CARES Act: Paycheck Protection Program Provides Small Business Loans to Support Employees (UPDATED)

Morgan Lewis
Contact

Morgan Lewis

The US Congress on April 23 passed the Paycheck Protection Program and Health Care Enhancement Act (Enhancement Act), which expanded funding for the existing Paycheck Protection Program (PPP).

Key features of the Enhancement Act include the following:

  • $310 billion increase in PPP funding, bringing the total authorized amount to $659 billion:
    • $30 billion set aside for loans by insured depository institutions and credit unions with assets between $10-50 billion
    • $30 billion set aside for loans made by (1) community financial institutions, and (2) insured depository institutions and credit unions with assets less than $10 billion
  • $10 billion increase in Emergency Economic Injury Disaster Grants with expanded access for agricultural enterprises (as defined in the Small Business Act)[1] with not more than 500 employees

Since the passage of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the Small Business Administration (SBA) has released ongoing guidance[2] on the Paycheck Protection Program. Key updates include the following:

  • Certification of Necessity: Pursuant to updated SBA guidance released on April 23, in making the certification that “the uncertainty of current economic conditions makes necessary the loan request to support [a borrower’s] ongoing operations,”[3] borrowers must take into account “their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.”[4] The guidance further notes that it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to the SBA, upon request, the basis for its certification. On April 28, the SBA indicated that the same guidance regarding access to liquidity applies to private companies. The SBA also created a safe harbor for any borrower that applied for a PPP loan, prior to this guidance, that repays the loan in full by May 7. This certification and all other aspects of a PPP application carry significant fraud risk (read our LawFlash on CARES Act’s Substantial Relief Funds Create Fraud Risk for more detail).
  • “Corporate Group” Funding Cap: The amount of PPP funds a “corporate group” can receive is capped at $20 million. Businesses are considered part of a corporate group if they are “majority owned, directly or indirectly, by a common parent.”
  • 75% Payroll Costs Rule: 75% of loan proceeds must be used toward payroll costs, and 75% of the forgiveness amount must also be used toward payroll costs.
  • Partnerships:
    • Partnerships (and LLCs filing taxes as partnerships) are eligible for PPP loans to cover costs, including compensation for partners; however, only one application should be submitted per partnership (which should cover the costs of the partnership and the partners).
    • Self-employment income of a general active partner (Schedule K-1 income) may be reported as a payroll cost up to $100,000.
    • A partner in a partnership may not submit a separate PPP loan application for himself/herself as a self-employed individual.
  • Hedge Funds and Private Equity Firms: Both are ineligible to receive PPP loans.
  • Private Equity Portfolio Companies: The SBA issued additional guidance regarding PE portfolio companies, emphasizing their need to properly analyze the “necessity” of a PPP loan pursuant to the new “certification of necessity” guidance.
  • Foreign Employees: Businesses with 500 or fewer employees whose principal place of residence is in the United States (as determined based upon IRS regulations (26 CFR § 1.121- 1(b)(2)) may qualify for the PPP despite a foreign employee headcount that, combined with the United States headcount, exceeds 500 employees.
  • Affiliation Rule and Minority Shareholders: If a minority shareholder irrevocably waives or relinquishes its existing rights, subject to certain conditions, such minority shareholder would no longer be considered an affiliate of the business for purposes of determining small business size status.
  • $100,000 Payroll Cost Threshold: The CARES Act excludes from “payroll costs” any employee compensation in excess cash compensation of $100,000; however, that exclusion does not apply to non-cash benefits (e.g., retirement plan contributions, healthcare benefits, insurance premiums, and state and local taxes).
  • Professional Employer Organizations (PEOs)/Payroll Providers: Businesses that contract with third-party payers such as PEOs may use payroll documentation from the payroll provider as acceptable PPP loan payroll documentation.
  • 12-Month Payroll Cost Calculation: Businesses may calculate their aggregate payroll costs using data either from the previous 12 months or from calendar year 2019.

Additional SBA guidance on the PPP can be found here:

Background

The US Senate’s vote to enact the Coronavirus Aid, Relief, and Economic Security (CARES) Act includes extraordinary public health spending to confront the coronavirus (COVID-19) pandemic, immediate cash relief for individual citizens, a broad lending program for small businesses, and targeted relief for hard-hit industries. Title I of the CARES Act—the Keeping Workers Paid and Employed Act—includes paycheck protection and loan forgiveness, and small business contracting relief.

The Keeping Workers Paid and Employed Act supports workers and small businesses weathering the economic impacts of the COVID-19 crisis. This act, in conjunction with the Enhancement Act, provides for $659 billion in new and increased federally guaranteed PPP loans through the SBA targeted to small businesses to help keep their workers employed.

By maintaining employees on their payroll through the duration of the crisis, these small businesses can qualify for PPP loan forgiveness. The Keeping Workers Paid and Employed Act is also retroactive, incentivizing small businesses to rehire employees who have recently been laid off.

PAYCHECK PROTECTION PROGRAM LOANS

The PPP offers 2-year loans of up to $10 million with an interest rate of 1.00% on a first-come, first-served basis. The total amount of the loan will be the lesser of the $10 million maximum and 2.5 times the borrower’s average monthly payroll for the past 12 months (excluding any compensation over $100,000). During the period of February 15, 2020 through June 30, 2020 (the Covered Period), the SBA will guarantee 100% of issued PPP loans. Loan proceeds may be used by small businesses to cover payroll costs (excluding individual employee compensation over $100,000), group healthcare benefits, mortgage interest payments, rent, utilities, and interest on other debt incurred prior to the Covered Period.

  • Collateral and Fee Waivers: Collateral requirements, borrower and lender fees, prepayment penalties, personal guarantee requirements, and certain other traditional SBA loan requirements are waived.
  • Optional Deferment: Automatic deferment of principal, interest, and fees for a period of six months and may be extended for up to 1 year.
  • Increased Lender Pool and Flexibility: The SBA delegated to lenders the authority to make determinations on borrower eligibility and creditworthiness through streamlined SBA channels. Furthermore, the SBA administrator and the secretary of the US Department of the Treasury have the authority to add additional lenders to the PPP.
  • Loan Limitations. Loan proceeds may not be used for employee compensation in excess of an annual salary of $100,000 or for certain taxes or other employee payments covered under other recent COVID-19 federal legislation. However, the $100,000 salary exclusion only applies to cash compensation above $100,000, not to non-cash benefits (e.g., retirement plan contributions, healthcare benefits, insurance premiums and state and local taxes). Additionally, Economic Injury Disaster Loans and SBA loans may not be used for the same purposes.

BORROWER ELIGIBILITY

Under the PPP, small businesses (including sole proprietors, paid independent contractors, and other self-employed individuals), nonprofits, and other specified businesses that have been operational since February 15, 2020 are all eligible for PPP loans. Additionally, the legislation has expanded the current definitions of “small business” to allow access to a greater number of borrowers.

“Small Business”: Borrowers must either be small businesses under current SBA rules for financial assistance (generally based on NAICS code limitations or an “alternative size standard[5]) or they must qualify under any of the additional categories applicable to the PPP, and the SBA “affiliation rules” apply unless noted below:

  • Fewer than 500 employees, full-time and part-time, whose principal place of residence is in the United States (full- or part-time, but not including independent contractors/individuals who receive 1099s) regardless of revenue
  • Hospitality and restaurant businesses that ordinarily would not be small but that have (1) more than one physical location and (2) no more than 500 employees per physical location (the “affiliation rule” is waived for these businesses)
  • Franchises assigned a franchise identifier code by the SBA
  • A business that receives financial assistance from a Small Business Investment Company
  • Sole-proprietors, paid independent contractors, and other self-employed individuals

Certification: In order to secure a loan, borrowers must provide a good faith certification that

  • the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the business;
  • the business will use the funds to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments; and the business is not applying for or already receiving duplicative funds from another SBA program.

Prioritized Borrowers: The SBA will encourage lenders to prioritize loans for small businesses in underserved and rural markets, including veteran-owned businesses, businesses owned by socially and economically disadvantaged individuals, women-owned businesses, and businesses in operation for less than two years.

LOAN FORGIVENESS

This powerful feature of the PPP makes borrowers eligible for loan forgiveness on all loan proceeds used during the period that is eight weeks following the origination of the loan on (1) payroll costs, (2) mortgage interest payments, (3) rent payments and (4) and utility payments. Forgiveness applies to both principal and any accrued interest.

The amount forgiven cannot exceed the principal amount of the loan, and the amount forgiven will be reduced based upon reductions in employees (calculated on an FTE basis) or employee salaries (in excess of 25%) during the eight-week forgiveness period—rehiring and/or normalizing salaries for recently impacted employees, however, will negate certain loan forgiveness reductions.

  • Tax Treatment: Amounts forgiven will be treated as non-taxable cancelled indebtedness.
  • Process: Borrowers will submit an application to the lender that will originate the loan, and the lender must issue a decision on the application within 60 days (although a shorter turnaround is expected), with a significantly shorter turnaround expected. Lenders will process loan forgiveness applications directly, and the SBA will purchase the forgiven loan from the lender within 90 days of forgiveness—lenders are granted safe harbor to protect them from liability when facilitating this process. Any loan amounts not forgiven at the end of one year are carried forward as an ongoing loan, with the 100% loan guarantee remaining in place.

CORONAVIRUS COVID-19 TASK FORCE

For our clients, we have formed a multidisciplinary Coronavirus COVID-19 Task Force to help guide you through the broad scope of legal issues brought on by this public health challenge. We also have launched a resource page to help keep you on top of developments as they unfold.


 

[1] 15 USC 647(b)

[5] 15 USC § 632 (a)(5)

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morgan Lewis | Attorney Advertising

Written by:

Morgan Lewis
Contact
more
less

Morgan Lewis on:

Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide
- hide

This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.