On Friday, March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act of 2020 (the “CARES Act” or “Act”) passed and was signed – it is the largest economic aid package in United States history. Small businesses and sole proprietors can apply today, April 3, 2020 for this PPP loan, and self-employed individuals and independent contractors can apply April 10, 2020.
The CARES Act provides nearly $2 trillion in economic assistance to various sectors of the economy impacted by COVID-19, with a significant portion assisting small businesses.
The Act designated $349 billion in additional funding for small businesses under a modified and expended U.S. Small Business Administration (“SBA”) 7(a) loan program, establishing a new Paycheck Protection Program (“PPP”) which serves to encourage and allow small businesses to keep employees on payroll while offering a forgiveness of loan funds used for payroll and other qualified expenses for a period of eight (8) weeks. Small businesses, including sole proprietors, independent contractors, individuals, and nonprofits are capable of receiving a loan of up to the lesser of $10 million or the sum of 2.5 times the monthly average payroll for the prior twelve-month period. It is important to understand that although the loan amount is based on payroll, it can be used for payroll, salary, compensation, commissions, rent, utilities, healthcare costs and insurance premiums, interest on mortgages, and even on interest on prior debt incurred before February 15, 2020. The amount of loan forgiveness would be reduced if those on payroll are considerably less than the amount of employees the employer had prior to the COVID-19 emergency. Additionally, the PPP loan must be used seventy-five percent (75%) for payroll to be forgiven, while twenty-five percent (25%) can be used for other expenses.
Below, we will discuss the specific provisions.
What Are Small Businesses for Purposes of Receiving a Payroll Protection Loan?
Small businesses include sole proprietorships, independent contractors, and even individuals as eligible loan recipients. The Act provides eligible loan recipients with access to PPP loans during the “covered period” which is defined as February 15, 2020 to June 30, 2020. During the covered period, any business concern, 501(c)(3) nonprofit organization, 501(c)(19) veterans organization, or tribal business concern may be eligible. These businesses must employ no more than the greater of 500 employees or the maximum number established by the SBA for the pertinent industry, which could be as many as 1,500 employees. Businesses identified in the Accommodation and Food Services Industry (according to the North American Industry Classification System), such as hotels, restaurants, and bars with more than 500 employees in multiple locations may still qualify for a PPP loan so long as each operating location has 500 or fewer employees. Additionally, the affiliation rules are waived for SBA approved franchises and businesses that have received financial assistance from a SBA licensed Small Business Investment Company (SBIC). For other businesses, the affiliation rules still apply.
Applicants must submit documentation in order to be verified as eligible, including payroll tax filings reported to the IRS, Forms 1099-MISC, and income and expenses from the sole proprietorship.
Does a Small Business Have to Pledge Collateral, Guaranty the Loan or Display Inability to Obtain Other Financing?
Unlike traditional SBA 7(a) loans, personal guarantees and collateral are not required to receive PPP Loans. Additionally, the PPP loan program waives the traditional 7(a) requirement that the applicant show that credit is not otherwise available.
What Small Business Certification is Necessary for a Loan?
The Act requires that small businesses certify that the loan is necessary due to the “uncertainty of current economic conditions” and that funds will be used to retain workers, maintain payroll, or make eligible mortgage interest, rent, and utility payments. Also, the small business must certify that it does not have an application pending, nor has it applied for or received duplicative amounts for the same purposes, under another PPP loan. Additionally, the small business must certify that the documentation provided, including tax documentation is accurate and that the small business understands the limits of the forgiveness (see below) and can be held liable for fraud.
What is the Loan Amount Available to Small Businesses?
Small businesses that were in business during the duration of the prior year may receive the lesser of $10 million or 2.5 times the monthly average payroll cost for the one-year period prior to the loan. If the business was not in business from February 15, 2019 to June 30, 2019, it is eligible for 2.5 times the average total monthly payments for payroll from January 1, 2020 to February 29, 2020.
“Payroll cost” is defined as the sum of (1) all salary, wage, commission, or similar compensation; (2) payment of cash tips or their equivalent; (3) payment for vacation, parental, family, medical, or sick leave; (4) allowances for dismissal or separation; (5) payment of group health care benefits including insurance premiums; (6) payment of retirement benefits; (7) local and state tax payments on compensation; and (8) the sum of payments of any compensation or income of a sole proprietor or independent contractor in an amount under $100,000.
It is important to note that payroll expressly excludes compensation in excess of $100,000, certain federal income taxes, any compensation of an employee with a principal residence outside of the United States, and qualified sick leave wages or qualified family leave wages for which credit was already provided under the Families First Coronavirus Response Act.
This $100,000 cap may be applied to employees with over that amount, up to that amount, but the excess of $100,000 will reduce the amount of the PPP loan.
What Can the Loan be Used For?
PPP loans are not just for payroll. They may be used for payroll costs, group health care benefits and insurance premiums, rent, utilities, interest on mortgages, and interest on other debt incurred before February 15, 2020. However, PPP loan funds cannot be used for (1) compensation of annual salary above $100,000, (2) compensation of employees with a principal place of residence outside the United States, or (3) leave wages covered by the Families First Coronavirus Response Act.
What Amount of the PPP Loan is Forgivable?
A PPP loan may be fully or partially forgiven. Any portion of the loan can be used over an eight (8) week period for payroll costs, mortgage interest payments for mortgages in existence as of February 15, 2020, rent, and utility payments. A reduction in the small businesses’ workforce may result in a reduction in the forgiveness amount. In order to receive forgiveness, seventy-five percent (75%) of the PPP loan must be used for payroll costs, while twenty-five (25%) can be used for the other expenses, such as rent or mortgage interest or utilities.
Any amount forgiven under the CARES Act that would ordinarily be included as gross income to the borrower for federal tax purposes is excluded from gross income.
What Are the Loan Terms for Any Amount That Is Not Forgiven?
For the portion of PPP loans that is not forgiven, payments will be deferred for only for six (6) months, and carry an interest rate of one percent (1%), and the maturity shall not exceed two (2) years.
Overall this Act provides an incredible opportunity for small businesses to utilize a loan that is forgivable for eight (8) weeks of necessary expenses at the same time ensuring that business will continue as usual, despite this Coronavirus Crisis. Additionally, if the time period of the emergency is extended, it is likely that the forgivable period will be as well, in additional legislation.