The Coronavirus Aid, Relief, and Economic Security (CARES) Act allocates $350 billion to help small businesses keep workers employed amid the pandemic and economic downturn. Known as the Paycheck Protection Program, the initiative provides 100% federally guaranteed loans to small businesses.
The Small Business Administration (“SBA”) will be releasing more details including the list of lenders offering loans under the program.
Small businesses with 500 or fewer employees during the “covered period” – February 15 through June 30, 2020 are eligible. Some industries may qualify with more employees, depending on the SBA’s applicable industry size standards, accessible here. The 500-employee threshold includes all employees: full-time, part-time, and any other status.
Individuals who operate a sole proprietorship or as an independent contractor and eligible self-employed individuals.
Any business concern that employs not more than 500 employees per physical location of the business concern and that is assigned a NAICS code beginning with 72 (Accommodation and Food Services companies).
Affiliation rules are also waived for franchises with codes assigned by the SBA, as reflected on the SBA franchise registry, and businesses that receive financial assistance from one or more small business investment companies (SBIC).
Along with small businesses, nonprofit organizations also are eligible. The CARES Act recommends that the SBA issue guidance to lenders to prioritize small businesses and entities in underserved and rural markets, including small business concerns owned and controlled by veterans and members of the military community, women or socially and economically disadvantaged individuals and businesses in operation for less than 2 years.
HOW MUCH CAN I BORROW
The Act offers a loan of up to $10 million based on a formula, which is essentially 2 ½ times the average monthly payroll incurred within the 1 year period before the date on which the loan is made, plus certain other costs. Compensation of an individual employee in excess of $100,000 is not included. Seasonal businesses may use the period February 15, 2019 – June 30, 2019 or March 1, 2019 – June 30, 2019 to calculate the average payroll.
What is included in the monthly payroll calculation:
- Salary, wage, commission and similar compensation, cash tips, vacation pay and sick/family leave, unless you took a credit under the Families First Act.
- Severance pay, health insurance premiums and other group health care benefits, retirement pay and state and local tax assessed on the compensation of employees.
What is excluded in monthly payroll calculation:
- Compensation of an individual employee in excess of an annual salary of $100,000, as prorated for the period February 15 to June 30, 2020, payroll taxes, railroad retirement taxes, income taxes and any compensation of an employee whose principal place of residence is outside of the United States.
- Qualified sick leave wages for which a credit is allowed under section 7001 of the Families First Coronavirus Response Act (Public Law 116– 5 127); or qualified family leave wages for which a credit is allowed under section 7003 of the Families First Coronavirus Response Act.
WHAT CAN WE USE THE LOAN FOR
Payroll costs (as defined above), group healthcare benefits, insurance premiums, and interest (but not principal) on mortgages or other debt incurred prior to February 15, 2020, rent on any lease in force prior to February 15, 2020, and utility payments.
Loans will be forgiven if employment and wage levels are maintained. There is a cure period for reductions that occur between February 15, 2020 and 30 days after March 27, 2020 as long as released employees are rehired or salary reductions are reversed by June 30, 2020. Reductions in employment or wages that occur during the period beginning on February 15, 2020, and ending 30 days after March 27, 2020 (as compared to February 15, 2020) shall not reduce the amount of loan forgiveness IF by June 30, 2020 the borrower eliminates the reduction in employees or reduction in wages.
The amount of loan forgiveness calculated above is reduced if there is a reduction in the number of employees or a reduction of greater than 25% in wages paid to employees. Specifically:
For the reduction in the forgiveness of the loan for employee headcount, the calculation is as follows:
- Average number of full time equivalent employees per month for the 8 week period beginning on the date of the origination of the loan divided by the average number of full time equivalent employees per month during the period 2/15/2019 – 6/30/2019, or, at your choice, the average number of full time equivalent employees per month during January and February 2020.
For the reduction relating to wages:
- The loan forgiveness is reduced by any reduction in total salary of any employee during the 8 week period beginning on the date of the origination of the loan that is in excess of 25% of the total salary of that employee during the most recent full quarter during which the employee was employed prior to the loan, which would be the first quarter of 2020. For the purpose of this calculation, anyone who has an annualized salary in 2019 of more than $100,000 is not included.
WHAT ABOUT THE PORTION OF THE LOAN NOT FORGIVEN?
Any loan amount remaining after this forgiveness is applied will be carried forward with a maximum maturity of 10 years and a maximum interest rate of 4% with an option to defer payments of interest and principal not more than 1 year.
CAN I APPLY NOW?
No. Loans will be made through eligible FDIC lenders. Now that the CARES Act is law, the SBA will give their loan guidelines to the banks. The banks will then prepare their loan application process.
Even though the application period for this loan runs through June 30th, we are recommending that any application be submitted as soon as possible in case the funds are limited. Our recommendation is to do the following now:
- Reach out to your banking contacts right away to indicate your interest in applying. The loans will actually be administered by the banks on behalf of the Federal government through the SBA’s 7(a) loan program. We are concerned that the banks may get flooded with requests in the next few days, but will hopefully attempt to service their existing client relationships first. The banks do not have the applications available yet, but we expect they will in the next few days.
- Organize your payroll records for the past 12 months. This will be one of the most important parts of the application process, but we do not yet know what specific information will be requested.
We expect more information to be available on this program in the coming days.
OTHER KEY POINTS TO KNOW
- A personal guarantee is not required for the loan.
- Loans are nonrecourse to the company unless the proceeds are used for an unauthorized purpose.
- The lender will not consider that the borrower sought and was unable to obtain credit elsewhere.
- No collateral is required for the loan.
- Loan forgiveness is not taxable.
- Loan forgiveness may not be combined with the Payroll Tax Deferral.
- Employer Retention Credit is not available to employers who receive a Paycheck Protection Program loan (“PPP”).
- Also available for self-employed individuals.
- Loan may be used for salaries, paid sick or medical leave, insurance premiums, and mortgage, rent and utility payments.
- Employee count is calculated per location for businesses in the hospitality and restaurant industries and certain others.
- Good faith certification required. Businesses cannot get both Economic Injury Disaster Loan (“EIDL”) and PPP loans at the same time. You can apply for the EIDL loan now and the PPP loan when it becomes available. If you qualify and accept the EIDL loan, and you subsequently qualify for the PPP loan, you can re-finance the EIDL loan with the PPP loan, OR you can apply for both loans and decide which one you take if you qualify for both. Loans are limited to one per Taxpayer Identification Number.