Under the recently passed Coronavirus Aid, Relief, and Economic Security (CARES) Act, the federal government is providing a wide array of programs designed to help small businesses, nonprofits and other employers, weather through the economic storm caused by COVID-19. Many of the programs have staggering amounts of funding but the funding is still running out. Additional funding is being discussed, but nothing is yet approved. Regardless of funding, the application process is brief and therefore we continue to recommend that everyone consider applying.
As we discussed in a recent article, a leading benefit of the CARES Act is the Paycheck Protection Program (the “PPP”). The PPP is a new program funded by the CARES Act and administered through the Small Business Administration (the “SBA”). It provides small businesses cash flow assistance through federally guaranteed loans in order to retain employees. PPP loans are 100% guaranteed by the federal government: business owners do not need to personally guarantee the loans or put up any collateral. More importantly, all or a portion of the loan is forgivable if certain criteria are met. We expect the vast majority of these loans will be forgiven. Finally, a PPP loan must be taken out before June 30, 2020 from a bank that is an authorized SBA lender.
Key Benefits of PPP Loans.
One of the most significant benefits of a PPP loan is the potential for complete loan forgiveness. If an employer uses the loan to primarily maintain its payroll, and pay other expenses like rent and utilities, the loan will be forgiven i.e., the employer will NOT need to repay the loan. By allowing this forgiveness, the federal government is hoping employers will keep workers employed, and put needed money (consumer spending) back into the economy.
In addition to forgiveness of up to eight (8) weeks of payroll and payroll related expenses, PPP loans have a host of other attractive terms. There are no SBA fees, a 1.0% interest rate on any amount not forgiven and at least six months of deferral before any repayment starts.
To qualify for loan forgiveness, an employer will have to provide documentation to confirm the calculation of the amount requested, how the loan was spent, what and how much of a salary reduction was imposed on any employees, and how has the employer’s employee headcount been impacted, if at all.
How much can be borrowed?
The maximum amount of a PPP loan is 2.5 times the average monthly payroll costs of the employer. Under the statute and the most recent guidance issued by the federal government on April 13, 2020 (the “Guidance”), this monthly average is based on the 12-month period prior to the date of the loan. However, in another part of the Guidance, and based on the PPP application, this monthly calculation is based on the 2019 calendar year. There is no answer to this controversy but we are using the 2019 calendar year. Beyond this controversy, there are special rules for seasonal employers and employers who were not in existence for either12-month period. A few important items employers should keep in mind when calculating the requested loan amount are:
• Only the first $100,000 of annual compensation per employee can be counted;
• Payroll costs include pay, benefits, state payroll taxes (but the employer’s portion of FICA taxes are not included), and severance pay; and
• Independent contractors receiving 1099 forms can be counted as employees when calculating your headcount, but their compensation will not be an approved payroll expenditure. This seems inconsistent but it is another issue related to how the statute was drafted.
How to Qualify for Loan Forgiveness?
The portion of a PPP loan which can be forgiven are monies used to pay the payroll costs for the first eight (8) weeks after the loan is taken, plus the following expenses during the same 8-week period, to the extent these costs do not exceed 25 percent of total of the amount to be forgiven:
• Interest on any mortgage obligation of the business;
• Rent payments;
• Utility payments;
• Employee benefits (including healthcare and retirement);
• State Payroll taxes (but not the employer’s portion of FICA); and
• Certain other items not listed here.
Unfortunately for some small businesses, the amount of a PPP loan which can be forgiven can be reduced under the following two circumstances:
• If the pay of any individual employee has been reduced by more than 25% from what it was before the 8-week period; and
• If the employer has reduced the number of full-time equivalent employees prior to the 8-week period.
In certain instances, the reductions discussed above can be waived in whole or in part if the employer reinstates lost wages for affected employees and returns its number of full-time equivalent employees to the prior levels by June 30, 2020.
Does my business qualify for a PPP Loan?
Most businesses with 500 or fewer employees will qualify for this loan. The following requirements apply to qualify for the PPP SBA loan under the CARES Act:
• Businesses and entities must have been in operation on February 15, 2020;
• The business or entity must have been harmed by COVID-19 between February 15, 2020 and June 30, 2020;
• Types of businesses:
- Small business concerns, as well as any business concern, a 501(c)(3) nonprofit organization, a 501(c)(19) veterans organization, or Tribal business concern described in section 31(b)(2)(C) that has fewer than 500 employees;
- Individuals who operate a sole proprietorship, as an independent contractor, and self-employed individuals.
We have only highlighted the relevant sections of the Paycheck Protection Program we think are most relevant to our readers. Please click here for a link to the law to read more about its details and other benefits.
In addition to the PPP loan available under the CARES Act, a small business can also receive a loan under the Economic Injury Disaster Loan (EIDL) provisions of the CARES Act, as long as the use of the funds is not for the forgiven payroll costs of the PPP. We will look more closely at the EIDL program of the CARES Act in the coming days.
The CARES Act and the Paycheck Protection Program have just been released and there is much still to learn about its applications and its practical impact.
The subject matter discussed in this post can be very technical. It is an evolving area of law and very fact specific. Our goal here is to simply alert you to some of the key issues involved. We urge you to seek competent legal counsel before applying these ideas to your specific situation. Brody and Associates stands ready to discuss your particular needs.
