For the many small and mid-size businesses impacted by the coronavirus pandemic, the recent CARES Act and other legislation adopted in earlier March 2020 offers businesses various resources for support to sustain business operations. This piece focuses on the Paycheck Protection Program expansion of the SBA 7(a) loan program, including loan amounts, eligibility, permitted uses, and forgiveness.

Many of the business-related provisions within the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), signed into law by President Trump on March 27, 2020, are fashioned to bolster a company’s ability to continue operating with as few disruptions to the workforce as possible. Among other things, the CARES Act includes provisions that allow for eligible businesses to receive forgivable loans through the Small Business Association (the “SBA”) by establishing the Paycheck Protection Program (the “PPP”), which expands upon the existing SBA 7(a) loan program. This article addresses eligibility for these loans and the subsequent forgiveness of these loans under the PPP. The covered period dictated by the Act is February 15, 2020 – June 30, 2020 (the “Covered Period”).

Benefits: There has been much talk about the loan forgiveness component of these loans, however, there are additional benefits that have not received the same attention, including the following:

1. The SBA will not be charging its typical Guarantee Fee at loan origination.
2. The SBA will pay the lender’s origination fee.
3. The interest rate on these loans is capped at 4% for the life of the loan per the language of the Act, with a recent borrower FAQ sheet released on March 31, 2020 by the SBA stating the interest rate is 0.5%.
4. Unlike other SBA loans, business owners will not be required to personally guarantee the loans, although the government may take action against owners if loan proceeds are used for improper purposes.

Maximum loan amount: Eligible participants are permitted to borrow the lesser of 2.5 times the total average monthly Payroll Costs incurred during the year prior to the date on which the loan is made (there are provisions within the Act that adjust this range for seasonal employers), or $10,000,000.00.

“Payroll Costs” include, per the Act: salary, wages, commissions, or similar compensation; payment of cash tip or equivalent; payment for vacation, parental, family, medical, or sick leave; allowance for dismissal or separation; payment required for the provisions of group health care benefits, including insurance premiums; payment of any retirement benefit; payment of State or local tax assessed on the compensation of employees; and the sum of payments of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment, or similar compensation and that is an amount that is not more than $100,000 in 1 year (pro-rated over the Covered Period).

Payroll Costs do not include amounts paid to employees whose principal place of residence is outside of the US, compensation over $100,000 paid to individual employees, taxes imposed or withheld under chapters 21, 22, or 24 of the Internal Revenue Code of 1986, qualified sick leave wages for which a credit is allowed under section 7001 of the Families First Coronavirus Response Act, or qualified family leave wages for which a credit is allowed under section 7003 of the Families First Coronavirus Response Act.

Eligibility: An applicant business does not have to be shut down to receive a loan – there is a presumption that the applicant business has been impacted by COVID-19. Further, please note that if you have laid off or furloughed some of your workforce, this does not impact your eligibility. It may, however, impact the amount forgiven, as described later in this article.

Eligible borrowers include any business concerns, nonprofit organization, veterans organization, or Tribal business concern described in section 31(b)(2)(C) in existence on February 15, 2020. These borrowers, however, cannot employ the greater of: 500 employees; or the size standard in number of employees established by the SBA for the industry in which the business concern, nonprofit organization, veterans organization, or Tribal business concern operates. This means that some companies may be eligible even if their employee count is above 500 based on their applicable employee size standard for their North American Industrial Classification System code. All individuals employed on a full-time, part-time, or other basis are included in this count. This includes employees obtained from a temporary employee agency, professional employee organization or leasing concern.

Use of loan: The proceeds of the covered loan may be used for:

1. payroll costs;
2. mortgage payments;
3. rent (including rent under a lease agreement);
4. utilities; and,
5. interest on any other debt obligations that were incurred before the Covered Period.

However, the four forgivable uses are:

1. Payroll Costs,
2. Interest on mortgages (which shall not include any prepayment or payment of principal on said covered mortgage obligation),
3. Rent under a lease agreement; and,
4. Payment on utilities (covered utilities include electricity, gas, water, transportation, telephone, or internet access for which service began prior to February 15, 2020).

Forgiveness: Borrowers may be eligible to receive loan forgiveness for costs incurred and payments made during the 8-week period of the loan (beginning on the origination date) relating to the four forgivable uses outlined above so long as these contracts were in place on February 15, 2020). Forgiveness will not exceed principal of the loan. Also, amounts forgiven will not be taxable income to the borrower.

Reduction of forgiveness: The amount forgiven will be reduced (but not increased) due to certain changes in the workforce.

The amount forgiven is reduced by a percentage equal to:

1. The average number of full-time employees during the Covered Period multiplied by:
   • a. Average full-time employees from February 15, 2019 – June 30, 2019; or,
   • b. Average full-time employees from January 1, 2020 – February 29, 2020
2. The amount forgiven is reduced by the amount of any reduction in total salary or wages of any employee greater than 25% during the most recent full quarter before the Covered Period (not including any employee who received compensation of more than $100,000 annually).

If, however, a borrower has terminated employees or reduced employee pay during this pandemic, the borrower can “cure” this and remain eligible for full loan forgiveness. The Act exempts terminations or reductions made between February 15, 2020, and April 26, 2020, (30 days after enactment of the Act) when the borrower rehires or fixes the reduction prior to June 30, 2020.

Finally, the borrower must submit an application for forgiveness and provide the requisite documentation, detailing the above. The lenders will have 60 days following the application to approve or deny the application.

If sums are not forgiven, then the loan continues with favorable terms: a maturity date of 2 years according to a recent SBA publication, an interest rate of .5% according to the same SBA publication, and lenders are required to provide borrowers with complete payment deferment for a period of not less than 6 months (including payment of principal, interest, and fees), and not more than 1 year. Further, as mentioned previously, no collateral or personal guarantee is required.

Prepare: Businesses seeking a PPP loan should gather the following documents and have ready answers to the following questions to expedite the lending process. They should also have answers to every item in the SBA application released on March 31, 2020. 

1. Business name, address, and point of contact
2. NAICS code
3. Type of entity (general/limited partnership, corporation (S-corp, C-corp, LLC, non-profit), sole proprietorship, independent contractor, self-employed)
4. Date established
5. Business Certificate/License
6. Are you a seasonal employer? What are your dates of operation?
7. Do you have a pending SBA 7(b)(2) loan application?
8. Business financial information, including federal tax returns for last 3 years
9. Payroll records for prior 12-months
10. For sole proprietors, independent contractors, and self-employed applicants, provide payroll tax filings reported to IRS, form 1099-MISC, and income and expense sheets.

Keep detailed records during the 8-week Covered Period of sums paid for payroll costs, mortgage interest (not principal), leases, and utilities (including electricity, gas, water, transportation, telephone, or Internet access), and keep copies of checks or record of payment of these expenses. Finally, maintain meticulous documentation verifying the number of employees on payroll and pay rates during February 15, 2020 – June 30, 2020.

This brief article does not address every nuance of the Act. Beyond PPP loans, the CARES Act offers other resources as well, including SBA Disaster Assistance, tax credits, and other business favorable elements of the CARES Act.