Updated Information on the CARES Act Paycheck Protection Program and Loan Forgiveness

By: Robert Best & Allyson Moore
June 10, 2020

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.

On May 15th, the SBA released the loan forgiveness application. The following week, the SBA issued additional comments for businesses and banks to better understand the loan forgiveness process. The SBA plans to continue issuing guidance and comments in the coming weeks, particularly in response to any forthcoming legislative changes.

On May 28th, the House of Representatives passed (417-1) the Paycheck Protection Program Flexibility Act (HR 7010) aiming to, as the name suggests, allow more flexibility for business owners. On June 3rd, the Senate passed the House version of the Paycheck Protection Program Flexibility Act and on June 5th, President Trump signed HR 7010 into law.  

What’s new in the Paycheck Protection Program Flexibility Act?

The Paycheck Protection Program Flexibility Act (“PPPFA”) provides six key changes to the prior program:

1.         Borrowers now have the option to elect to extend the 8-week time period to spend the funds to 24 weeks (six months).

2.         Borrowers must now spend at least 60% of the loan on payroll, or else none of the loan will be forgiven.

3.         Borrowers now have until December 31, 2020 to restore their workforce levels and wages as required for full forgiveness.

4.         Borrowers may now delay payment of their payroll taxes.

5.         There are two new exceptions allowing borrowers to get full forgiveness even if they do not fully restore their workforce by December 31st (lack of qualified workers or limited business operations due to COVID-19 restrictions).

6.         Borrowers have up to five years to repay the loans at the 1% interest rate.

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.

Yes, there is a 30-day window following a negative finding that borrowers may choose to appeal. The SBA will release additional guidance on the appeals process in coming weeks. 

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 the PPPFA, 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 now be deferred even if the employer is the recipient of a PPP loan. 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.

Can I qualify for forgivable loans under this Program?

A borrower shall be eligible for loan forgiveness. However, there is a triggering requirement and a few restrictions: first, the borrower must use 60% of the PPP loan for payroll to trigger forgiveness; second, 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 or now, borrowers can choose to extend that 8-week period to 24 weeks. Additionally, as stated above, at least 60% of the loan must be used for payroll or none of the loan will be forgiven.

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 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 from the 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.

The PPPFA has now pushed back the 8-week, June 30th deadline to December 31st, allowing businesses more time to rehire workers to achieve full forgiveness. Additionally, the new measures provide two exceptions for loan forgiveness for employers who are unable to rehire an employee (or a replacement) due to restrictions imposed to comply with social distancing guidelines or an inability to hire a similarly qualified employee.

How do I apply for forgiveness?

The borrower must submit an application for forgiveness to the lender, the application must be accompanied by the following: (1) Certification (in the application form); (2) Documentation verifying payroll and non-payroll costs; and (3) Calculation of payroll and non-payroll costs. The lender will then have 60 days to issue a decision on the loan forgiveness application.

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. The PPPFA has extended the minimum loan term to five years, while still maintaining the 1% interest rate.

Will the SBA review my loan?

Possibly, the SBA has discretion over which PPP applications it will review. If selected, the SBA could review both borrower eligibility and the loan amounts and use of proceeds. For borrower eligibility, the SBA has stated that it does not plan to review whether there was an economic necessity, so long as the loan amount is under $2 million.

How long do I need to maintain records in case the SBA reviews my loan?

The PPP requires borrowers to maintain records for six years after the loan is either forgiven or paid in full. However, the SBA may review any borrower’s loan application at any time.

If the SBA determines my loan is ineligible, can I appeal?

Yes, there is a 30-day window following a negative finding that borrowers may choose to appeal. The SBA will release additional guidance on the appeals process in coming weeks.