By Sharon C. Lincoln and Eric W. Dyer
The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) includes the Paycheck Protection Program, a new initiative that makes it easier for eligible organizations to obtain loans through the Small Business Administration (“SBA”) in order to keep operations running and retain employees.
An eligible organization may receive a loan covering up to 2.5 months of its average monthly payroll costs (with some limitations). A significant portion of the loan may be eligible for tax-free forgiveness.
A summary of the Paycheck Protection Program is as follows:
Duration and Terms
The Program is available until June 30, 2020 or until SBA guarantees authorized under the CARES Act reach the $349 billion limit. It is expected that the SBA will confirm guarantees on a first-come, first-served basis.
Interest on loans made under the Program is 1.0%. In addition, payments of principal, interest, and fees will be deferred for six months.
Typical SBA borrower and lender fees are waived under the Program. Borrowers are not required to personally guarantee the loans under this program and no collateral is required.
The Program is accessible to any business entity, section 501(c)(3) nonprofit organization, section 501(c)(19) veterans organization, and Tribal business concern that has no more than 500 employees or meets the size standard established by the SBA (based upon the relevant industry in which the entity operates). Note that this program is not available to non-charitable tax-exempt organizations (apart from veterans organizations) such as social welfare organizations, agricultural cooperatives or business leagues.
Organizations with multiple physical locations, not more than 500 employees per physical location, and a NAICS code beginning with 72 (i.e., the accommodation and food services sector) are eligible to participate in the Program.
Affiliation rules apply to aggregate related entities (and their employees) for purposes of determining eligibility for the Program. However, such rules do not apply to organizations with a NAICS code beginning with 72, organizations operating as a franchise, and organizations receiving funding from a small business investment company licensed under section 301 of the Small Business Investment Act of 1958.
The Program is also available to sole proprietors, independent contractors, and self-employed individuals.
Eligible organizations must certify that:
- The uncertainty of current economic conditions makes the loan request necessary to support the organization’s ongoing operations;
- The funds will be used to retain workers, maintain payroll, or make mortgage interest payments, lease payments, and utility payments;
- The organization does not have another application pending for a Paycheck Protection Program loan for the same purpose and amounts;
- During the period beginning February 15, 2020 and ending on December 31, 2020, the organization has not received any amounts under the Program for the same purpose and duplicative of amounts applied for or received under the Program.
Loan Amount Tied to Payroll Costs
An eligible organization is able to receive a loan equal to the lesser of $10 million or 2.5 times the organization’s average monthly payroll costs for the one-year period preceding the loan origination date. The Act provides special accommodations for entities that have been in existence for less than one year and for seasonal employers.
For purposes of determining the maximum loan amount, the per employee payroll cost may not exceed $100,000. Certain other exclusions also apply (for example, the compensation of an employee whose principal location is outside of the United States may not be included in the calculation of an organization’s average monthly payroll costs).
For sole proprietors and independent contractors, payroll costs include the sum of payments of any compensation 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 per year or pro-rated as provided under the Program.
The loan may be used to cover payroll costs, salaries and commissions, benefits such as paid vacation time, maternity, sick leave and health care, and certain other obligations such as mortgage interest, rent, utilities, and debt incurred prior to February 15, 2020.
Tax-Free Loan Forgiveness
The Paycheck Protection Program offers a certain degree of loan forgiveness so long as the amount forgiven was solely used to maintain payroll and pay mortgage interest, rent, and/or utilities.
The amount eligible for forgiveness relates to expenses incurred and paid during the first eight weeks following the origination of the loan and will be reduced in proportion to the reduction in the borrower’s workforce during this period as well as by the amount by which the employer reduces any employee’s pay by more than 25% during this period. In addition, not more than 25% of the forgiven amount may be for non-payroll costs.
Amounts forgiven under the Program are not taxable.
Any portion of the loan that is not forgiven may be repaid over a term of 2 years from the date the organization applies for loan forgiveness.
The Act provides that priority for the loans under the Program should be given to small business concerns and entities in underserved and rural markets, including veterans and members of the military community, small business concerns owned and controlled by socially and economically disadvantaged individuals, women, and businesses in operation less than 2 years.
An organization that would benefit from the Paycheck Protection Program should take the following steps:
- Contact its bank and ask if the bank is planning to offer loans under the Program. If the answer is “no,” contact a nearby bank that is an SBA preferred lender.
- Prepare the application form. The application form is here.
- Compile the appropriate documentation, including documentation that shows the following:
- The number of full-time equivalent employees on payroll.
- The dollar amounts of payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities for the eight week period following the making of the loan.
As noted above, the Act defines payroll costs broadly, to include wages, salaries, retirement contributions, health care benefits, covered leave and the payment of state or local tax assessed on the compensation of employees.
Applications for small businesses and sole proprietors may be submitted to SBA approved lenders starting Friday April 3. Applications for independent contractors and self-employed individuals may be submitted to SBA-approved lenders starting Friday April 10.
Borrowers may also want to review the Fact Sheet issued by Treasury on March 31, 2020, available here.
The CARES Act authorizes the SBA to provide economic injury disaster loans (“EIDL”) to small businesses as well as to private nonprofit organizations (of any size) and agricultural cooperatives. A loan advance in the form of an emergency grant may be issued to an eligible organization that has applied for an EIDL. The emergency grant may not be in excess of $10,000 and the SBA must distribute the grant within three days.
If the SBA denies the organization’s EIDL application, the emergency advance funds do not need to be repaid and may be used for payroll costs, increased material costs, rent or mortgage payments, or for repaying obligations that cannot be met due to revenue losses.
Should you need assistance or have any questions concerning the Paycheck Protection Program, contact Sharon C. Lincoln at email@example.com or your Casner & Edwards attorney.