Please Note:  Client alerts relating to the CARES Act and other legislation relating to the COVID-19 pandemic will be updated periodically with new developments.  Please continue to check our website and this blog for these updates and contact our offices with any questions or assistance.

 

As background, on March 6, the Coronavirus Preparedness and Response Supplemental Appropriations Act was passed (Round 1).  On March 18, the Families First Coronavirus Response Act was passed (Round 2).  On March 27, the President signed into law the CARES Act (Round 3).  This third act includes a $2 trillion relief package.

The focus of this Client Alert is the Paycheck Protection Program.  However, there are other loan programs available, such as the Economic Injury Disaster Loans and Loan Advance, SBA Debt Relief, SBA Express Bridge Loans.  To learn more about these other programs, visit www.sba.gov.

 

THE PAYCHECK PROTECTION PROGRAM

Pivotal to Round 3 is the inclusion of nearly $350 billion for a small business loan program called the Paycheck Protection Program (the “Program”).  This Program is designed to allow for small businesses that are suffering from the fallout of the COVID-19 pandemic to obtain a loan quickly, and with less red tape and fewer roadblocks than the Small Business Administration (SBA) existing loan programs.  It is also designed to incentivize business owners to keep employees on the payroll by offering loan forgiveness. In addition, even businesses that have existing SBA loans are entitled to relief under the program, as long as the pre-existing loan was not used for payroll purposes.  With these quick new developments, it is important for small businesses to understand the critical aspects of the new Paycheck Protection Program, and what concrete steps a small business may take to alleviate the economic impact on its business.

The Program has been added as a new program under Section 7(a) of the Small Business Act.

 

Covered Period for Loan

The Paycheck Protection Program is retroactive to February 15, 2020 and lasts through June 30, 2020.

Small businesses and sole proprietorships may start applying for paycheck protection loans from existing SBA lenders starting April 3.

Independent contractors and self-employed individuals may start applying on April 10.

The application period ends on June 30, 2020.

 

Eligibility

Small businesses, 501(c)(3) nonprofits, tribal businesses, and 501(c)(19) veteran’s organizations that:

• Have fewer than 500 employees and were in operation on or before February 15, 2020;
• Have more than one physical location and is assigned the North American Industry Classification System (NAICS) code that relates to the accommodation and food services industry (NAICS 72), and had 500 employees per physical location of that business; or
• Are sole proprietors, self-employed, or independent contractors.
• Nonprofit organizations are still subject to the SBA’s affiliation standards.
• Eligible franchises may be found through the SBA’s Franchise Directory at: https://www.sba.gov/sba-franchise-directory.

 

Maximum Amount for Loan

• The loan amount will be the lesser of 2.5x average monthly payroll for the preceding 12 months or $10 million.
• Based on Feb 15, 2020 payroll – includes part-time and 1099 workers.
• Most Applicants will use the average monthly payroll for 2019, excluding costs over $100,000 on an annualized basis for each employee.
• For businesses with less than 12 months of payroll history, the average monthly payroll will be calculated by the average of January and February 2020. For seasonal businesses, average monthly payroll will be calculated by taking March 1 – June 30, 2019 payroll averages.

 

Allowable Uses for the Loan (“Purpose of the Loan”)

• Payroll costs, which are capped at $100,000 on an annual basis for each employee. Payroll costs include salary, wages, commissions, vacation and sick leave, or other similar compensation;
• Rent obligations;
• Mortgage interest obligations;
• Health care benefits, including group health care coverage premiums, and retirement contributions;
• Utilities;
• State and local taxes assessed on compensation of employees; and
• Interest on existing business debt obligations incurred prior to February 15, 2020.
• For an independent contractor or sole proprietor: wage, commissions, income, or net earnings from self-employment or similar compensation.

 

Terms of the Loan Forgiveness

• The amount of principal that may be forgiven is equal to the amount spent by the borrower during an 8-week period after the origination date used to cover payroll, rent, mortgage interest payments, health care benefits, utilities. Borrowers may choose which 8 weeks they want to count towards the covered period, which may start as early as February 15, 2020.  In other words, the loan is forgiven at the end of the 8-week period after you take out the loan.
• Loan funds may not be used to pay salaries over $100,000 per year to qualify as forgivable.
• If, after amounts of the loan have been forgiven and a balance remains, the maximum maturity for the unforgiven portion of the loan is 10 years and the maximum rate is 4%.
• If a business took out an SBA Economic Injury Disaster Loan (EIDL) related to COVID-19 between January 31 and April 3, 2020, the borrower may refinance the loan under this program and receive loan forgiveness benefits on the refinanced amount.
• If a business keeps all of its employees, the entirety of the loan will be forgiven. If the business lays off employees, the forgiveness will be reduced by the percent decrease in the number of employees.
• If the business’s total payroll expenses on workers making less than $100,000 annually decreases by more than 25%, the loan forgiveness will be reduced by that same amount.
• If a business has already laid off some of its employees, the loan may still be forgiven for the full amount of the payroll cost if it rehires the employees by June 30, 2020.
• The amount forgiven may not exceed the principal amount of the loan.

 

Requirements

• IRS payroll tax filings; state income, payroll and unemployment insurance filings; financial statement verifying debt payments before the covered period.
• Documentation demonstrating expenses, including cancelled checks, payment receipts, transcripts of accounts, or other such documents on covered mortgage, lease and utility payments.
• Good faith certification that documents supporting the application are true and correct, and that proceeds were used for such purposes.
• Borrowers must also certify that they are not receiving this assistance and duplicative funds for the same uses from another SBA program.

 

Waivers and Deferments

• Borrower and lender fees ordinarily payable to the SBA are waived.
• Payments of principal, interest, and fees by the borrower are deferred for at least 6 months and up to 1 year.
• Waives collateral and personal guarantee requirements.

 

Considerations

Although the Program is aimed at assisting small businesses to keep employees on the payroll, businesses must also remember that the loan is a debt that is only forgiven under the above specific limitations.  Employers should also keep in mind other worse case scenarios that could affect the loan.  For example, if the business is forced to lay off employees even after receiving a loan, that business will be required to pay back the loan. If a business reduces its headcount requirement under the loan, then the loan forgiveness is reduced. Therefore, it is advisable for businesses to take a careful look at payroll and other fixed expenses.