CARES Act – Paycheck Protection Program

By: Timothy Lynn

Payroll Protection Program

As part of the CARES Act, the SBA 7(a) Loan Program would provide significant assistance to small businesses in the form of potentially forgivable loans.

Eligibility:

Eligible businesses include:

1. Small business concerns
2. Any for-profit business with fewer than 500 employees
3. Any 501(c)(3) or (19) not-for-profit with fewer than 500 employees

To be eligible for a Small Business Interruption Loan, the applicant must have been in operation on February 15, 2020 and had employees for whom applicant paid salaries and payroll taxes or independent contractors to whom it issued a Form 1099-MISC.

Loan Terms:

• These loans are nonrecourse loans. No personal guarantees are required except for “bad actor” liability for misuse of loan proceeds.
• Interest rate cannot exceed 4%.
• Unavailability of credit from other sources does not apply to loans made during the covered period.
• SBA fees are waived.
• No collateral.
• Maximum maturity of 10 years. The SBA guarantee continues for the whole term.
• Deferment of payment of principal, interest and fees for no less than 6 months and no more than one year.
• No prepayment penalties.

These Small Business Interruption Loans would be available for a covered period of February 15, 2020 to June 30, 2020.

Loan Forgiveness:

A borrower for a Payroll Protection Loan is eligible for forgiveness in an amount equal to the sum of the following costs incurred during the 8 weeks after the origination of the loan:

1. Payroll costs (definition below)
2. Payment of interest on a covered mortgage obligation (pre-dating February 15, 2020)
3. Payment of covered rent (lease agreement in force before February 15, 2020)
4. Any covered utility payment (service began before February 15, 2020)
Forgiven amounts are treated as cancelled debt. SBA covers the full amount forgiven by payment to the lender. Forgiven amounts are not cancellation of debt income for federal income tax purposes.

The amount forgiven may be reduced if employment levels decrease or salaries and wages decrease. Exceptions are provided for employers who laid off workers after February 15, 2020 but brings them back to work before June 30, 2020.

Loan Amount:

Maximum loan amount is determined as follows:

• Average total monthly payments for payroll during the 1 year period before the date on which the loan is made
• Multiplied by 2.5
• This is subject to a cap of $10 million.

Special exceptions are made for seasonal employers and employers not yet in business in 2019.

Payroll Costs means the sum of salary, wage, commission or similar compensation, cash tips or equivalent, vacation, parental, family, medical or sick leave, termination benefits, payments for group health benefits (including premiums), payment of retirement benefits, and state and local payroll taxes. It can also include compensation to or income of a sole proprietor or independent contractor.

Payroll Costs excludes payment in excess of an annual salary of $100,000 (for employees, sole proprietors and independent contractors).

Permitted Uses of Loan Proceeds:

Small Business Interruption Loans may be used for the following purposes:

1. Payroll costs
2. Costs for continuing group health benefits during periods of paid sick, medial or family leave (including insurance premiums)
3. Employee salaries or similar compensation
4. Interest on mortgage obligations (no payment of principal)
5. Rent
6. Utilities
7. Payment of interest on other debt obligations incurred before the covered period (i.e., incurred before February 15, 2020).

Express Loans: The limits for express loans is increased to $1 million until January 1, 2021 (at which time it returns to $350,000).

Borrower Certifications:

1. That the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient;
2. Acknowledging that funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments;
3. That the eligible recipient does not have an application pending for a loan under this subsection for the same purpose and duplicative of amounts applied for or received under a covered loan; and
4. During the period beginning on February 15, 2020 and ending on December 31, 2020, that the eligible recipient has not received amounts under this subsection for the same purpose and duplicative of amounts applied for or received under a covered loan.