Archive for May 2020


SBA paycheck protection and economic injury disaster loans: new developments

May 21st, 2020 — 1:40pm

By Christopher J. Graham and Joseph P. Kelly

There have been more developments regarding SBA paycheck protection loans and economic injury disaster loans that may be of interest:

SBA paycheck protection loans:

  • New SBA regulations and guidance:

The SBA is updating its regulations and guidance, with the most recent FAQs coming on May 13. There are now 9 Interim Final Rules and 47 FAQs, which continue to be updated. You can find them in the program rules section of this link.

  • IRS notice re tax deductibility of PPP-loan funded payroll and other costs:

The IRS also issued a notice regarding the deductibility of expenses funded with PPP loan proceeds, at least to the extent of loan forgiveness. For example, if a taxpayer funds payroll costs with PPP loan proceeds and the loan is forgiven as a result, the IRS would disallow ordinarily permitted tax deductions for those costs. The rationale is that the taxpayer really isn’t paying those costs; the government is via the SBA loan “grant.” The IRS position has been controversial. And on May 6, a bipartisan senate group proposed legislation (S.3612) to “clarify” that those types of costs would remain tax deductible, notwithstanding loan forgiveness; so maybe borrowers will be able to have their cake and eat it too?

  • Some of the most recent SBA FAQs address:

Reduced loan forgiveness resulting from reductions in employees; employees refusing to be rehired:

As explained in a prior blog post, if you reduce your monthly average number of full-time equivalent employees during the 8-week period beginning from the initial loan disbursement—when compared to that monthly average for your base period, loan forgiveness is reduced proportionately. Some businesses reportedly were finding that with enhanced unemployment benefits under the CARES Act, employees were refusing to be rehired because they had a better short-term deal on unemployment; and the result for the employer would be reduced loan forgiveness. Although a reduction in full-time equivalent employees ordinarily would reduce loan forgiveness, SBA FAQ (# 40) creates an exception to the extent borrowers make a written offer to rehire an employee and the employee refuses the offer; but there must be supporting documentation of both the offer and rejection.
Additional special rules for seasonal employers:

See FAQ 41.

US companies owned by foreign entities:

See FAQ 44: To determine whether an applicant exceeds the 500-employee small-business loan eligibility threshold, the applicant must count all employees of its own and the employees of its U.S and foreign affiliates. Some had argued, based on wording in earlier SBA guidance, that only US-based employees were counted.

The good faith need certification and May 18 safe harbor to return loan proceeds:

As stated in prior blog posts, the CARES Act provides that, an “eligible recipient applying for a covered loan shall make a good faith certification— … that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operation of the eligible recipient ….” An SBA FAQ relating to “large companies” stated that “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.” A subsequent FAQ extended the same rule to “businesses owned by private companies.” Later SBA FAQs characterized the “large companies” FAQ as one that (1) “reminded all borrowers of an important certification required to obtain a PPP loan” and (2) “reminded borrowers to review carefully the required certification on the Borrower Application Form that ‘[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.’” Late Wednesday, the SBA issued this additional clarification:

Question: How will SBA review borrowers’ required good-faith certification concerning the necessity of their loan request?

Answer: 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. SBA has previously stated that all PPP loans in excess of $2 million, and other PPP loans as appropriate, will be subject to review by SBA for compliance with program requirements set forth in the PPP Interim Final Rules and in the Borrower Application Form. If 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, 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 SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request. SBA’s determination concerning the certification regarding the necessity of the loan request will not affect SBA’s loan guarantee.

The SBA also created a safe harbor, now until May 18, for borrowers to reconsider this issue and possibly return loan proceeds – though if your loan was for less than $2 million, it appears that the need threshold is a bit easier to meet then before.

75% rule and 8-week period; litigation:

Treasury Secretary Mnuchin reportedly expressed openness to a “fix” that would change the percentage of loan proceeds that must be devoted to “payroll costs” to qualify for loan forgiveness from 75% to 50% and extend the time for using loan proceeds to more than 8 weeks. This reportedly followed complaints by certain industry groups, restaurants being among them, that the current structure was unworkable. There also are suits against the SBA challenging the validity of its guidance; so perhaps those suits will result in changes. For now, it’s still 75% and an 8-week period, and the guidance is what it is. But be alert for changes.

SBA economic injury disaster loans:

Congress recently authorized more money for this loan program. But, now, if you’re not a farmer, you need not apply. Farmers were given priority; no politics, of course! See this link for more details: https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/economic-injury-disaster-loan-emergency-advance#section-header-0.

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IL Business Alert: COBRA; Workers Comp; New Executive Order/Plan; New Paid Leave, Payroll Tax Deferral; and Employee Retention Credit Guidance

May 14th, 2020 — 9:35pm

By Christopher J. Graham and Joseph P. Kelly

It’s hard enough to do business with the havoc arising from the pandemic. Then, as you probably know, there has been a flurry of legislation, ostensibly to help businesses and employees. And there is potential “help” in some of the legislation, but also a substantial compliance burden, which for small businesses can be especially difficult to deal with.

Here’s a summary of some of what’s new:

  • COBRA notice form and timing changes:

Many employers have laid off employees as a result of the pandemic. If your business has a group health insurance plan, there’s a new US Department of Labor form to provide notice to your employees of rights under COBRA and new extended times for employees to elect COBRA coverage. While not required, it’s best to use the DOL form to avoid any claim that the notice was legally insufficient and potential adverse consequences. See here for more details and the form.

  • Illinois workers compensation Covid-19 presumption – repeal:

Last month, the Illinois Workers Compensation Commission approved a new “emergency” Rule providing that certain employees who contracted COVID-19 would be rebuttably presumed to have contracted the virus in the course of employment. But that Rule has since been repealed.

  • Governor Pritzker’s modified stay-at-home order and plan to re-open Illinois:

You’ve likely seen these but here’s a link to the modified stay-at-home order and here’s a link to the plan to reopen up Illinois.

  • Emergency paid sick leave act and emergency family and medical leave expansion act—regulations and FAQs:

We provided an overview of these new laws in prior alerts here, here, and here.

Most of you presumably have posted or otherwise circulated the required poster for your employees about the new laws. And if your employee makes a claim for paid leave under either new law, there is now a mountain of regulations and guidance from the Department of Labor and IRS to wade through, in addition to the statutes. This is not an easy compliance burden for small businesses and the new laws apply even for businesses with a single employee.

Here is a link to the DOL regulations. And here is a link to the DOL guidance in the form of answers to Frequently Asked Questions, modified most recently on Friday. There are now 93 DOL FAQS!

There also are related IRS regulations and FAQS and forms for tax credits and advances that, assuming you jump through the hoops, should be there to fund required paid leave; the credits/advances also are available for certain self-employed persons for qualified sick leave and family leave equivalent amounts. Here are the IRS FAQs on the paid leave credits/advances.

If you get a paid leave claim, you will need to document the claim consistent with the DOL regulations and FAQs, whether you pay the claim or not. All paid leave claims also must be documented as required to obtain available tax credits or advances. Paid leave records also must be retained for at least 4 years. See the FAQs for details.

Although hardship exemptions may be available for businesses with less than 50 employees, there’s a compliance and documentation requirement for the exemption to apply.

If you have more than 50 employees and are already required to provide unpaid leave under the Federal Family and Medical Leave Act, there are details in the regulations and FAQs about coordinating the new paid leave with unpaid leave under the “old” Act. If you do business in a jurisdiction with State or local paid leave law (Chicago, for example, has a paid leave ordinance; the State of Illinois does not), you will need to coordinate your obligations under each law.

The DOL has enforcement powers and there are penalties for failure to comply; employees have the right to bring claims as well.

  • Payroll tax deferral and employee retention credit:

Payroll tax deferral was another new benefit for employers under the CARES Act – with certain 2020 payroll tax payments deferred until 2021 (50%) and 2022 (50%). The IRS has issued additional guidance on how this works. One clarification that’s been made: if you receive an SBA paycheck protection loan, you may benefit from payroll tax deferral, but only until the loan is forgiven; before the recent guidance, it was unclear before whether if you received a “PPP” loan, you also could benefit from deferral.

There are now detailed IRS FAQs about employee retention tax credits here. If you receive a paycheck protection loan, however, you are not eligible for these credits.

If you haven’t done so already, you should be coordinating with your tax advisor and payroll service on the tax matters identified above.

The SBA continues to issue new “guidance” and regulations almost every other day it seems—with more expected next week; and we expect to blog further about some of the new guidance soon.

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Mandatory sexual harassment training for ALL Illinois employers

May 5th, 2020 — 9:28pm

By Joseph P. Kelly

On January 1, 2020, the Workplace Transparency Act went into effect, imposing new obligations on Illinois employers. Among those new obligations is a requirement that all Illinois employers—even those with as few as one employee—conduct annual sexual harassment training. Employers that fail to comply face the possibility of civil penalties.

All employees—full-time, part-time, seasonal, etc.—must be trained. Employers can offer to let employees take the training outside of work—whether on a laptop or cell phone—but would have to compensate non-exempt employees for their time spent outside of work on the training.

The Illinois Department of Human Rights (IDHR) released its model Sexual Harassment Prevention Training (link here) that employers can conveniently rely on to conduct the required training. Employers should document that they received the training. The IDHR’s model training contains a Certificate of Participation form that can be used for such documentation.

The IDHR also put out an FAQ (link here) that is helpful resource to answer any questions Illinois employers may have about the training.

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