executive compensation of borrowers, with restrictions to remain in place for one year following the repayment of obligations
Applicable to Loans to Air Carriers and National Security-Related Businesses
- Alternative financing is not reasonably available
- Intended obligations must be prudently incurred
- Loan or loan guarantee must be sufficiently secured or is made at a rate that reflects the relative risk, and, to the extent practicable, is not less than an interest rate based on market conditions for comparable obligations prior to the COVID-19 outbreak
- Until September 30, 2020, borrower to maintain its employment levels as of March 24, 2020, to the extent practicable, and in any case shall not reduce employment levels by more than 10%
Applicable to Other Loans by and Through the Federal Reserve (including Program for Midsized Businesses)
- Requirements under section 13(3) of the Federal Reserve Act (12 U.S.C. 343(3)), including requirements relating to loan collateralization, taxpayer protection, and borrower solvency, shall be applicable to these loans.
- Borrowers applying for direct loans through the Program for Midsized Businesses must provide a series of certification, including:
- That the uncertainty of economic conditions makes the loan necessary to support ongoing operations.
- Funds will be used to retain 90% of its workforce, at full compensation and benefits, until September 30, 2020.
- Its intention to restore not less than 90% of its workforce that existed as of February 1, 2020, and to restore all compensation and benefits to the workers of the recipient no later than four months after the termination date of the public health emergency declared on January 31, 2020 in response to COVID-19.
- It will not outsource or offshore jobs for the terms of the loan and for two years after repayment
- It will not abrogate existing collective bargaining agreements for the terms of the loan and for two years after repayment
- It remains neutral in any union organizing efforts for the term of the loan
Prohibition on Loan Forgiveness
No loan forgiveness is available for loans advance under Title IV of the CARES Act.
How to Apply
On March 30, 2020 the Treasury Department released guideline documents governing the application procedures and minimum requirements for direct loans and loan guarantees from the $46 billion portion of the Title IV appropriation to air carriers and business critical to the maintenance of national security, which guidance document can be found here.
However, as this juncture very little guidance is available and no specific mechanism is in place for the administration of the remaining $454 billion appropriation, and the Act did not provide a deadline for the release of guidelines for the same. We plan to monitor developments closely.
III. Taxpayer Relief Provisions
The CARES Act includes a number of taxpayer relief provisions. Below we focus on the provisions with the most immediate impact for businesses: the refundable employee retention payroll tax credit and the payroll tax payment date deferral. In later publications, we will analyze other CARES Act tax measures, including the rollback of the prohibition on net operating loss carrybacks, an increase to the charitable deduction ceiling, and a modification of the business interest limitation.
A. Section 2301 – Employee Retention Credit for Employers Subject to Closure Due to COVID-19
The CARES Act enacted a refundable payroll tax credit for eligible employers that continue to pay their employees despite being forced to close or facing economic hardship stemming from the coronavirus pandemic—but only if the employer does not receive a Paycheck Protection Loan.
Amount of the Employment Retention Credit (ERC)
The Employee Retention Credit for Employers Subject to Closure Due to COVID-19 (ERC) is equal to 50% of the qualified wages of each employee of an eligible employer. Total wages eligible for the credit are capped at $10,000 (including health benefits), limiting the maximum total credit to $5,000 per employee.
The ERC offsets an eligible employer’s portion of the Social Security tax, after reduction for the credits in IRC §§ 3111(e) and (f) (credits for the employment of qualified veterans and the research expenditures of qualified small businesses) and for the paid sick and family leave payroll tax credits in §§ 7001 and 7003 of the Families First Coronavirus Response Act (FFCRA). If the ERC exceeds the applicable taxes in any calendar quarter, the excess credit is treated as an overpayment and is refunded to the employer. Employers subject to the Railroad Retirement Tax Act are also entitled to the ERC.
Eligible Employers
An employer carrying on a trade or business in 2020 is eligible for the ERC if its business has been impacted in one of two ways:
- Suspension under a COVID-19 shut-down order. An employer is eligible for the ERC in each calendar quarter that its business is fully or partially suspended due to a government shut-down order related to COVID-19.
- Over 50% decline in gross receipts. An employer is eligible for the ERC starting the first 2020 calendar quarter the employer’s gross receipts are less than 50% of the employer’s gross receipts in the same quarter in 2019. Eligibility ends after the 2020 calendar quarter in which the employer’s gross receipts return to more than 80% of gross receipts from the same quarter in 2019.
Tax-exempt organizations are eligible for the ERC. Government employers are not eligible.
Qualified Wages
The ERC is available for wages paid between March 12, 2020 and before January 1, 2021. Wages that qualify for the ERC depend on the size of the employer.
- Employers with over 100 full-time employees, on average in 2019. Qualified wages are limited to compensation paid to employees who are not working because of one of the two COVID-19 impacts describe above (suspension of the business or decline in revenue). For employers with over 100 employees, qualified wages exclude increases to a retained employee’s compensation.
- Employers with 100 or fewer full-time employees, on average in 2019. All employee wages qualify for the ERC, whether or not the employee is working, as long as the employer is experiencing one of the two impacts of COVID-19.
Employer-provided health plan costs count toward qualified wages. However, qualified wages exclude any wages that count toward the federal paid sick and family leave payroll tax credits under sections 7001 and 7003 of the FFCRA.
Employers Receiving SBA Paycheck Protection Loans Ineligible
An employer who receives a Small Business Administration (SBA) loan under section 1102 of the CARES Act (i.e., a Paycheck Protection Loan) is not eligible for the ERC.
Importantly, the Act states that an employer must affirmatively elect not to have the ERC apply to its payroll taxes. This indicates that the ERC may apply automatically, absent taxpayer action. Although no guidance has been published addressing the election, employers applying for a Paycheck Protection Loan should be aware that the Internal Revenue Service has been authorized to recapture the ERC if it is allowed to a taxpayer that receives a Paycheck Protection Loan.
How to Receive the ERC
On March 31, 2020, the Internal Revenue Service released the final Form 7200, allowing advance payment of employer credits due to COVID-19, and corresponding instructions. Form 7200 is used to claim advanced payment of both the ERC and the refundable payroll tax credits for paid sick and family leave under sections 7001 and 7003 of the FFCRA.
To receive advance payment of these payroll tax credits, employers must first offset the amount of all employment taxes (not just Social Security taxes) by an amount equal to the payroll tax credits. In other words, the ERC and the FFCRA payroll tax credits will first reduce amounts withheld for federal income tax, the employee portion of both Social Security and Medicare taxes, and the employer portion of both Social Security and Medical taxes. Employers will not be required to deposit these employment taxes with the IRS to the extent that they are used to offset the payroll tax credits.
If the quarterly employment taxes do not fully cover the available payroll tax credits in a calendar quarter, an employer should then file Form 7200, requesting advance payment of the remaining credit amount. Employers who use a third-party payer for employment taxes (e.g., a payroll service provider or professional employer organization), must provide copies of the Form 7200 to the third-party payer.
For any calendar quarter in which an employer paid qualified wages, Form 7200 can be filed at any time during the quarter and before the end of the month following the quarter. Form 7200 can be filed several times during each calendar quarter, as anticipated payroll tax credits accrue. Form 7200 cannot be filed for a calendar quarter after an employer files its Form 941. Notably, Form 7200 can only be filed by faxing the form to (855) 248-0552.
Penalty Waiver
The Internal Revenue Service will waive penalties under IRC § 6656 for failure to deposit taxes if it determines that the employer acted in reasonable anticipation of the ERC.
Important Limitations
Employers should be aware of the additional limitations in the ERC.
- Employer aggregation rules. Businesses will be treated as a single employer for purposes of the ERC if they are part of a controlled group or under common control, as determined under IRC § 52(a) or (b), or that are part of an affiliated service group, as defined in IRC § 414(m), or that are otherwise treated as a single employer under regulations promulgated pursuant to IRC § 414(o).
- Employer owners and family likely not eligible. Wages paid to relatives including children, parents, siblings, in-laws, dependents, members of the employers household will likely not qualify for the ERC. Wages paid to anyone who owns, directly or indirectly, more than 50% of the employer will likely not qualify for the ERC.
- Work Opportunity Credit wages excluded. An employer cannot count wages for employees for whom the employer takes the Work Opportunity Credit in IRC §§ 38 and 51.
- Qualified wages excluded from Employer Credit for Paid Family and Medical Leave Credit.
- ERC belongs to the employer, not a PEO. If an employer works with a Certified Professional Employment Organization (i.e. a third-party payer), the credit is treated as belonging to the employer with respect to work-site employees.
Section 2302 – Delay of payment of employer payroll taxes
Under the CARES Act, employers and self-employed individuals can defer paying payroll and self-employment income taxes, respectively, that accrue from March 27, 2020 through December 31, 2020 (the payroll tax deferral period).
- Employers. Employers can defer the employer portion of Social Security taxes (and not Medicare taxes).
- Self-employed individuals. Self-employed individuals can defer 50% of the Social Security portion (and not the Medicare portion) of the self-employment income tax.
- Deferred payment due dates. 50% of the deferred taxes must be paid by December 31, 2021. The remaining 50% must be paid by December 31, 2022.
Note that an employer taking the ERC and the payroll tax credits for paid sick and family leave under sections 7001 and 7003 of the FFRCA may be able to significantly reduce, if not entirely eliminate, its total payroll tax liability.
An employer that uses third party agents (e.g. payroll processing service providers) and certified professional employer organizations to remit its payroll taxes can instruct the agent or PEO to defer payment of payroll taxes during the payroll tax deferral period. In that case, the employer will be solely responsible for payment of those taxes.
No Deferral for Employers with Paycheck Protection Loan Forgiveness. Payroll tax deferral does not apply to employers who receive a Paycheck Protection Loan that is forgiven under section 1106 of the CARES Act.
This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. Please consult with legal counsel for specific advice as to how these laws may impact you or your business or any other circumstance.