Physician practices across the United States have had their businesses thrown into disarray with the temporary curtailment of elective procedures and reduction in patient volume as a result of the COVID-19 response. Enacted March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act” or the “Act”) provides for substantial financial assistance to small business owners, including physician practice owners. The Paycheck Protection Program set forth in the Act (the “Program”) will provide immediate direct financial assistance for most physician practices. We summarize the relevant provisions of the Act in this Report.
Paycheck Protection Program
A primary objective of the CARES Act is to assist businesses in being able to provide their employees with paychecks, despite the economic downturn created by COVID-19. The Act provides nearly $350 billion for relief for small businesses in the form of the Program, which will be administered by the Small Business Administration (“SBA”). Under the Program, the SBA will be authorized to issue loans of up to $10 million to eligible businesses and, subject to certain conditions discussed below, the loan will be forgiven.
a. Eligible Businesses
Under the CARES Act, an eligible entity includes any business that qualifies as a small business concern under current SBA rules. The Act further applies to any business concern, including sole proprietors, independent contractors, and other self-employed individuals, with less than 500 employees, or a greater number of employees if provided for in the SBA’s industry classifications, are eligible for the Program. In calculating the 500-employee threshold, private equity or venture capital-controlled companies will need to aggregate the number of employees of any other affiliated company controlled by such fund. Certain businesses in the hotel and hospitality industry with fewer than 500 employees at each physical location are not required to aggregate their total employees and are eligible under the Program.
501(c)(3) organizations are also eligible for SBA loans under the Program. This is a significant expansion of the small business concern interpretation and will provide relief for a variety of organizations, including educational institutions, foundations, social service organizations and hospitals.
Significantly, borrowers are assumed to be adversely affected by COVID-19 and are not required to meet any threshold economic requirements or prove that their business has been harmed. The SBA is expected to release additional guidance on this provision in the coming days.
b. Maximum Loan Amount
Between February 15, 2020 and June 30, 2020 (the “Covered Period”) eligible businesses can borrow 2.5 times the average monthly payroll costs incurred during the same prior one-year period, up to a total of $10 million, plus any outstanding amount of an Economic Injury Disaster Loan (“EDIL”) made between January 31, 2020 and the date on which loans under the Program are made. For seasonal employers, average monthly payroll costs are based on the 12-week period between February 15, 2019 and June 30, 2019. Additional loan calculation amounts are provided for businesses that were not in operation from February 15, 2019 to June 30, 2019. For purposes of determining a business’s eligible loan amount, payroll costs include compensation to employees in the form of a salary, wage, commission or similar compensation; payment of cash tip or equivalent , vacation, parental, family, medical or sick leave; allowance for dismissal or separation; payment required for group health benefits; and payment of retirement benefit or payment of state or local tax assessed on the compensation of employees. Payroll costs exclude the following:
- Individual compensation in excess of $100,000 per year rate of pay;
- Payroll and federal income taxes;
- Compensation for persons whose principal residence is outside of the United States; and
- Qualified sick leave or family leave wages for which a credit is allowed under the Families First Coronavirus Response Act.
c. Permissible Uses of Covered Loans
- Payment of compensation to employees, within the $100,000 limit;
- Payment for vacation, parental, family, medical or sick leave;
- Payment required for group health benefits, including insurance premiums;
- Payment of interest on any mortgage obligations;
- Payment of interest on existing debt obligations; and
- Rent and utility payments.
d. Loan forgiveness
Businesses that receive a loan under the Program are eligible for loan forgiveness. The amount of loan forgiveness cannot exceed the amount of the loan, but it may equal a business’s eligible costs incurred and paid within an 8-week period, beginning on the date of the origination of the loan. Business costs eligible for loan forgiveness include:
- Payroll costs, as defined above. At least 75% of the forgiven amount must be used for these costs;
- Interest payments on covered mortgage obligations, but not prepayment or principal payments;
- Rent under a lease agreement in force before February 15, 2020; and
- Utility payments for which service began before February 15, 2020.
The amount of eligible loan forgiveness will generally be reduced by the percentage of full-time employees not retained, and by the amount that any reduction in total salary and wages exceeds 25% of pre-coronavirus amounts. A business is still eligible for loan forgiveness if it has already laid off employees, so long as those employees are rehired by June 30, 2020. To the extent that the loan has remaining balance after the application for forgiveness, the SBA will continue to guarantee the remaining balance and the loan will have a maximum maturity date of two years from when the borrower applied for loan forgiveness. The SBA Administrator is required to issue additional guidance on the loan forgiveness portion of the program by April 27, 2020.
The loan application process is designed to be more efficient than applying for a normal bank loan. When applying for loan forgiveness, the borrower will be required to provide documentation including:
- Documentation verifying the number of full-time equivalent employees employed during the relevant period and the compensation paid to them. Such documentation includes but is not limited to payroll tax filings reported to the IRS and state income, payroll and unemployment insurance filings;
- Cancelled checks and payment receipts or other documents verifying payments on covered mortgage obligations;
- Payments on covered lease obligations and covered utility payments;
- Any other documentation deemed necessary by the SBA; and
- Certification that the documentation is true and correct and that the amount of forgiveness requested was used for eligible costs.
Lenders are required to render a decision on a borrower’s loan forgiveness application within 60 days of receipt of the required documentation. Any amount of loan forgiveness is not included in gross income for US federal income tax purposes.
e. Loan Terms
- No personal guarantee is required to receive a loan. However, lenders will have recourse against a shareholder, member, or partner if the loan proceeds are used for non-allowable uses.
- All administration fees for loans received under this Program are waived.
- Payments on covered loans are deferred for at least six months and up to one year.
- There is no requirement that the eligible business demonstrate that it is unable to obtain credit elsewhere.
- 0.5% fixed rate;
- Businesses receiving a loan under the Program are not eligible to use the payroll tax credits available under the Families First Coronavirus Act or the deferral of employer social security taxes under the CARES Act.
f. How to apply for a Paycheck Protection Program Loan
Beginning on April 3, 2020, a business may apply for the Program at any lending institution that is approved to issue loans through the existing SBA Section 7(a) lending program, as well as other approved lenders. Business owners may contact its local SBA office to find a list of approved borrowers or visit the SBA’s website for a partial list of approved borrowers. All owners, shareholders, and members who won 20% or more of the business must sign the loan application. The Act allocated a set amount of funding for the Program, and eligible businesses and persons are encouraged to apply for loans under the Program early. The Program is open until June 30, 2020.
g. Borrower Certification
Prior to receiving a loan, borrowers must certify the following:
- The loan is necessary to support ongoing operations given the present uncertain economic conditions;
- The loan proceeds will be used to retain workers, maintain payroll or make mortgage payments, make lease payments, and make utility payments;
- The eligible loan recipient does not have a duplicate Section 7(a) loan pending for the same purpose;
- The applicant will not receive another loan under the Program, for the same purpose, through December 31, 2020.
h. Important links
For a top-line overview of the program CLICK HERE
If you are a lender, more information can be found HERE
If you are a borrower, more information can be found HERE
The application for borrowers can be found HERE
By April 11, 2020, the SBA is expected to issue additional guidance on how to implement the Program. Businesses should consult with their advisers to determine if they are eligible for the Program, and if so, begin organizing the necessary documents to expedite the loan process.
We anticipate there will be further developments on this topic and we will update this article from time to time as necessary to keep it current.