CARES Payroll Protection Program & Emergency Injury Disaster Loan

Dear Valued Clients and Friends of Perlson LLP,

The world, our nation and our communities are in unchartered territory as we navigate the COVID-19 pandemic. This crisis will have immediate and long-term economic effects. Perlson LLP is here to guide you and your business through these unprecedented times.

To that end, we want to share highlights on the recently signed Coronavirus Aid, Relief and Economic Securities Act (CARES Act) . This is an historic $2 trillion relief package aimed to provide economic and financial support to individuals and businesses. The act includes several key provisions:

  • Paycheck Protection Program (PPP)
  • Emergency Economic Injury Disaster Loans (EIDL)
  • Payroll and Employer Retention Credits
  • Deferral and Employer Payroll Taxes
  • Enhanced Unemployment Benefits
  • Recovery Checks for Individuals
  • Business Limitation Modification and Technical Corrections
  • Accessing Retirement Accounts and Deferrals of Required Minimum Distributions
 
The Act itself is broad. Further below are details on the most significant provisions: the Paycheck Protection Program and changes to the Emergency Economic Injury Disaster Loans (including a $10,000 grant). We will continue to provide updates on this Act and additional resources via ongoing email blasts. Our goal is to keep you informed of resources available to get you through this rapidly evolving crisis. Please reach out to your Perlson LLP account manager for support and guidance at any time.
 
Hope you all stay safe and healthy.
 
Our best,
 
Perlson LLP

 
Paycheck Protection Program
 
What Is The Paycheck Protection Program (PPP)?
The program provides up to $349 billion in loans to eligible entities. The 100% federally-guaranteed loans may be used for a variety of purposes including payroll, rent, utilities and interest on debt. The loans are intended to provide borrowers much-needed liquidity during these uncertain times. The principal amount of the loan borrowed under the PPP may be entirely forgiven under certain circumstances.
 
What Businesses Are Eligible?
Eligible entities are those with less than 500 employees, including the following:

  • Businesses
  • 501(c)(3) nonprofit organizations
  • Veterans organizations
  • Certain tribal business concerns
  • Eligible self-employed individuals - these individuals will be required to submit documentation substantiating such classification, e.g., payroll tax filings, 1099-MISC and other information
  • Independent contractors
  • Sole proprietorships
  • Businesses in the accommodation and food services industry; (NAICS 72) that have less than 500 employees per physical location
 
Compared to other loans administered by the SBA, the PPP includes provisions which waive the usual criteria of personal guarantee, need for collateral, the credit elsewhere test and certain industry-specific affiliation rules. Therefore, the following entities can also apply:

  • Restaurants, food-service, caterers and hotels which employ 500 or fewer employees per physical location
  • Franchises that are approved on the SBA’s Franchise Directory
  • Small businesses that receive financing through the Small Business Investment Company (SBIC) program
 
How Much is the Loan?
The maximum loan amount is the lessor of 2.5 times the average month’s eligible payroll costs or $10,000,000. In determining the 250% of average monthly payroll costs, business should consider the average monthly eligible payroll costs incurred during the one-year period before the date on which the loan is made.
 
If you are a seasonal employer, the monthly average cost will be calculated differently. The SBA will use the 12-week period starting February 15, 2019 or at the election of the applicant the period of March 1, 2019 through June 30, 2019. If your business did not exist before June 30, 2019, the SBA will look at average monthly payroll from January through February 2020.
 
For purposes of calculating the loan size, payroll costs are defined as:
  • Employee salary, hourly wages, tips and commissions
  • Sole proprietor income or independent contractor compensation
  • Vacation, family medical or sick leave payments
  • Allowance for dismissal
  • Group health benefits including insurance premiums
  • Retirement benefits
  • State/local tax assessed on compensation of employees
  • Maximum compensation per individual is $100,000 annually
 
Payroll costs exclude:
  • Compensation of an individual person in excess of $100,000 (as prorated for the period)
  • Federal employment taxes imposed or withheld taxes
  • Compensation to an employee whose principal residence is outside of the U.S.
  • Qualified sick leave, for family leave wages, for which a credit is allowed under Section 7001 of the Families First Coronavirus Response Act
 
How Can The Loan Be Used?
The loan can be used for the following purposes: 

  • Employee salary or wages, cash tips or equivalent payments
  • Vacation, parental, family, medical, or sick leave payments-exclusive of those for which a tax credit is allowed under Section 7001 or 7003 of the Families First Coronavirus Response Act
  • Payments required for the provision of group healthcare benefits, including insurance premiums
  • Mortgage payments, rent and utility payments
  • Interest on debt obligations incurred prior to February 15, 2020
 
How Does The Loan Forgiveness Work?
Loan recipients can be eligible for forgiveness for an amount equal to the amount actually paid for payroll costs, salaries, benefits, rent, utilities and debt interest during the eight weeks following disbursement of the loan.

  • The forgiveness amount is subject to reduction if there is a workforce reduction or a reduction in the salary or wages of an employee.
  • The amount attributable to a workforce reduction will be equal to the initial forgiven amount multiplied by the quotient of average FTEs during the eight-week period divided by the average FTEs for the period from February 15, 2019 through June 30, 2019, or January 1, 2020 through February 29, 2020, as determined by the recipient
  • The amount attributable to a salary or wage reduction will be the amount of any salary or wage decrease in excess of 25 percent of the total salary or wages during the most recent full quarter such employee was employed before the eight-week period. Only employees who did not receive, during any single pay period during 2019, wages or salary at an annualized rate of pay in excess of $100,000 are included in this calculation.
 
Reductions in workforce, salaries and wages that occur from February 15, 2020 to April 26, 2020 will be disregarded for purposes of reducing the forgiveness amount so long as the reductions are eliminated by June 30, 2020. If a covered loan has a remaining balance after the forgiveness described above, it will have a maximum maturity of 10 years and an interest rate not exceeding 4 percent. Lenders must defer payments under the loan for at least six months and up to one year.
 
Eligible recipient seeking loan forgiveness will need to submit proof to lender supporting calculations for the forgiveness amount and certify amounts were spent on appropriate items. Amounts forgiven under this section will be excluded from gross income for taxability considerations.
 
How to Apply & Requirements?
The process of how to apply for this loan has not been formally announced by the Department of Treasury. The Act makes note that this process must be formalized within 15 days of the bill being signed into law. The SBA is authorizing banks and other commercial lenders currently authorized to make SBA loans to originate and administer the new loan program.
 
Similar to the SBA Disaster Loan, it will be free to apply.
 
You will need to make a good faith certification that the loan is necessary as a result of economic uncertainty caused by COVID-19 and will be applied to maintain payroll and make required payments. Borrowers must also certify they are not receiving assistance and duplicative funds for the same use from another SBA program.
 
In preparation for the loan application, we recommend you start preparing an analysis of your trailing twelve months monthly payroll costs, gathering payroll returns and updating your 2020 books and records immediately.
 
What if I applied for the Emergency Economic Injury Disaster Loan?
A borrower that has taken out an SBA Economic Injury Disaster Loan (EIDL) between the period January 31, 2020 through the date of the Paycheck Protection loans are first made available is eligible for an additional loan through the PPP. Their EIDL must be for purposes  other than  payroll costs and the other qualified expenses covered by the PPP. The CARES Act provides a limitation on a borrower receiving assistance via the PPP and EIDL through SBA for the same use.
 
You can apply for the EIDL now and the PPP loan when it becomes available. If you qualify and accept the EIDL (including the emergency EIDL grant) and you subsequently qualify for the PPP, you can refinance the EIDL with the PPP loan. This could be a consideration for borrowers with immediate financing needs. The emergency EIDL grant award of up to $10,000 would be subtracted from the amount forgiven under the PPP. If you qualify for both loan programs, you could also just decide to accept one of them. Loans are limited to one per Taxpayer Identification Number.
 
Economic Injury Disaster Loan & Emergency Grant
 
What is an Economic Injury Disaster Loan?
The Economic Injury Disaster Loan Program (EIDL) can provide up to $2 million of financial assistance to small businesses or private, non-profit organizations which suffer substantial economic injury as a result of the declared disaster. This is regardless of whether the applicant sustained physical damage. Actual loan amounts are based on the amount of economic injury.

The CARES Act dramatically expands the availability of EIDL and streamlines the application process. Small businesses can apply for an EIDL directly through the SBA online portal.
 
What has changed?
EIDL are now available throughout the U.S., whereas previously they were only available in declared disaster areas. The CARES Act expands eligibility for EIDL beyond the previous definition of “Small Businesses” to include:

  • A business with 500 or less employees
  • Tribal businesses, cooperatives and ESOPs with 500 or less employees
  • Any individual operating as a sole proprietor or an independent contractor
  • Private nonprofits and small agricultural cooperatives
 
For EIDL completed before December 31, 2020, the SBA will no longer require personal guarantees (or advances) for those loans under $200,000 . The SBA has also changed the requirement of how long borrowers must be in business, from one full year to now only as of January 31, 2020. Additionally, they will no longer require borrowers to demonstrate they are unable to obtain credit elsewhere. 
 
For EIDL which close before December 31, 2020, all credit decisions will be made solely based on the credit score of the applicant or an appropriate method establishing the borrower’s ability to pay .
 
EIDL applicants may also request an emergency grant directly from SBA of up to $10,000.
 
What is the Emergency Economic Injury Grant?
The CARES Act includes $10 billion in funding to provide advance emergency grants of $10,000 to entities that also apply for a SBA EIDL. These emergency grants will be provided to applicants within three days of applying for the loan. The grant is available to small businesses, private nonprofits, sole proprietors and independent contractors, tribal businesses as well as cooperatives and employee-owned businesses.

In advance of disbursing the advance payment, the SBA must verify the entity is an eligible applicant for an EIDL. Applicants which do not certify eligibility with the SBA would be under penalty of perjury.

The emergency grant does not need to be repaid, even if the grantee is subsequently denied an EIDL. The grant may be used for the following:

  • Provide paid sick leave to employees
  • Maintain payroll
  • Meet increased production costs due to supply chain disruptions
  • Cover business obligations, including debts, rent and mortgage payments
 
Eligible grant recipients must have been in operation as of January 31, 2020.

              
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