Updated: 31 March, 2020
Below are summaries of several of the provisions of the Coronavirus Aid, Relief and Economic Security Act (“the CARES Act”) which we felt would be of most immediate importance to many of our clients.
I. EMERGENCY SMALL BUSINESS LOAN RULES LOOSENED BY CARES
Economic Injury Disaster Loans (“EIDL”) were made available prior to CARES, but the rules surrounding them were relaxed by CARES so that they are more small-business friendly.
How do I apply for an EIDL loan?
Loans are currently processed directly on-line through the SBA, although the SBA may decide to enlist the assistance of lenders for the processing and making of loans.
What are the limits and requirements of this program?
Loans are available in a maximum amount of $2 million, carry an interest rate of 3.75 percent and have a maximum term of 30 years. Only loans over $200,000 must now be guaranteed by any owner having a 20 percent or greater interest in the business that applies. The CARES Act removed the former requirement that the borrower have to show that it could not secure credit elsewhere or that the borrower had been in business for at least one year, provided it was in operation on January 31, 2020.
Importantly, under the CARES Act Section 1110, entitled Emergency EIDL Grant, the first $10,000 of EIDL loans are wholly forgivable (i.e. they’re grants!), provided the funds are used for essentially the same reasons as permitted under the Paycheck Protection Program (see below).
The EIDL grants can be approved solely on the basis of (i) the applicant’s credit score (i.e. without tax returns) and (ii) the applicant’s certification that the funds are used for paid time off, maintaining payroll, purchasing materials impacted by COVID-19, rent/mortgage payments, or paying other obligations that cannot be met due to revenue loss. EIDL grant funds must be provided by the SBA within 3 days of receipt of the application.
The best course of action for business needing funds before the Paycheck Protection Program (see below) is in place is to apply for 7(b) EIDL loans, including the EIDL grants, and re-finance them into Paycheck Protection Program forgivable loans to the maximum extent possible. Note that EIDL loans (after the first $10,000 grant) are not forgivable, so if a business does not meet the Paycheck Protection Program requirements, it will be required to repay the EIDL loan amounts (over the first $10,000).
EIDL applications may be made online, here: https://www.sba.gov/funding-programs/disaster-assistance. In addition, applicants may submit their applications to their local SBA office by mail or apply in person at an SBA Disaster Recovery Center. For information or to find a location near you, contact the SBA’s Customer Service Center at 1-800-659-2955 (TTY: 1-800-877-8339) or e-mail email@example.com.
To learn what you need for the application, the application and other instructions can be found here: https://www.sba.gov/disaster/apply-for-disaster-loan/pdfs/Business%20Loan%20Application%20(SBA%20Form%205).pdf
A tutorial prepared by the SBA can be found here: https://www.sba.gov/sites/default/files/resource_files/how_to_disaster_app_March_2020.pdf
II. PAYCHECK PROTECTION PROGRAM FOR EMPLOYERS AND EMERGENCY FORGIVABLE LOANS
In response the COVID-19 epidemic, Sections 1102 (“Paycheck protection program”) and 1106 (“Loan forgiveness”) of the CARES Act amends the Small Business Act to provide emergency forgivable loans to employers primarily in order to pay employees/independent contractors and also to meet employer’s mortgage, rent, and utility expenses. The maximum loan amount is essentially equal to 2.5 times the average monthly payroll of the employer.
The biggest downside at this point is that the application process may not be known until April 26, 2020, and a business cannot receive relief under the Program if it receives any other relief (including EIDL grants) under the CARES Act. Financial institutions are encouraging business to apply for an EIDL loan (which is not forgivable after the first $10,000) while the procedures for applying for the Program are worked out.
What is the Program about?
Encouraging employers to keep their employees on the payroll, regardless of whether they are able to effectively work from home.
Who is eligible?
Almost every business operating on February 15, 2020 that can demonstrate that is harmed by the crisis, needs the loan to continue operations during the COVID-19 emergency and has between 1-499 employees or independent contractors is eligible. Businesses in the Accommodation and Food Service NAICS category are eligible even if they have over 500 employees. Some nonprofits are also eligible.
Sole proprietorships and self-employed individuals may also qualify under this program though the calculation of the maximum (or even available) loan amount is not clear at this time. Guidance from the Small Business Administration is to be published on or before April 26, 2020.
Participation in this program makes the employer ineligible for other provisions of the CARES Act, including EIDL disaster grants and the CARES Act tax credit.
What are the benefits versus conventional loans?
No collateral requirements.
No personal guarantees.
Borrower does not have to certify that it could not get a loan through other sources.
How much can you get under the Program?
The maximum loan amount is the employer’s average monthly payroll for the prior year multiplied by 2.5, up to $10,000,000 total. This number could be less if the employer had any employees/independent contractors making over $100,000 a year. In that instance, only the first $100,000 for each employee goes into the average payroll.
How much of the loan is forgivable and what are the requirements for forgiveness?
Under Section 1106 of the CARES Act, provided the employer did not reduce the number of its full-time employees or their wages, all of the loan to the employer under the Program is forgiven provided the loan funds were used for:
- payroll costs (not to exceed $100,000 of annualized compensation per employee); or
- payments of interest on any mortgage loan incurred prior to February 15, 2020; or
- payment of rent on any lease in force prior to February 15, 2020; or
- payment on any utility for which service began before February 15, 2020.
This forgivable amount is reduced by the number of employees the employer let go during the 8 week period following receipt of the loan and by any wage reduction over 25% during that 8 week period.
The forgivable amount will not be reduced for elimination of employees or reduction in wages if the elimination/reduction occurred between February 15, 2020 and April 26, 2020, provided that an employee is re-hired or their wages are reinstated by June 30, 2020.
The borrower must apply for forgiveness, but forgiveness is presumed if the borrower provides supporting documentation (paystubs etc.) and certifies to the forgivable amount.
All the forgiven amount is also non-taxable for the borrower.
How to apply?
No one knows yet! The SBA has until April 26, 2020 to provide guidance on how to apply. The applications will be through banks/credit unions. If you are interested in applying for a forgivable loan under the Program you should immediately begin collecting the following:
- Previous 3 years business tax returns;
- Most current interim financial statements;
- Debt schedule; and
- Payroll tax filings reported to the IRS.
III. DIRECT PAYMENTS TO WORKERS, FAMILIES AND BUSINESSES
What types of direct payments are available to individuals and families?
The Treasury Secretary estimated individuals could start receiving stimulus checks within three (3) weeks. The stimulus checks will consist of a single payment which would be a maximum of $1,200 for eligible individuals ($2,400 in the case of eligible individuals filing a joint tax return). Individuals or couples with qualifying children age 16 or under will be entitled to an additional $500 per child.
Taxpayer eligibility depends on adjusted gross income (“AGI”). Single adults with Social Security numbers who are United States residents and have an AGI of $75,000 or less would qualify for the full amount of the stimulus payment. The payments would progressively decrease for individuals with an AGI more than $75,000, with an income cap of $99,000. Married couples with no children with an AGI of $150,000 or less would be entitled to the full stimulus payment of $2,400. A taxpayer filing as a head of household would get a full payment if their AGI is $112,500 or less. The stimulus payments would decrease for married couples who have no children and an AGI of $198,000 or more. Individuals claimed as a dependent (including college students and other adults) are not eligible for a stimulus payment.
How do I apply or let the IRS know that I am eligible?
The IRS determines an individual’s eligibility for a stimulus payment based on taxpayer’s 2019 income. However, IRS will determine eligibility based on 2018 income for taxpayers that have not filed their 2019 tax return. Taxpayers are not permitted to determine their eligibility based on anticipated income for 2020. Taxpayers are not required to apply to receive a payment. If the IRS already has the taxpayer’s bank account information, it will transfer the money to the taxpayer via direct deposit based on the most recent income-tax figures it has. Taxpayers will also receive a notice through the mail after the payment is disbursed.
What types of direct federal payments are available to renters/landlords/multi-family landlords?
The Cares Act provides limited relief for individual renters and landlords. The Act allows multifamily borrowers with federally backed multifamily mortgage loans to request a forbearance of up to thirty (30) days if they are experiencing financial hardship due, directly or indirectly, to COVID-19. The forbearance can be extended up to two (2) additional thirty (30) day periods. A condition for forbearance is the landlord/borrower not evicting any of its tenants or charging late fees or penalties for late rental payments during the forbearance period.
Are there any local rules or rent relief orders?
Yes. On March 19, 2020, the Texas Supreme Court entered an emergency order prohibiting any action to evict a tenant from a residential property until after April 19, 2020. Although a writ of possession can be issued, execution on the writ of possession may not be occur before April 26, 2020. The only exception to the emergency order prohibiting evictions applies in cases where: (1) the tenant, the tenant’s household members or guests pose an imminent threat of physical harm to the landlord, the landlord’s employees or other tenants; or (2) in cases of criminal activity.
On March 26,2020, the Austin City Council passed an ordinance effective March 26, 2020 through May 8, 2020 that requires landlords to provide tenants at least sixty (60) days to cure any delinquent payments before providing the tenant with a notice to vacate. Landlords that violate the ordinance are subject to a fine of $500 for each day the violation continues.
IV. RETIREMENT ACCOUNTS AND CHARITABLE CONTRIBUTIONS
Can I use my retirement accounts to help with losses from COVID-19?
Penalty-Free Withdrawals. Yes, taxpayers may take penalty-free withdrawals from 401K accounts up to $100,000. The taxpayer will still pay income taxes on the withdrawal, but will no longer incur a 10% penalty, and the tax can be spread over a 3-year period.
Eligibility. Those diagnosed with COVID-19, or whose spouse is diagnosed by a test, or who has experienced adverse financial consequences as a result of being quarantined, being furloughed, being laid off, or who has experienced reduced work hours due to the virus, lack of child care, or reduced business hours to name a few. The employee’s certification is sufficient to qualify for the penalty-free distribution.
Loans from Qualified Plans. A taxpayer can take out loans up to the lower of $100,000 or 100% of the account balance from 401Ks. IRAs don’t permit loans.
Suspends Required Distributions. For retirees, Section 2203 of the Act, suspends for 2020 the mandatory distributions the government requires most to take from their 401Ks and individual retirement accounts starting at age 70 ½ or 72 ½.
What are the new incentives for making charitable contributions?
Taxpayers Who Do Not Itemize. Those who do not itemize can claim up to a $300 charitable contribution “above the line” and carry over excess charitable contributions.
Taxpayers Who Do Itemize. The charitable deduction limit for those who do itemize has been increased to 100% of adjusted gross income.
Corporations. Their basic deduction is increased from 10% to 25% of the business’ taxable income, and the limits on contributions of food inventory is increased to 25% from 15%.
V. MORTGAGE AND FORECLOSURE RELIEF
Lenders of mortgages backed by FHA, Department of Agriculture, VA, Freddie Mac or Fannie Mae may not execute foreclosures – or foreclosure-related evictions- for 60 days starting March 18, 2020. The foreclosure period may be longer, but most of the bill mirrors the federal recommendations outlined below.
Is there an overall set of rules that applies to government backed mortgages?
No. There is no uniform federal policy concerning COVID-19 and mortgage relief. The options available to you vary by loan investor, but includes the following five major investors: Fannie Mae, Freddie Mac, Federal Housing Administration (FHA), Veterans Affairs (VA), and the U.S. Department of Agriculture’s Rural Home Service (RHS).
- Forbearance may be granted upon a showing of economic hardship arising out of the COVID-19 pandemic. Forbearance may be granted up to 180 days, or even more.
- Borrowers impacted by COVID-19 must contact their mortgage servicer if they are unable to make mortgage payments or if you feel a recent economic hardship may affect your ability to make future mortgage payments.
A. The Federal Level
1. FHA Insured Single-Family & Home Equity Mortgages
- Initiation of Foreclosures and conducting Foreclosure Sales immediately suspended for 60 days (May 17, 2020).
- Evictions of persons from properties secured by FHA-Insured Single-Family Mortgages suspended for 60 days.
- Borrowers impacted by COVID-19 should contact their mortgage servicer if they are unable to make mortgage payments.
- FHA Servicers must review impacted borrowers for short and long-term forbearance options, loan modifications, and other options based on the borrower’s individual circumstances.
- Be sure to confirm with your servicer whether your loan is still FHA-insured. Again, the loan servicer may be different from who actually owns/holds your loan.
2. VA Mortgages
- Servicers are strongly encouraged to establish a sixty-day moratorium beginning March 18, 2020, on completing pending foreclosures or initiating new ones.
Note: The following issues have not yet been addressed by HUD/FHA or VA:
- Whether Credit Bureau Reporting of unpaid payments during forbearance relating to COVID-19 will be suspended;
- Whether servicers are required to obtain documentation of the economic hardship; and
- Whether borrowers in a forbearance plan will or will not incur late fees.
3. Single Family Mortgage Loans Owned by Fannie Mae and Freddie Mac
- Foreclosure Sales and Evictions are suspended for at least 60 days (May 17, 2020). This does not apply to abandoned or vacant properties.
- Borrowers impacted by COVID-19 should contact their mortgage servicer if they are unable to make mortgage payments.
- Impacted Borrowers can request “forbearance” – a suspension or reduction in mortgage payments for up to 12 months.
- Borrowers in a forbearance plan will not incur late fees.
- Credit Bureau Reporting of unpaid payments during a forbearance plan related to COVID-19 is suspended.
- Servicers are not required to obtain documentation of the hardship.
- Near the end of the forbearance period, servicers must work with borrowers to provide a permanent solution to bring the loan current, including review for a loan modification.
Note: To determine whether a loan is owned by Fannie Mae or Freddie Mac:
Federal Reserve, FDIC, NCUA, OCC, CFPB, and the Conference of State Bank Supervisors have issued an Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (March 22, 2020). In sum, agencies encourage financial institutions to work “prudently” with borrowers who are facing economic hardship due to COVID-19.
B. Texas State Level: Texas State-Wide Order
- Eviction hearings are postponed until after April 19, 2020.
- A writ of possession may be issued but it cannot be executed until after April 26, 2020.
VI. EXPANDED UNEMPLOYMENT
What changes has CARES made to the normal state unemployment schemes?
CARES increases unemployment benefits and expands the pool of those who are eligible. States will continue to pay unemployment to people who qualify, but CARES adds $600 per week from the federal government on top of whatever base amount a worker receives from the state for up to four months.
The legislation also adds 13 weeks of unemployment insurance across the board, which applies to those already receiving benefits as well as new applicants.
Is there any relief for those who are self-employed?
Self-employed people, freelancers and contractors, who normally are not eligible for unemployment, will be eligible to apply for benefits on a temporary basis through the end of 2020.