April 2, 2020
With many businesses struggling during the COVID19 pandemic, we wanted to highlight one of the major components of the CARES Act that was recently passed by the federal government; namely, the Paycheck Protection Program.
This program is found in Title I – Keeping American Workers Paid and Employed Act, and it is essentially a revenue replacement program for businesses facilitated through forgivable loans. This is a program that will be administered by the Small Business Administration (SBA) under its 7(a) lending program and is open until June 30, 2020. You can read more on the SBA website.
The goal of the program is to:
A) Help small businesses pay for their near term operating expenses during the worst of the crises; and
B) Provide an incentive for employers to keep their employees on the payroll.
The PPP allows for small businesses (generally businesses, nonprofits, Tribal businesses, and veteran’s organizations with 500 employees or less, sole proprietors, self-employed individuals, or independent contractors who were in business on February 15, 2020) to take loans for up to $10 million which they can then use to defer the costs of keeping employees, adding employees, and paying certain other expenses.
Congress has earmarked $350 billion for the PPP. The loans under the PPP are federally insured and SBA-preferred lenders will begin taking applications beginning April 3, 2020. The intent is that funds will be dispersed within a three-week period. Importantly, businesses may be eligible to have up to 100% of the loan forgiven subject to certain qualifications, requirements, and limitations which we will address below.
A. Covered Expenses:
- Salary or wages and payments of cash tips;
- For a sole proprietor or independent contractor, this means wages, commissions, income, or net earnings from self-employment capped at $100,000 on an annualized basis for each employee.
- Health benefits;
- Retirement benefits;
- State and local taxes;
- Vacation, family, medical and sick leave;
- Rent, under lease agreements in force before February 15, 2020;
- Utilities, for which service began before February 15, 2020;
- Mortgage interest obligations, incurred before February 15, 2020; and
- Interest on other debt obligations incurred previous to February 15, 2020.
B. Stipulations to the PPP:
- Eligible payroll costs cannot include annual compensation in excess of $100,000 for an individual employee.
- The Loan amount may only be the lesser of the total average monthly payroll costs for the preceding 12 months (March 2019 to February 2020) multiplied by 2.5, or $10 million (the maximum loan amount). The result is that most businesses may borrow up to roughly 10 weeks’ worth of payroll expenses.
- You will need to certify that the loan will be used to support ongoing operations and to retain workers, maintain payroll or make mortgage, lease, and utility payments.
C. Loan and Repayment Terms:
- No collateral or personal guarantee is required;
- Payment Deferral for not less than six (6) months nor more than one (1) year;
- Borrower and Lender Fees are waived;
- Prepayment Fees are waived;
- Maximum of 10-year maturity after application for loan forgiveness with SBA indicating a two-year maturity;
- The interest rate is not to exceed 4% during the covered period with the SBA announcing that the program will have a 0.5% fixed interest rate;
- 100% federally guaranteed through December 31, 2020;
- SBA requirement that a business is unable to obtain credit elsewhere will be waived.
D. Forgiveness of PPP Loans:
In order to have the PPP loan forgiven, you must follow certain rules:
- Eligibility for loan forgiveness will be for an eight (8) week period following the loans origination date in an amount that is equivalent to the sum spent on the following covered expenses during that eight (8) week period:
- Payroll costs (compensation above $100,000 for any individual employee is excluded)
- Interest on mortgage obligations
- Rent obligations
- Utility payments
- The amount forgiven cannot exceed the amount borrowed
- The loan forgiveness will be reduced under the following circumstances:
- The loan forgiveness will be proportionally reduced if the average number of employees is reduced during the covered period when compared to the same period in 2019.
- Note that because many businesses have already been forced to lay off or furlough employees, there is a clause that will allow those businesses to still qualify for loan forgiveness if they re-hire workers (who they laid off between February 15, 2020, and April 26, 2020, due to COVID19) by June 30, 2020. You will not be penalized for having a smaller workforce at the beginning of the period assuming you rehire laid-off workers. For example, if a business lays off 25 employees on March 31, 2020, and rehires them all before June 30, 2020, those 25 employees will be deemed to have been employed for purposes of calculating the average number of full-time employees during the eight (8) week period. The formula is as follows: Amount of forgivable payroll and other costs described above, multiplied by the quotient of (A) the average number of full-time employees (FTEs) per month employed during the eight-week period beginning on the date of the origination of the loan by (B) at the election the borrower (1) the average number of FTEs per month employed during the period beginning on Feb. 15, 2019, and ending June 30, 2019, or (2) the average number of FTEs employed during the period beginning Jan. 1, 2020 and ending Feb. 29, 2020. For
- The loan forgiveness will be proportionally reduced by the amount of any reduction in total employee pay during the covered period in excess of 25% of the total pay as of the last quarter, for any employee who made less than $100,000 annualized in 2019.
- It is anticipated by the SBA that not more than 25% of the forgiven amount may be for non-payroll costs due to the likely high subscription;
- To apply for loan forgiveness, you must submit payroll documentation and documentation of expenses during the covered period to your lender and you will receive a decision within 60 days.
You must certify that:
- The Loan is necessary because of economic uncertainty caused by COVID-19 and will be applied to maintain payroll and make required payments;
- That you are not receiving this assistance and duplicative funds for the same uses from another SBA program
E. Tax Implications for PPP Loans:
• The canceled loan amount will NOT count toward gross income for tax purposes.
F. Applying for the Loan:
The PPP loans will be made by SBA-approved lenders. You should contact your local lending officer to find out if they are SBA-approved. Visit www.sba.gov for a list of SBA lenders. Click HERE for a sample application. It is expected that lenders will experience an exponential increase in loan applications and you should begin assembling documentation now to expedite the process if this is a loan program you would like to pursue including the following:
• SBA Form 1919;
• SBA Form 2483;
• Articles of incorporation/organization;
• Bylaws/Operating Agreement;
• Payroll expense verification documents, including IRS Forms 941 and 944, payroll summary reports and bank statements, a summary of payroll benefits;
• Trailing Twelve-month profit and loss statement;
• Mortgage and rent statements; and
• Utility statements;
Mark Laverdiere, Esq