CARES Act: Paycheck Protection Program
By John W. Lewis and Davidson Lentz
Coronavirus Aid, Relief, and Economic Security Act
includes $349 billion towards forgivable small business loans under the “Paycheck Protection Program.” Any business or nonprofit with 500 or less employees, or a larger amount established by the SBA’s size standards is eligible to receive a forgivable loan.
Additionally, any hotel, restaurant, or food service business with less than 500 employees
per physical location
of the business, is eligible to receive a forgivable loan.
These loans are issued by 7(a) lenders at private financial institutions, with a 100% guarantee by the federal government through December 31, 2020. The loan amount is determined by the business’ average payroll over two and a half months, based on the past year’s average monthly payroll costs, up to a maximum of $10 million. There is no requirement that you must be unable to obtain loans elsewhere, and no collateral or personal guarantee is required.
These loans can be used to pay for:
- Payroll costs; iii
- Costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;
- Employee salaries, commissions, cash tips, or similar compensation;
- Mortgage interest payments (not principal);
- Rent (including rent under a lease agreement);
- Utilities; and
- Interest on any other debt obligations that were incurred before February 15, 2020.
The law delegates authority to the 7(a) lenders to make and approve the loans based on an evaluation of the eligibility of the borrower. In addition to general financial information, a lender must also consider whether the borrower was in operation on February 15, 2020 and had employees for whom they paid salaries and payroll taxes (or Form-1099 independent contractors).
These loans are eligible for loan forgiveness up to 100% of the principal for eligible expenses during the covered period (the 8-week period from the loan’s origination). These expenses include the cost of maintaining payroll, mortgage interest, rent, and utility payments. A borrower must provide their lender with documentation to support these expenses, and the lender must verify the information and issue a decision on the application for forgiveness within 60 days. Any amount forgiven is excluded from gross income calculations for tax purposes, and any balance remaining has a maximum loan term of 10 years and a maximum interest rate of 4%.
However, the forgiven amount can be reduced if employee compensation was reduced more than 25% during the covered period, or if there was a reduction in full time employees during the covered period compared to the same period in 2019. That said, there is a re-hire exception which allows employers to re-hire employees prior to June 30, 2020 to eliminate these reductions and still receive forgiveness. The SBA will issue more detailed guidance and regulations concerning forgiveness within the next 30 days.
In addition to financial documents and information that a 7(a) lender requires, the bill also requires an applicant to submit a good faith certification that:
- The uncertainty of current economic conditions makes necessary the loan request to support your ongoing operations.
- The funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments.
- You do not have an application pending (nor have received) another loan under this program for the same purpose and duplicative of amounts applied for or received.
- An SBA Economic Injury Disaster Loan made between January 31, 2020, and the date a covered loan is made can be refinanced as part of a covered loan.
- The SBA has been tasked with providing additional guidance and regulations within 30 days of enactment.
- Payments are deferred between 6 months to 1 year on amounts not forgiven.
- Lenders have been asked to prioritize businesses that have been in operation less than two years, are in underserved and rural markets, or are owned by women or “socially and economically disadvantaged” individuals.
- SBA Express loans have been temporarily increased from $350,000 to $1,000,000.
i Established in the SBA Table of Size Standards, according to the NAICS designation.
ii Any business with an NAICS code starting with 72.
iii Payroll is defined as the sum of payments of any compensation with respect to employees that is a: salary or wage; payment of cash tip or equivalent; payment for vacation, parental, family, medical, or sick leave; allowance for dismissal or separation; payment required for the provisions of group health care benefits, including insurance premiums; payment of any retirement benefit; or payment of State or local tax assessed on the compensation of employees; and the sum of payments of any compensation to a sole proprietor or independent contractor that is a wage, commission, or similar compensation and that is in an amount that is not more than $100,000 in 1 year, as prorated for the covered period.