Kuhn Rogers PLC has been closely monitoring federal, state and local reaction to COVID-19 and how businesses are affected, including the CARES Act. On March 27, 2020 the bill, known as the Coronavirus Aid, Relief, and Economic Security (CARES) Act was fully passed by Congress and immediately signed by President. The focus of the bill ranges from small business interruption to individual, family, and business economic relief. While the bill also contains a number of economic and healthcare response-related provisions, this analysis focuses on the Paycheck Protection Program.
The CARES Act provides economic relief with a newly-created tool: the Paycheck Protection Program (“PPP”). The program targets businesses, 501(c)3 non-profits, Tribal businesses, and veteran’s organizations with 500 employees or less as eligible for federally insured, partially forgivable loans that can be used to cover short-term operating expenses during the economic crisis. The maximum loan size is equivalent to 250% of the employer’s average monthly payroll costs over a 1-year period or $10 million, whichever is less. Payroll costs are defined broadly to include wages, salaries, retirement contributions, covered leave, and other expenses. This program expands the existing Small Business Administration (“SBA”) loan program and allows the SBA to provide additional loans and loan forgiveness to businesses and certain individuals as a result of the COVID-19 pandemic. PPP loans may be obtained by contacting an SBA-approved lender. The SBA will provide loans through the PPP during the covered period, from February 15, 2020 to June 30, 2020.
The SBA has prepared guidance titled “Interim Final Rule” and application forms so the SBA institutions can process applications. It will be important to get your application in as soon as possible, as funding is limited. Below are answers to many of the questions that you may have regarding this program. Should you have any question please feel free to reach out to us. Please note the significant differences between CARES Act (PPP) and the Interim Final Rule:
- Term: 2 years instead of possible maximum term of 10 years;
- Forgiveness: 75% of loan proceeds must be used for payroll costs;
- Deferral: 6 months instead of possible 12 months;
- Interest: 1% instead of maximum amount 4%;
- Borrowers can only apply for one PPP loan; and
- Potential liability for misuse of funds.
Does your Business Qualify?
The PPP expands existing SBA coverage. The following types of entities qualify for loans through the PPP:
Small Businesses & Certain Nonprofit Organizations
Small Businesses, 501(c)3 organizations, veteran’s organizations, and tribal businesses that either employ 500 or fewer employees or employ not more than the size standard established by the SBA for their industry are eligible for the PPP.
Entrepreneurs & Independent Contractors
The PPP also extends coverage to eligible sole proprietors, independent contractors, and self-employed individuals. In order to receive a loan through the PPP, these individuals must furnish certain documentation, such as Form 1099-MISC and profit and loss statements to establish eligibility.
Food & Hospitality Sector
A business that has more than one physical location, but is designated under NAICS code 72, the Food and Hospitality Sector, is eligible for a PPP loan as long as each location does not employ more than 500 employees. This includes franchise organizations.
Key Limitations & Requirements
The following are examples of some generally-applicable limitations, expansions, and requirements. The SBA will provide loans through the PPP during the covered period: February 15, 2020 to June 30, 2020.
- Maximum interest rate of 1 % and SBA application fees are waived.
- During the covered period, no collateral or personal guarantee shall be required for the loan.
- The maximum loan size is equivalent to 250% of the employer’s average monthly Payroll Costs, which are defined below, during the 1-year period prior to when the loan is made or $10 million, whichever is less.
- Payroll Costs are capped at $100,000 per employee on an annualized basis.
- Special calculation rules apply for seasonal workers and self-employed individuals.
- Loans may be used for operational expenses such as Payroll Costs, which include continuing costs associated with group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums; employee salaries, commissions, or similar compensations. Additionally, the loan proceeds can be used to pay the interest on mortgage obligations; rent; utilities; interest on other debt so long as that debt obligations was incurred before the covered period. Collectively these costs are authorized purposes.
- Loans will be forgivable to the borrower as long as the loans are not used for unauthorized purposes, such as compensation for employees with a primary residence outside the U.S.
- Canceled indebtedness shall be excluded from gross income for federal income tax purposes.
- Complete payment deferment for at least six months and up to 12 months.
- No requirement that applicant is unable to obtain credit elsewhere.
- No pre-payment penalty.
- Business must maintain its March 24, 2020 employment levels through September 30, 2020 as much as practicable, and in any case shall not reduce its employment levels by more than 10%
WHAT ARE PAYROLL COSTS?
the term ‘Payroll Costs’—
(aa) the sum of payments of any compensation with respect to employees that is a—
(AA) salary, wage, commission, or similar compensation;
(BB) payment of cash tip or equivalent;
(CC) payment for vacation, parental, family, medical, or sick leave;
(DD) allowance for dismissal or separation;
(EE) payment required for the provisions of group health care benefits, including insurance premiums;
(FF) payment of any retirement benefit; or
(GG) payment of State or local tax assessed on the compensation of employees; and
(bb) 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; and
(II) shall not include—
(aa) the compensation of an individual employee in excess of an annual salary of $100,000 as prorated for the covered period;
(bb) taxes imposed or withheld under chapters 21, 22, or 24 of the Internal Revenue Code of 1986 during the covered period;
(cc) any compensation of an employee whose principal place of residence is outside of the United States;
(dd) qualified sick leave wages for which a credit is allowed under section 7001 of the
Families First Coronavirus Response Act (Public Law 116–6 127); or
(ee) qualified family leave wages for which a credit is allowed under section 7003 of the Families First Coronavirus Response Act (Public Law 116–12 127).
General Borrower Requirements
If an entity or individual is eligible for the PPP above, then PPP loans will be extended as long as the borrower was in business on February 15, 2020, and it paid employees or independent contractors. In addition, any person applying for the loan must make a good faith certification that the uncertainty of current economic conditions justifies the loan request to support the ongoing operations of the borrower. The applicant must also acknowledge that funds will be used to retain workers and maintain payroll.
Lenders will have delegated authority to allow the bank to process, close and service a loan without SBA review. All borrower and lender fees will be waived, along with collateral and personal guarantee requirements. Principal, interest, and fees will be automatically deferred for six months. You can search for SBA lenders at the link below:
Interaction with Economic Injury Disaster Loans
A business can obtain a new Paycheck Protection loan AND an SBA Economic Injury Disaster Loan so long as they are used for different expenses. The emergency EIDL grant award of up to $10,000 would be subtracted from the amount forgiven under the Paycheck Protection Program.
Loan Forgiveness Under the PPP Overview
One of the main features of the PPP is that loan forgiveness will be available for certain operational expenses incurred by the borrower in the first eight weeks after the loan’s origination. These operational costs are generally the same as the operational costs that are allowable uses for the PPP loans, such as Payroll Costs, rent, utilities, interest on mortgage obligations, healthcare premiums and payments of other debts incurred prior to February 15, 2020. You will owe money when your loan is due if you use the loan amount for anything other authorized costs over the 8 weeks after getting the loan. You will also owe money if you do not maintain your staff and payroll.
- Number of Staff: Your loan forgiveness will be reduced if you decrease your full-time employee headcount.
- Level of Payroll: Your loan forgiveness will also be reduced if you decrease salaries and wages by more than 25% for any employee that made less than $100,000 annualized in 2019.
- Re-Hiring: You have until June 30, 2020 to restore your full-time employment and
salary levels for any changes made between February 15, 2020 and April 26, 2020
How to Apply for Loan Forgiveness
In order to apply for loan forgiveness, an eligible recipient can submit an application to the lender that originated its loan, including:
- Documentation verifying the number of full-time equivalent employees and relevant pay rate, including state and federal payroll and unemployment filings;
- Documentation verifying covered payroll, interest on debt obligations, leaves, and utility payments (such as, canceled checks, receipts, and account statements);
- A certification from the recipient that all documentation presented is true and correct AND the amount for which the forgiveness is requested was used for permissible purposes; and,
- Any other documentation as required by the SBA.
Lenders are required to issue a loan forgiveness decision within 60 days; they will be repaid 90 days after the date on which the amount of forgiveness is determined. Any amount that is not forgiven will be guaranteed by the Administration.
Subsidy for Certain Loan Payments
In its passage of the CARES Act, congress included a provision creating subsidies for certain SBA loans. This legislation noted that all borrowers are adversely affected by the COVID-19 and, as a result, relief payments by the SBA are appropriate for all borrowers.
For any loan guaranteed under section 7(a) of the Small Business Act, excluding those made under the Paycheck Protection Program, the SBA shall pay principal, interest, and associated fees in a regular servicing status for various loans for six months. The borrower is relieved of any payment of such amounts.