COVID-19 LEGISLATIVE OVERVIEW - FML CPAs

COVID-19 LEGISLATIVE

OVERVIEW

HR 6074 – Coronavirus Preparedness and Response Supplemental Appropriations(CPRSA) Act (March 6, 2020) Economic Injury Disaster Loan Program (EIDL)

HR 6201 – Families First Coronavirus Response (FFCR) Act (March 14, 2020) Sick Leave and Family Medical Leave

HR 748 – Coronavirus Aid, Relief, and Economic Security (CARES) Act (March 27, 2020) Individual Stimulus / Rebate Paycheck Protection Program (PPP) Small Business Debt Relief Program Emergency Economic Injury Grant (EEIG) Tax Provisions

Covid-19 Legislative Overview

EIDL Program (Disaster Loans)

The EIDL Loan Program has been in existence for many years through the SBA

HR 6074 expanded the program by declaring “disasters” in most state and local jurisdictions b/c of the Covid-19 Pandemic

Loan Amounts – up to $2m

Terms – 30 year; 3.75% (for profit), 2.75% (non-profit)

Deferral – 1 year (interest accrues)

Eligibility – small business (defined by SBA), however, all businesses with less than 500 employees eligible; most non-profits; other co-ops, sole proprietors, independent contractors


Eligible Uses: working capital (includes payroll and

other expenses); repayment of debt; A/P; other bills in normal course of business. Proceeds can NOT be used to replace lost revenue or acquire capital equipment.

Emergency Economic Injury Grant (EEIG):makes available a $10k grant for

all EIDL applicants regardless of approval of loan application.


Miscellaneous: personal guarantee required (only loans over $200k) collateral required for loans over $25k financial analysis of ‘ability to repay’ performed credit check performed waiver of ‘credit available elsewhere’ provision waiver of tax return requirement must be in operation as of January 31, 2020.

Interaction with Paycheck Protection Program Loan (PPP): may apply for both EIDL and PPP, however, funds cannot be used

for same purpose If EEIG received, such amount will reduce PPP loan forgiveness

amount. EIDL loans may be refinanced into PPP loan.

Application through SBA https://covid19relief.sba.gov

https://covid19relief.sba.gov/

SBA Affiliation Rules

• The CARES Act expanded financial assistance available to qualifying small businesses through 7(a) loans under the new Paycheck Protection Program (PPP) and the 7(b)(2) economic injury disaster loans.

• To be eligible for this assistance, a business must have: 1) fewer than 500 employees OR 2) fewer than the number of employees the SBA has designated as the size standard based on a company’s applicable 6-digit NAICS code, whichever is GREATER.

• With limited care-out exceptions, the SBA affiliation rules will play a determining factor as to eligibility of a particular business regarding an SBA loan. This could have a significant impact on PE/VC-backed companies.

http://www.fmlcpas.com/cares-act-paycheck-protection-program/

https://www.naics.com/search/


Business entities are considered to be affiliates ofone another by the SBA when:• one controls or has the power to control theotherOR

• a third party or parties controls or has thepower to control both.

In either circumstance, the evaluation of control needs to be determined based upon equity ownership and control rights.


On April 3, 2020, the Small Business Administration (SBA) and the US Treasury issued guidance on Affiliation rules applicable to the Paycheck Protection Program (PPP). The guidance outlines four major tests that can establish affiliation for the PPP:1. Affiliation based upon ownership.2. Affiliation rising under stock options,

convertible securities and agreements to merge.

3. Affiliation based upon management.4. Affiliation based on identity of interest.


Test 1 - Affiliation based upon ownership• For equity ownership – entity owning or has

the power to control more than 50 percentof the voting equity.

• If no entity or individual is found to control based uponownership (none over 50%), SBA will deem theBoard, President of CEO, managing member, partnerwho controls the management of the entity to be incontrol.

• But, a minority shareholder will be deemed to controlif, under the governance documents, it has the abilityto prevent a quorum or otherwise block action by theboard or shareholders.

Test 2 - Affiliation rising under stock options, convertible securities and agreements to merge• When determining size and power to control the SBA

requires options, convertible securities and agreements to merge (including those in principle) to be treated as if those rights have been exercised.

• Agreements that provide a possibility of a merger or sale at a later date should NOT be considered.

• Options, convertible securities and agreements to merge incapable of fulfillment, unenforceable or probability deemed extremely remote are NOT considered.

• SBA will NOT take into considerations “agreements” that appear to terminate control before actually doing so or recognize the “ability” to divest all or part of their ownership interest to avoid affiliation.


Test 3 – Affiliation based upon management

• If CEO/President/Partner/Managing Member of a company also controls the management of another company.

• If individual or company controls the Board or management of their company and Board or management of another Company

• If individual or company controls management of another company through a management agreement.


Test 4– Affiliation based on identity of interest

• Interest between close relatives (defined in 13 CFR 120.10) with identical or substantially similar business or economic interest.

The affiliation rules are WAIVED for a business under 500 employees with a 1) NAICS code beginning with 72, 2) recognized as a franchise by SBA and 3) any business receiving financial assistance from a company licensed under section 301 of the Small Business Investment Act (SBIA).


Paycheck Protection Program Loan (PPP)

Added by the CARES Act (HR 748)

Loan Amounts – up to $10m computed using average monthly ‘payroll costs’ (prior 12 month period) * 2.5

Option to use 1/1/20 - 2/29/20 if ‘not in business’ 2/15/19 -6/30/19

Payroll costs include: salary, wage, commission or other similar compensation (under $100k) vacation, family, medical or sick leave allowance for dismissal/separation group health care benefits retirement benefits state/local taxes on compensation or employees See FAQ Section

Terms: Currently 2 years – CARES Act provides for up to 10 years Current rate 1.0% loan forgiveness available (discussed later)

Deferral – 6 month with eligibility up to 1 year


Eligibility – defined to include: Small business less than 500 Employees (or pursuant to

SBA size standard index) 501(c)(3) non-profit organizations 501(c)(19) veteran organizations 31(b)(2)(C) Tribal organizations Sole proprietorships and independent contractors Self-employed individuals ‘Per location’ rules for Food/Accommodations Affiliation Rules (discussed earlier) – waived for franchises

Eligible Uses – payroll costs, continued health care benefits during periods

of sick/family leave, interest on mortgage obligations, rent, utilities, interest on any debt obligation entered into prior to 2/15/20


Loan forgiveness What’s included?

Qualified amounts spent during 8-week period following approval of PPP loan for: payroll costs, interest on mortgage obligations, rent, utilities

Loan forgiveness will be reduced for either: reduction in FTE’s or reduction in salary greater than 25% to employees making

less than $100k

How do I obtain loan forgiveness? Apply to lender with documentation verifying FTE’s, amounts

spent on qualified amounts. Lender must provide a decision regarding loan forgiveness within 60 days

Will I be taxed on loan forgiven? No, HR 748 specifically provides that loans forgiven pursuant

to PPP will not be included in taxable income.


Miscellaneous No personal guarantee, no collateral required, no

‘credit available elsewhere’ required Only required to (1) be in business and (2) have

payroll costs as of 2/15/20 Must provide good faith certification that:

loan is necessary to support ongoing operations due to uncertain economic conditions

the funds will be used to retain payroll or make mortgage, lease or utility payments, and

business does have an existing SBA loan for same purpose

Employers receiving PPP loans are not eligible for worker retention credits and if PPP loan is forgiven are not eligible for deferral of payroll taxes


FAQs / Uncertain Elements Eligibility – how will foreign owners /

operations impact my application? Payroll costs – Do I use 2019 or prior 12

months? Payroll costs – Do I include withholding or

employment taxes including FICA federal or state payroll taxes?

Payroll costs – can I include payments to independent contractors?

Payroll costs measurement period – what if I wasn’t in business 2/15/19 – 6/30/19?

Affiliation rules – is new guidance forthcoming? Banks – where do I reach out if my bank won’t

accept my application?


FAQs / Uncertain Elements Timing – when can I expect the funds? Loan amount – can I receive a loan for less

than 2.5x payroll costs? Loan forgiveness – what happens if I

terminate/furlough employees but bring them back?

Loan forgiveness – what does the 25% rule mean?

General – if I make a mistake, what will the bank do with my application?

Tax Credits – if I receive a PPP loan, am I eligible for the payroll retention credit or payroll tax deferral?

Paid Sick Leave / Paid FMLAHR 6201

Families First Coronavirus Response Act (HR 6201) mandates sick leave and family medical leave be paid by ‘covered’ employers (less than 500 employees) pursuant to specified conditions.

Paid Sick Leave – HR 6201 provides that ‘covered’ employers provide paid sick leave to employees that are unable to work (or telework) for the following reasons:

1. Employee is subject to government ordered quarantine or isolation

2. Employee has been advised by a healthcare provider to self-quarantine

3. Employee has symptoms of Covid-19 and is seeking medical diagnosis

4. Employee is caring for individual subject to either (1) or (2) above

5. Employee needs to care for a child whose school or place of daycare is closed or whose childcare provider is unavailable due to Covid-19

6. Employee is experiencing any other substantially similar condition specified by the Secretary of Health and Human Services

Paid Sick Leave / Paid FMLA - HR 6201

If Employee is unable to work for (1), (2), or (3) above, then Employer provides 80 hours of sick leave pay at regular rate of pay capped at $511/day ($5100 in aggregate)

If Employee is unable to work for (4), (5), or (6) above, then Employer provides 80 hours of sick leave pay 2/3 at regular rate of pay capped at $200/day ($2,000 in aggregate) Intermittent Leave

Covers all employees regardless of tenure

Paid Family Medical Leave – HR 6201 provides that ‘covered’ employers provide paid family medical leave to employees that are unable to work (or telework) related to public health emergency defined as need to care for child (18 & under) whose school or place of care has been closed due to Covid-19. Paid FMLA leave is 2/3 regular rate of pay capped at

$200/day for 10 weeks following Paid Sick Leave above Covers employees employed for at least 30 days

Paid Sick Leave / Paid FMLA - HR 6201

Will I get reimbursed for these ‘mandated’ Sick/Medical Leave payments? Reimbursement is provided through federal

employment tax credits applied against employer funded social security taxes

Unused credits will be refunded Certain limitations on credits (WOTC and

R&D) Credits are included in federal taxable

income In practice, employers should offset

deposits with expected credits and reconcile such amounts on quarterly 941.

Covid-19 Tax Considerations

Most applicable tax items are contained in the CARES Act, however, taxpayers should also be aware of tax deadline extensions: Federal filing and payment of all individual and

corporation income tax returns and Q1 estimates originally due 4/15/20 to 7/15/20

Many state deadlines extended (CT Corp filing and payment extended to 6/15/20; CT Individual filing and payment deadline to 7/15/20; CT PET filing deadline extended to 4/15/20 (payment deadline extended to 6/15/20); Individual Q1 & Q2 payments extended to 7/15/20


Business Tax Considerations Employee Retention Payroll Tax Credit Payroll Tax Deferral Net operating loss modifications Business Interest Expense Deduction

LimitationsQualified Improvement Property AMT Carryovers Charitable Contributions Loan Forgiveness (covered earlier) Sick/FMLA Paid Leave – tax credits

(covered earlier)


Individual Tax Considerations Recovery Rebates Retirement Plans Charitable Contributions Student Loans

FML Contact Information

Frank MilonePartner, Assurance & Advisory ServicesOffice: 860-657-3651

Bill ClaffeyPartner, Tax ServicesOffice: 860-657-3651

FML - COVID-19 Resources for Businesses and Individuals at www.fmlcpas.comhttp://www.fmlcpas.com/news-knowledge/coronavirus-updates-resources-for-business/

http://www.fmlcpas.com

http://www.fmlcpas.com/news-knowledge/coronavirus-updates-resources-for-business/

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COVID-19 LEGISLATIVE OVERVIEW - FML CPAs