*UPDATED* General Information on the CARES Act Paycheck Protection Program:
This Program allows banks to lend directly to businesses, and those loans will be backed by the Small Business Administration (“SBA”). This bill provides covered loans to small businesses affected by COVID-19, enabling them to pay their employees’ payroll and encouraging them to retain employees during this economic hardship. Each covered loan has at least a six-month payment deferral, and is capped at a 1% interest rate. The coverage period for the loan begins on February 15, 2020 and lasts until June 30, 2020. The Program is first-come, first-served; therefore, we recommend that businesses apply for their loan as soon as possible.
On Thursday, April 2nd, the SBA issued an Interim Final Rule regarding the implementation of the Paycheck Protection Program. This Interim Final Rule became effective without advance notice and public comment because Section 1114 of the CARES Act authorized the SBA to issue regulations to implement without regard to notice requirements, due to the emergent nature of the CARES Act. The Interim Final Rule still invites public comments that the SBA plans to consider those comments and any potential updates needed as the Program rolls out.
The application period for the Program’s loans opened on Friday, April 3rd. However, due to the newly provided SBA guidance from the Interim Final Rule, many lenders are holding off on reviewing applications until they can review the guidance.
Do I qualify for a Paycheck Protection Program Loan?
Small businesses, non-profits, tribal businesses, veteran’s organizations, sole proprietorships, self-employed individuals, and independent contractors with 500 or fewer employees are eligible to participate. Certain industries may have more than 500 employees if they meet the SBA’s size standards for those industries (e.g., Breweries and other Beverage Product Manufacturers).
How do I apply?
Eligible participants must make a good faith certification that the current economic uncertainty caused by COVID-19 makes the loan request necessary to support its ongoing operations, and that funds will be used to retain workers and maintain payroll and other debt obligations. The applications are through the lending institutions that are approved to participate in the Program. Even though the application period runs through June 30, 2020, businesses should begin the application process as soon as possible by reaching out to banking contacts and preparing payroll records for use in the application.
What can I use the loan for?
Borrowers can use the loan funds for payroll costs; employee salaries; costs for benefits during paid sick, family or medical leave; insurance premiums; mortgage interest payments; rent; utilities; and interest on other debt obligations incurred before February 15, 2020.
How much can I get with the loan?
The loans have a maximum amount calculated as the average total monthly payments for payrolls costs incurred during the year prior to the loan multiplied by 2.5, with a limit of $10 million.
What is included in payroll calculation:
- Salary; wage; commission; cash tips; and similar compensation.
- Vacation, family, or medical leave (except sick and family leave wages for which a credit is allowed under the Families First Coronavirus Response Act).
- Severance and retirement pay.
- Health insurance premiums or other group health care benefits.
- State and local tax on employee compensation.
What is excluded in payroll calculation:
- Compensation of an employee who earns more than $100,000 per year (prorated for the period February 15 to June 30, 2020).
- Compensation and income taxes of an employee located outside of the United States.
- Payroll taxes and railroad retirement taxes.
Do I have to put up any guaranty or collateral?
No, unlike other SBA-backed loans, owners do not need to provide personal guarantees or put up their available assets as collateral.
Can I get my payroll tax payment deferred?
Under a different section of the CARES Act, the employer’s portion of employee’s payroll social security tax (6.2%) due on wages paid from March 27, 2020 to January 1, 2021 can be deferred. Fifty percent of the taxes will need to be paid no later than December 31, 2021 and the remaining fifty percent will need to be paid no later than December 31, 2022. However, if the taxes are being paid with the loan, they cannot be deferred.
Can I qualify for forgivable loans under this Program?
A borrower shall be eligible for loan forgiveness. However, there are restrictions: the portion of the loan that is forgivable is only from expenses going towards payroll (for employees salaried at less than $100,000 per year), interest payments on mortgages (incurred prior to February 15, 2020), payments of rent (prior to February 15, 2020), and payments on any utility (for which service began before February 15, 2020).
How much is forgivable?
The amount forgivable equals the amount spent by the borrower during the 8-week period following receipt of the loan on the above-listed expenses. Additionally, no more than 25% of the loan forgiveness amount may be attributable to non-payroll costs.
Importantly, the amount of loan forgiveness will be reduced if there is a reduction in the number of employees or a reduction of greater than 25% in employee wages.
Reduction for Employee Headcount: Forgiveness is reduced by either the average number of full-time employees per month for the 8-week period beginning on the loan date divided by the average number of full-time employees per month during the coverage period or the average number of full-time employees per month during January and February 2020.
Reduction for Wage Decrease: Forgiveness is reduced by any decrease in total salary of any employee during the 8-week period from loan date that is in excess of 25% of the total salary of that employee during the most recent full quarter, which would be the first quarter of 2020.
How do I apply for forgiveness?
The borrower must submit an application for forgiveness to the lender, including documentation verifying employees and additional information. The SBA indicated in the Interim Final Rule that more information will be available on applying for forgiveness in the coming weeks.
What about the portion that is not forgiven?
As noted above, these loans have a maximum interest rate of 1% with an option to defer payments of interest and principal for at least six months. Further, there is a maximum maturity of two years for these loans.