Special Report

New Federal Stimulus for Businesses during the COVID-19 Crisis.

It is merely days after enactment of the Coronavirus Aid, Relief and Economic
Security (CARES) Act. In brief, subject to important limitations, all small businesses will
be eligible for a low cost, long-term loan of as much as two and a half months of their
historical payroll costs, some of which will be subject to complete forgiveness of
indebtedness.

What law applies? The part of the CARES Act that is of most immediate interest is
the Paycheck Protection Program (the “PPP”). This program will be administered by the
Small Business Administration (the “SBA”) through banks that have been approved by the
SBA.

How is the program administered? We anticipate that all businesses wishing to take
advantage of the PPP will do so through approved banks, rather than through the SBA. A
business that regularly banks with an institution that has not been preapproved by the SBA
will either have to wait for its bank to go through the approval process or else contact a
different bank that is already approved.

What businesses are eligible? All “small businesses” are eligible, defined by the
CARES Act as businesses having 500 or fewer employees. There are some exceptions in
the Act that include additional businesses as well.

What is the amount of the available loan? A qualifying business will be eligible for
a loan of up to 2 1⁄2 months of its average payroll costs incurred by the business during the
12 months leading up to the loan, with a maximum loan of $10 million. Payroll expense
paid to any individual in excess of $100,000 per annum is not included in determining the
average payroll cost.

What can the loan be used for? Loan proceeds may be used for payroll costs,
mortgage interest, rent, and utilities paid by the business between February 15, 2020, and
June 30, 2020.

What will the terms of the loan be? Payments may begin 6 to 12 months after the
start of the loan, and the term of the loan may be as long as 10 years. The interest rate will
be not more than 4%. Neither collateral nor personal guarantees will be required.

Is the government really going to forgive part of the loan? Yes. The government
will forgive the total amount of the loan spent on payroll costs, mortgage interest, rent, and utilities paid by the business during the 8-week period beginning on the origination date of
the loan. There are special rules limiting the amount of forgiveness, such as where an
employee makes more than $100,000 per annum or an employee has been required to take a
pay cut of more than 25%.

But if the government cancels a portion of this debt, won’t the business be subject to
income tax on “cancellation of indebtedness income?” No. The CARES Act prevents the
forgiveness of this debt from being taxed under normal Internal Revenue Code provisions.
The cancellation of debt, combined with the protection from taxation of that forgiveness,
turns that portion of the PPP loan into what some might categorize as a tax-free subsidy to
the business.

Pavia & Harcourt cautions that the foregoing is merely a summary, based on early
readings of the CARES Act. Regulations (yet to be proposed by the SBA) are likely to give
more precise guidance than is presently available. In the meantime, it would be appropriate
for all businesses that may be interested in obtaining a PPP loan to make a preliminary
determination whether to move in that direction. If yes, we are available to guide you toward
a satisfactory result. Although the federal government has made a huge amount of money
available in this program, it could be that businesses are already lining up at the front door
of their favorite bank, and it would be unfortunate to wind up at the end of the line. Under
present legislation, the availability of the loan program will end on June 30, 2020.

Contacting Pavia & Harcourt LLP

Questions regarding matters discussed in this publication should be directed to Robert Tolz,
Esq., of our firm, at (212) 508-2371 or [email protected].

This publication by Pavia & Harcourt LLP is for information purposes only. It does not constitute legal, tax or other professional advice or opinions on specific facts or matters, nor does its distribution establish an attorney- client relationship. This material may constitute Attorney Advertising as defined by the New York Court Rules. As required by New York law, we hereby advise you that prior results do not guarantee a similar outcome.