By: Janira Beltrán-Sellés, Esq. & Yaritza Portalatín-Méndez, Esq.
The recently enacted United States’ “Coronavirus Aid, Relief, and Economic Security Act” or the “CARES Act” can provide much needed relief for Puerto Rico small businesses who are struggling to continue their operations during the pandemic. We hereby highlight three important provisions of the CARES Act for which we recommend immediate attention.
Expanded Disaster Loan Program
For qualifying small businesses (includes non-profits) with 500 or fewer employees, SBA’s Disaster Loan program is expanded with an injection of $10 billion. The application is free of charge and, upon applying, the business may be eligible for up to $10,000 as an advance, to be received within three days after submitting the application. Regardless of the approval or denial of the loan, the advance received does not need to be repaid.
The advance may be used to pay for sick leave to employees affected by COVID-19, to retain employees, to meet increased costs to obtain materials unavailable from the business’s original source due to interrupted supply chains, to make rent or mortgage payments and to repay debts that cannot be paid due to revenue losses.
The SBA urges eligible businesses to submit their application as soon as possible, since they expect an excessive rise in the number of requests.
New Paycheck Protection Program (PPP)
Under the PPP, eligible businesses could receive loans for up to $10 million or 250% of their average monthly payroll costs. Payment deferral will be available for 6 months up to 1 year.
Borrowers will be required to make a good faith certification with the following:
- that the uncertainty of current economic conditions makes necessary the loan request to support the business’ ongoing operation;
- acknowledging that funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments; that the eligible recipient does not have an application pending for an equivalent loan for the same purpose and duplicative of amounts applied for or received under a covered loan; and
- during the period beginning on February 15, 2020 and ending on December 31, 2020, that the eligible recipient has not received amounts under section 7(a) of the Small Business Act for the same purpose and duplicative of amounts applied for or received under a covered loan.
The funds may be used to cover eligible payroll costs, including salaries, commissions, regular paid leave, health-care benefits, mortgage interest and utility payments. Employee compensation over $100,000 per year is not an eligible payroll costs, among other exclusions.
SBA-guaranteed loans under the PPP could have all or part of their loan forgiven for eligible payroll costs, mortgage interest, rent, and utility payments during a covered period of eight weeks. The SBA will continue to guarantee any remaining amount after the forgiveness.
For any amounts not forgiven under the PPP, the maximum term is 10 years, the maximum interest rate is 4%, zero loan fees and zero repayment fees (subject to SBA establishing application fees caps for lenders that charge).
Payroll Tax Deferral and Employer Retention Credit
Puerto Rico employers may be able to defer FICA tax payments (employer portion) through the end of 2020 to be repaid in two equal installments on years 2021 and 2022. Self-employed individuals may be able to defer 50% of Social Security tax payments.
Deferral does not apply to businesses with small business loan debt forgiven under the CARE’s Act.
Certain Puerto Rico employers may also be able to obtain a refundable credit when they are subject to closure or significant economic downturn due to COVID-19 but retain their employees. The credit would be for 50% of eligible employee wages paid after March 12, 2020, and before January 1, 2021 (for amounts representing up to $10,000 worth of compensation, including health benefits). The maximum retention credit amount is $5,000 per employee.
Businesses with more than 100 full-time employees in 2019 that are not providing services may be eligible for the credit. Businesses with fewer than 100 full-time employees may receive credit for wages paid while business was closed or during the quarter in which they had a significant decline in gross receipts.
These credits may not be claimed by businesses that are granted a loan under the PPP.
We remind you that our virtual offices are open, as per Government lockdown order. Our attorneys are available via telephone or video conference to attend to your legal needs.
This publication is a summary of recent pronouncements referred to herein and is not intended to substitute legal advice. We encourage you to contact us or your tax advisor if you have any questions or need assistance regarding any of the matters presented herein. An attorney-client relationship with Pellot-González, P.S.C. cannot be formed by reading or responding to this memorandum. Such a relationship may be formed only by express agreement with Pellot-González, P.S.C.
