The CARES Act establishes a new loan program for small businesses during the period starting on March 1, 2020, and ending on December 31, 2020, and in certain situations forgiveness of such loan, which many health care providers and suppliers should review. Known as “7(a) Paycheck Protection Program loans” (“PPP Loans”), businesses in the health care industry having 500 or fewer employees or otherwise meet the Small Business Administration (“SBA”) small business size standards are eligible for a PPP loan administered by the Small Business Administration. PPP loans can also be applied for by individuals who operate a sole proprietorship, are independent contractors, and are eligibly self-employed. Health care providers and suppliers remaining open due to their essential nature during this uncertain economic period must become aware of this loan program and associated requirements of the SBA.
PPP Loans may be used to pay a number of business expenses, as follows:
- payroll support, including paid sick, medical, or family leave, and costs related to the continuation of group health care benefits during those periods of leave;
- employee salaries
- interest on mortgage payments;
- rent (including rent under a lease agreement);
- utilities; and
- interest on any other debt obligations that were incurred before the covered period.
The maximum amount of a PPP Loan is calculated by determining your average total monthly payments for payroll costs incurred during the 1 year period before the date on which the loan is made, and multiplying that number by 2.5. The cap on a PPP Loan is $10,000,000. The CARES Act requires lenders to defer all payments under PPP Loans for a period of “not more than 1 year.”
In order to qualify for a PPP Loan, an eligible business must have been in operation on February 15, 2020, and either had employees it paid salaries and payroll taxes or paid independent contractors reported on a Form 1099-MISC. Additionally, applicants must also certify in good faith that (1) the need of the loan is due to the uncertainty of current economic conditions and is necessary to support ongoing operations; (2) the funds will be used only for the allowable uses; (3) the applicant does not have another pending application under this program for the same purpose; and (4) the applicant has not received a loan under this program for the same purpose and duplicative amounts. Applicants are not permitted to have multiple applications with multiple SBA lenders under this program. Additionally, receipt of a loan under this program prohibits receipt of the Employee Retention Credit for Employers
PPL Loans made to the business during the period starting March 1, 2020, and ending on June 30, 2020 shall be forgiven and treated as canceled debt (not included in gross income) to the extent funds are sepnt on cover payroll costs, and most mortgage interest, rent, and utility costs over the 8-week period after the loan is made. For purposes of calculated total loan forgiveness, “payroll costs” do not include:
- compensation of an individual employee in excess of $16,666 during such period;
- 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.
However, the amount of the PPP Loan forgiveness will be reduced in the following situations:
- If the business reduces employees during the period, the forgiven amount will be reduced by a percentage equal to the difference obtained from subtracting the amount calculated as follows, from 1: Divide your average number of full-time equivalent employees per month employed by the business for the 8 weeks beginning on the loan originationd by either the average number of full-time equivalent employees per month employed by the business during the period beginning on February 15, 2019 and ending on June 30, 2019, or the average number of full-time equivalent employees per month employed by the business from January 1, 2020 to February 29, 2020. The average number of full-time equivalent employees is determined by calculating the average number of employees for each pay period falling within the month.
- If the business reduces employee compensation during the period, the forgiven amount will be reduced by the amount of any reduction in excess of 25 percent of compensation in the most recent full quarter in which the employee was paid in compensation during the covered period of any employee who was compensated..
Additional benefits of this program are that an applicant does not have to be unable to obtain credit elsewhere to qualify, nor does there need to be a personal guaranty or collateral for the loan. There also is no prepayment penalty for these loans and the interest rate cannot be more than 4 percent. Actual interest rates will be determined by the lender.
Special Note on Affiliations with Larger Enterprises. If your business is affiliated with a larger enterprise, such as in the case of a “friendly” professional corporation to a larger management organization, the number of employees in your business may be aggregated with the number of employees in the affiliated entity or entities when determining eligibility for a small business loan. Businesses are considered by the SBA to be affiliated for purposes of the loan program when one controls or has the power to control the other, or a third party or parties controls or has the power to control both. It does not matter whether control is exercised, so long as the power to control exists.
In determining whether affiliation exists, the SBA will consider the totality of the circumstances and may find affiliation even though no single factor is sufficient to constitute affiliation. The SBA considers factors such as ownership, management, previous relationships with or ties to another concern, and contractual relationships, in determining whether affiliation exists.
Therefore, if your business entity is managed by a larger organization, the extent of the manager’s control over your business activities will be important to understand prior to certifying as a small business. For example, if the management organization has unfettered ability to force the owners of the managed business to sell their equity interests, it is likely the SBA would consider the entities affiliated for purposes of the 7(a) loan program. Additionally, if another company (such as a management organization) has the power to appoint a majority of the directors of a managed business, then the entities may be considered affiliated by the SBA. It is important to analyze this prior to submitting a small business loan application since a misrepresentation on the application could result in civil or criminal penalties.