The CARES Act

April 4th, 2020

New Guidance for Bioscience Startups

The CARES Act was signed March 27th with the goal to inject liquidity into an American economy profoundly affected by COVID-19. Even as we are writing this, the language of the law is being updated and clarification of certain critical details requested.

On April 2, House Minority Leader Kevin McCarthy (R-Calif) said that the affiliation rule that excluded most of the VC- and PE-backed startups in our ecosystem is “going to be solved in a day or two.” The Treasury will release additional guidance, and the remaining exclusion will be “small businesses controlled by a single outside shareholder.” (More.)

Initial start date for the SBA-backed PPP applications is April 3. However, pushing this date back to Monday is under consideration to accommodate preparations, with more detail to come.

Much of the recent attention has been devoted to the two SBA-backed programs (labeled Medium-Term Relief). Below you will find their key points as well as the tax incentive programs (labeled Near-Term Relief) included in the bill. The tax relief programs can offer an alternative (not additional) smaller but meaningful source of cash for those in our startup community that will still be excluded from the SBA-backed loans under revised guidelines, or as the budgeted amount of SBA-backed funding is potentially depleted.

Our goal here is to summarize the main tools offered by the bill and point to the list of startup-relevant information sources and qualified advisers (legal and accounting) who are highly experienced in venture capital, startup and tax law and IRS reporting.

Please note the list of sources and links at the end.

Current draft: Most of the VC- and PE-backed clients may not qualify for either of these due to triggering the affiliation rules.
New rules: Should include VC- and PE-backed clients, except those controlled by a single outside shareholder; details are yet to be released.

SBA Paycheck Protection Program (PPP) Loan

  • Apply via a local bank (find one here); Cleveland banks are actively preparing for the unprecedented volume and will field most questions now
  • Application form found here
  • No personal guarantees, no fees, no collateral required
  • Requirement that the business is unable to obtain credit elsewhere doesn’t apply (venture and/or traditional debt); should not affect existing credit covenants
  • Rate fixed at 1% (adjusted up from 0.5% today, but down from proposed 4% in initial draft)
  • Amount of 2.5 times monthly payroll
  • At least 6, up to 12 months of payment deferral
  • 10-year term
  • Forgivable if proceeds are spent on payroll, interest payments on other commercial debt, rent and/or utilities. No limit on amount forgiven if spent on qualified expenses. Additional guidance on qualified payroll expenses is needed.
  • Uses of funds: payroll, rent, mortgage, utilities

SBA Economic Injury Disaster Loan (EIDL)

  • Apply directly to SBA
  • Up to $2 million with collateral or $25,000 unsecured
  • Interest rates up to 3.75% for companies and 2.75% for nonprofits
  • Principal and interest deferment up to 4 years
  • Must have tangible and significant presence in a disaster area
  • Provides for an emergency advance/grant of $10,000 within three days of applying that does not need to be repaid

Do not explicitly exclude venture- and private equity-backed companies from qualifying; frees cash by foregoing, deferring and/or refunding Social Security payroll tax liability.

Employee Retention Refundable Tax Credit

Potential for revenue-generating startups with Social Security payroll tax liability

  • Key factor in eligibility is loss of at least 50% of revenue in Q1 2020 vs. Q1 2019
  • Tax credit first offsets SS payroll tax liability, allowing the company to keep the cash; then, the balance over the liability is refunded back
  • Not eligible if awarded SBA PPP loan
  • Frees cash by offering refundable tax credit against 6.2% SS payroll tax in the amount of 50% of up to $10,000 of wages paid to an employee (maximum credit of $5,000 per employee) after March 12, 2020 and before January 1, 2021
  • New IRS Form 7200 can be used to obtain an advance payment of these credits

Payroll Tax Deferral

Potential for startups with Social Security payroll tax liability

  • Do not have to demonstrate revenue loss to be eligible for this benefit
  • Not eligible if awarded an SBA PPP loan and that loan is forgiven
  • Frees cash by allowing companies to defer deposit and payment of the 6.2% SS payroll tax for the remainder of 2020, beginning March 27, 2020
  • 50% deferred until December 31, 2021, and the remaining 50% deferred until December 31, 2022
  • New IRS Form 7200 can be used to obtain an advance payment of these credits

Sources (do not reflect expected NEW SBA loan guidance)

Additional Resources for Bioscience Startup Ecosystem

Squire Patton Boggs – Venture Law Meetup: SBA Loans Under the America CARES Act
FRIDAY, APRIL 3, 9:00 a.m. 
REGISTER

Kohrman, Jackson, Krantz – Free Hotline
FRIDAY, APRIL 3, 9:00 a.m. – 7:00 p.m.
Pro-bono, free hotline for small businesses with complimentary 20-minute consultations on the CARES Act and the SBA Loan programs. The hotline number is 1-888-4KJKLAW (455-5529), or visit coronavirus.kjk.com.

Gener8tor – Emergency One-Week Program for Ohio Startups
APRIL 6 – APRIL 10, 2020
Signup deadline is April 4 at 11:59 p.m. Visit Gener8tor’s website to apply.

PLUS

CONTACT FOR MORE INFORMATION:

Tatyana Hower
VP, BioEnterprise
thower@bioenterprise.com
440.610.4979

Tyler Allchin
Director, BioEnterprise
tallchin@bioenterprise.com
216.983.9484