The Coronavirus Aid, Relief, and Economic Security Act or the “CARES Act” became law on March 27, 2020. The CARES Act was passed in an effort to help small businesses continue operations and retain workers as the country meets the challenge of curbing the devastation of COVID-19 and the resulting impact such efforts have had, and will continue to have, on the economy. The CARES Act is an extensive piece of legislation. This post will focus on providing a summary of the main provisions related to the Paycheck Protection Program available to businesses with less than 500 employees.
What is the Paycheck Protection Program?
The Paycheck Protection Program (PPP) allows the Small Business Administration (SBA) to administer and work with lenders to provide forgivable loans to small businesses through June 30, 2020, to be used by borrowers for certain permissible purposes related to payroll costs and certain necessary business expenses.
Who qualifies for the Paycheck Protection Program?
To qualify for the Paycheck Protection Loan, the borrower must be:
1. A businesses with not more than 500 employees;
- Includes, individuals who operate under sole proprietorship or as an independent contractor and eligible self-employed individuals are also eligible.
- Businesses in the hospitality industry (those with a NAICS Code of 72) are eligible for a loan as long as they do not employ more than 500 employees “per physical location.”
2. Was in operation on February 15, 2020; and
3. Had employees for whom the business paid salaries and payroll taxes OR paid independent contractors as reported on Form 1099.
How much could your business receive in Paycheck Protection Loan?
During the Coverage Period for the Paycheck Protection Program (2/15/20 – 6/30/20), you may apply for a maximum amount that is equal to 2.5 times your average monthly payroll costs and qualified expenses in the one-year period before the loan is made (if you have not been in business for a year and were not in business from 2/15/19 – 6/30/19, then 2.5 times the payroll costs and expenses from 1/1/20 – 2/29/20). The interest rate on the loan may not exceed 4%.
Additionally, if you received the SBA Economic Injury Disaster Loan (EIDL) between January 31, 2020 and June 30, 2020, then you may receive an additional PPP Loan amount equal to the outstanding amount of your EIDL loan (up to $10 million) in order to refinance and convert the EIDL into a PPP loan.
What are the average monthly payroll costs and qualified expenses used to determine the loan amount?
1. “Payroll costs,” defined as the sum of payments of any compensation with respect to employees that is a –
- salary, wage, commission, or similar compensation;
- 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 or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment, 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
2. Group health care benefits paid during periods of paid sick, medical or family leave, and insurance premiums
3. Mortgage Interest Payments (does not cover prepayment or principal payments)
What could you use Paycheck Protection Program Loans to pay?
A borrower may use the Paycheck Protection Loan to pay for the expenses outlined above.
The following are impermissible uses of the loan funds:
- Compensation to any individual employee in excess of an annual salary of $100,000 as prorated for the covered period (2/15/20 – 6/30/20).
- Taxes imposed or withheld under chapters 21, 22, or 24 of IRS code.
- Compensation of any employee whose principal place of residence is outside the United States. The United States includes all states, the District of Columbia, and U.S. territories.
- Qualified sick leave or family leave wages for which credit is allows under the FFCRA. Employers will already receive a tax credit for those payments. However, the Paycheck Protection Loan could be used to pay other sick leave or family leave that does not quality for a tax credit under the FFCRA .
The principal, interest, and any fees will be deferred for 6 to 12 months loan disbursement.
How much of the loan is forgivable?
The total amount that the borrower paid for “payroll costs” as defined above, mortgage interest, rent, and utilities during the 8-week period beginning on the date the loan is disbursed to the borrower up to the principal amount. Since the maximum loan amount is for 2.5 times your average costs in these areas over the previous year, it is possible that you would spend less than the total loan amount on those same categories of qualified expenses in the 8 weeks following your receipt of the loan amount. In that case, only part of the loan would be forgivable.
The final amount that is forgiven could still be different. That is because the forgivable amount will be reduced if the borrower reduces the number of full-time equivalent employees or reduces the pay of any employee by 25% or more when compared with the fourth quarter of 2019 (and fails to bring those numbers back up by June 30, 2020).
Loan forgiveness requests will have to be submitted to lenders with documents demonstrating the dates funds were used, the amounts paid, and that the payments were for qualified expenses. Some have recommended opening a separate bank account to receive the PPP Loan disbursement and to pay qualifying expenses out of that account to streamline the documentation process.
The amount of the Paycheck Protection Loan that is ultimately forgiven will not be included in the borrower’s taxable gross income calculations.
The balance of the loan that is not forgiven will have a maximum maturity date of 10 years. The SBA is instructed to provide lenders with more detailed guidance within 30 days of the CARES Act passing.
How do I apply for the Paycheck Protection Loan?
Borrowers will need to apply for the Paycheck Protection Loan from lenders directly. It may take a couple of weeks at the very least for current SBA lenders to make applications available. Remember that loan applications must be submitted by June 30, 2020.
Is the Paycheck Protection Loan Different Than the SBA Economic Injury Disaster Loan (EIDL)?
Yes. As discussed above, the Paycheck Protection Loan may be easier to qualify for and has a maximum loan amount based on your historic payroll costs (as defined) and certain qualified business expenses, a large portion of which may be forgivable. The EIDL, however, has a higher cap on the maximum loan amount, and requires a personal guarantee or collateral on the loans for more than $200,000. However, the EIDL, does allow for a $10,000 advance, without any requirement for personal guarantee, that does not require repayment, even if the borrower ultimately does not qualify for the loan. However, if you then qualify for the Paycheck Protection Loan, the $10,000 advance from the EIDL will be deducted from the forgiveness amount.
The application for the EIDL (including the request for Advance) is available here: https://covid19relief.sba.gov/#/
The changes are coming quickly and we will continue to monitor developments to help businesses and employees to weather this storm.