On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (or “CARES”) Act, the largest stimulus in American history (the “Act”). The Act expands eligibility and loosens restraints on the Section 7(a) Loan Program of the U.S. Small Business Administration (“SBA”), authorizes up to $349 billion in new Paycheck Protection Program Loans (“PPP Loans”), makes them 100% (rather than 75%) guaranteed and provides for PPP Loan forgiveness in certain circumstances.

On April 2, 2020, the Department of the Treasury released an Interim Final Rule regarding the Paycheck Protection Program (the “PPP”). On April 3, 2020, Treasury released additional guidance on the PPP. This summary has been updated to reflect guidance provided in the Interim Final Rule.

Important Note: The following is a general summary of the Act. The Act is complicated and its implementation is dependent in part on the adoption of contemplated regulations. This analysis does not constitute legal advice, and is being provided on an informational basis only. For advice about whether and how you or your company can take advantage of the benefits of the Act, please contact your legal counsel.

WHO IS ELIGIBLE FOR PPP LOANS?

• Under the Act, PPP Loans must be made on or before June 30, 2020.
• Loans will be made on a first-come, first-served basis.
• Eligible firms include any business concern, nonprofit organization, veterans organization, or Tribal business concern that has 500 or fewer employees whose principal place of residence is in the United States.
• If a firm operates in an industry with an SBA size standard that is greater than 500 employees (e.g., Telecommunications Carriers have a size standard of 1500 employees), such firm would also be eligible.
• Companies involved in food or accommodation services are eligible regardless of their total size as long as they do not have any physical locations with more than 500 employees.
• The affiliation rules (13 C.F.R. 121.103) are waived with respect to food or accommodation service firms, certain franchisees, and companies who receive financing through the Small Business Investment Company (SBIC) program.
• For everyone else, the normal affiliation rules apply (13 C.F.R. 121.103) to determine a company’s size.¹
• SBA intends to promptly issue additional guidance with regard to the applicability of affiliation rules to PPP Loans at 13 C.F.R. §§ 121.103 and 121.301.
• To qualify under the 500 employees or less provision, the term “employee” includes individuals employed on a full-time, part-time, or other basis.
• Eligible firms must also be a small business concern as defined in Section 3 of the Small Business Act, 15 U.S.C. § 632.
• Sole proprietorships, independent contractors, and certain self-employed individuals are also eligible. Accordingly, businesses should not include 1099s when determining whether it has 500 or fewer employees.

HOW MUCH CAN BE BORROWED THROUGH A PPP LOAN?

• Generally, a PPP Loan is capped at 2.5 times the average monthly payroll costs.
• Monthly “payroll costs” are averaged over the 12 months preceding the loan.
• The instructions attached to the Final Borrower Application Form approved by Treasury and SBA indicate that most applicants will use the average monthly payroll for 2019. We believe this instruction is incongruent with the CARES Act and the guidance issued by the Treasury on April 2, 2020.
• “Payroll costs” include payments of compensation, including salary and wages, payment of vacation, sick or other leave, “allowance of dismissal or separation,”² payment of health care benefits including insurance premiums, payment of retirement benefits, payment of state of local taxes assessed on the compensation of an employee, and compensation payments to any sole proprietors or independent contractors.
• For each employee, or for each sole proprietor or independent contractor, “payroll costs” do not include compensation in excess of an annual salary of $100,000.
• Tentatively, we interpret this provision to mean that a business cannot include more than $8,333 in compensation, per person, in determining average monthly payroll costs.
• In addition, the maximum PPP Loan amount also can include the amounts of certain other outstanding SBA loans made to the borrower on or after January 31, 2020 (presumably, for the purpose of refinancing such outstanding loans).
• In no event can a PPP Loan exceed $10 million.

HOW CAN THE PROCEEDS OF A PPP LOAN BE USED?

• Allowable uses include: (1) payroll costs; (2) costs related to the continuation of group health care benefits; (3) employee salaries, commissions, or similar compensations; (4) payments of interest on any mortgage obligation; (5) rent; (6) utilities; and (7) interest on any other debt obligations that were incurred before February 15, 2020.
• Per the above section on the total borrowing cap, you can also use the PPP Loan to refinance an earlier SBA loan made during the period beginning on January 31, 2020.

WHAT MUST THE BORROWER DO BEFORE IT CAN RECEIVE A PPP LOAN?

• An otherwise eligible recipient must make a good faith certification:
• that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient;
• acknowledging that funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments; and that the eligible recipient does not have another application pending for the same type of loan or has received the same type of loan.

WHAT ARE THE TERMS AND CONDITIONS OF A PPP LOAN (FOR BOTH LENDERS AND BORROWERS)?

• Neither a personal guarantee nor collateral can be required.
• Interest rates for all loans issued under the PPP will be 1% per annum.
• SBA will reimburse processing fees to a lender authorized to make a PPP Loan equal to (a) 5% of the loan amount for loans less than or equal to $350,000; (b) 3% of the loan amount for loans more than $350,000 but less than $2,000,000; and (c) 1% of the loan amount for loans of $2,000,000 or more.
• The concept here appears to be that lenders are not making a lot of money off these loans (interest rate capped at 4%), so to incentivize lenders, SBA is reimbursing anticipated processing costs at the above pre-established rates.
• Agents are allowed to assist lenders in preparing loan applications.
• Agent fees will be paid by the lender out of the fees that the lender receives from SBA.
• Agents may not collect fees from the borrower or be paid out of PPP proceeds.
• The agents’ fees are capped at: 1% for loan amounts not more than $350,000; 0.5% for loans more than $350,000 but less than $2,000,000; and 0.25% for loans of $2,000,000 or more.
• SBA is encouraged to issue guidance to lenders and agents to ensure that the processing and disbursement of PPP Loans prioritizes small business concerns and entities in underserved and rural markets, including veterans and members of the military community, small business concerns owned and controlled by socially and economically disadvantaged individuals, women, and businesses in operation for less than two years.
• There is no prepayment penalty on a PPP Loan.
• All payments (including principal, interest, and fees) must be deferred at least 6 months, but not more than 1 year.
• Beyond that, lenders are encouraged to provide payment deferments, when appropriate, and to extend the maturity of PPP Loans, so as to avoid balloon payments or any requirement for increases in debt payments resulting from deferments provided by lenders during this period of the national emergency.

UNDER WHAT CIRCUMSTANCES WILL A PPP LOAN BE FORGIVEN?

• A PPP Loan borrower is eligible for forgiveness of indebtedness in an amount equal to the sum of the following costs incurred and payments made by the borrower during the 8 weeks following loan origination (“Baseline Forgiveness”):
• (1) payroll costs;
• (2) payments of interest on mortgage obligations incurred before February 15, 2020;
• (3) payments on rent obligation under lease agreements in force before February 15, 2020; and
• (4) payments for utilities (electricity, gas, water, transportation, telephone, or Internet access) for which service began before February 15, 2020.
• Not more than 25% of the loan forgiveness amount may be attributable to non-payroll costs. Stated differently, at least 75% of the loan forgiveness amount must be attributable to payroll costs.
• To the extent a PPP Loan is forgiven under the terms of the Act, cancellation of indebtedness income under the general tax code will not apply to such loan forgiveness.
• Forgiveness is possible up to the principal amount of the PPP Loan, if the loan was entirely used for the above four purposes.
• The percentage of the PPP Loan that will be forgiven will be reduced based on the reduction in the number of the borrower’s average number of full-time employees and the reduction in employees’ wages:
• Forgiveness reduced proportionate to the reduction in the average number of full-time equivalent employees (“FTEs”) during the 8 weeks following loan origination, as compared to the average number of full-time equivalent employees per month in (A) the period from January 1, 2020, through February 29, 2020; or (B) the period from February 15, 2019, through June 30, 2019 (together, “Applicable Measurement Period”); and
• Example: Reduction is proportional. If a borrower had on average 100 employees during its chosen measurement period (1/1/20 – 2/29/20 or 2/15/19 – 6/30/19), and then maintained 90 employees on average during the 8-week period after loan origination, the borrower would be eligible for forgiveness for up to 90% of the eligible costs it paid with PPP Loan money.
• Forgiveness is also reduced by the aggregate amount that any employee’s total salary or wages are reduced in excess of 25%, during the 8 weeks following loan origination, as compared to the most recent full quarter prior to such origination.
• Does not include employees who received, during any single pay period during 2019, wages or salary at an annualized rate of pay in an amount more than $100,000.
• Accordingly, final forgiveness amounts will equal Baseline Forgiveness TIMES Average FTEs per month during the 8-week covered period DIVIDED BY Average FTEs in the Applicable Measurement Period MINUS the amount of any reduction in total salary or wages, in excess of 25%, of any employee (who in 2019 made an annualized salary of $100,000 or less) when comparing average monthly salary of the 8-week period to the most recent full quarter prior to loan origination.
• Reduction in FTEs below the FTEs in the Applicable Measurement Period will likely have the biggest impact on loan forgiveness as there is a multiplier effect.
• Reduction in salaries of employees earning no more than $100,000 per annum in 2019 will likely have no impact, provided that the reduction is not more than 25% of the amount for each employee.
• Reductions in salaries of employees earning more than $100,000 per annum in 2019 will likely have no impact on loan forgiveness.
• For reduction determination purposes (both number of employees and wages), SBA will not count the period starting February 15, 2020,and ending 30 days after the enactment into law of the Act if, by June 30, 2020, the borrower eliminates the reduction in employees or the reduction in wages.
• Congress is here, in essence, giving borrowers the opportunity to rehire employees or return employees to prior salaries, and thereby avoid having a period of fewer employees or lower wages counted against the borrower for loan forgiveness calculation purposes.
• A more technical reading of the CARES Act would require an employer to eliminate the entire salary reduction of an impacted employee prior to June 30, 2020, rather than simply reduce the reduction to 25% or less, as allowed for in the final forgiveness amount formula stated above.
• Borrowers must apply for PPP Loan forgiveness; it is not granted automatically.
• Applications will require significant documentation of employment figures and payroll costs, etc.
• After receiving a forgiveness application, the lender must make a determination within 60 days.
• Lender is held harmless from wrongly granting an application where the borrower attested to the accuracy of its payment information.
• Maximum maturity of the unforgiven portion of the PPP Loan is two years from the date on which the borrower applies for loan forgiveness.
• The Treasury and the SBA determined that a two-year loan term is sufficient in light of the temporary economic dislocations caused by COVID-19.
• SBA will issue additional guidance on loan forgiveness.

UNDER WHAT CIRCUMSTANCES DOES THE ACT PROVIDE FOR ADDITIONAL RELIEF FOR OTHER TYPES OF SBA LOANS?

• For other 7(a) loans, as well as loans made under Title V of the Small Business Investment Act of 1958, SBA will pay the principal, interest, and any associated fees that are owed on a covered loan for six months.
• Applies to loans even if made before the Act was enacted.
• If the loan is on deferment, SBA will pay the loan for six months after the deferment period ends.
• Act authorizes up to $17 billion in these payments.
• The Act makes clear that SBA will make these payments in a manner such that “the borrower is relieved of the obligation to pay that amount.”

WHAT ARE THE CONSEQUENCES FOR USING PPP FUNDS FOR UNAUTHORIZED PURPOSES?

• If you use PPP funds for unauthorized purposes, the SBA will direct you to repay those amounts.
• If you knowingly use PPP funds for unauthorized purposes, you will be subject to additional liability such as charges for fraud.
• Under certain statutes, including the False Claims Act, “knowingly” is defined to include any reckless disregard for the falsity of certification or statement.
• If one of your shareholders, members, or partners uses PPP funds for unauthorized purposes, SBA will have recourse against the shareholder, member, or partner for the unauthorized use.
• There may be additional consequences, under federal law, for those who make a knowingly false statement for the purpose of obtaining PPP loans or influencing the action of the Small Business Administration. See, e.g., 15 U.S.C. § 645(a); 18 U.S.C. § 1014, 31 U.S.C. § 3802(a)(2), 31 U.S.C. § 3729(a)(1)(G).

¹ The affiliation analysis can be very complex and businesses are advised to consult with counsel before determining whether a business that potentially has affiliates is eligible for a PPP Loan.
² The meaning of this language from the Act is not clear.

Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. The author has provided the links referenced above for information purposes only and by doing so, does not adopt or incorporate the contents. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties