On March 27, 2020, President Trump signed into law a broad economic relief package known as the “CARES Act” which, among other things, establishes the Paycheck Protection Program. The Program permits the Small Business Administration (“SBA”) to guarantee loans provided by eligible lenders to help employers pay payroll and various other overhead expenses (“covered loans”). Set forth below is a summary of the key provisions:
Borrower Eligibility: From February 15, 2020 – June 30, 2020 (the “covered period”), most business concerns or nonprofit organizations with not more than 500 employees (or such lesser number as may be set for the industry) are eligible to receive a loan made under Section 7(a) of the Small Business Act. An eligible recipient applying for a covered loan must make a good faith certification: (I) that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient; (II) acknowledging that funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments; (III) that it does not have an application pending for a loan for the same purpose and duplicative of amounts applied for or received under a covered loan; and (IV) during the period February 15, 2020 – December 31, 2020, that it has not received amounts for the same purpose and duplicative of amounts applied for or received under a covered loan.
Maximum Covered Loan Amount: Generally, the maximum covered loan amount shall be the lesser of (i)(I) the sum of (aa) the product obtained by multiplying (AA) the average total monthly payments for payroll costs1 incurred during the 1-year period before the date on which the loan is made (except for certain seasonal employers); by (BB) 2.5; and (bb) the outstanding amount of a loan made under the SBA Disaster Loan Program between January 31, 2020 and the date on which such loan may be refinanced as part of this new program; or (II) if requested, for businesses not in existence during the period beginning on February 15, 2019 and ending on June 30, 2019, the sum of (aa) the product obtained by multiplying (AA) the average total monthly payments for payroll costs incurred during the period beginning on January 1, 2020 and ending on February 29, 2020; by (BB) 2.5; and (bb) the outstanding amount of a loan made under the SBA Disaster Loan Program between January 31, 2020 and the date on which such loan may be refinanced as part of this new program; or (ii) $10,000,000.
Allowable Use for Covered Loans: Covered loans may be used for: (1) payroll costs; (2) costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums; (3) employee salaries, commissions, or similar compensations; (4) payments of interest on any mortgage obligation (which shall not include any prepayment of or payment of principal on a mortgage obligation); (5) rent (including rent under a lease agreement); (6) utilities; and (7) interest on any other debt obligations that were incurred before the covered period.
Covered Loan Terms: During the covered period, covered loans do not require collateral or a personal guarantee. Any covered loan balances that have not been forgiven (see discussion below), shall continue to be guaranteed by the SBA and shall have a maximum maturity of ten years from the date on which the borrower applies for loan forgiveness. Covered loans shall bear an interest rate not to exceed four percent (4%).
Covered Loan Deferrals: The SBA shall require lenders to provide complete payment deferment relief for impacted borrowers with covered loans for a period of not less than six months and not more than one year, including payment of principal, interest, and fees. Additional guidance is expected shortly from the SBA.
Covered Loan Forgiveness: Borrowers shall be eligible for loan forgiveness in an amount equal to the sum of the following costs incurred and payments made during the covered period: (1) payroll costs, (2) any payment of interest on any covered mortgage obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation), (3) any payment on any covered rent obligation, and (4) any covered utility payment. Amounts which have been forgiven shall be excluded from gross income for purposes of the Internal Revenue Code. There are limits on the amount of forgiveness, including that it (a) may not exceed the loan’s principal amount and (b) is subject to various reductions based on reductions in the number of employees.
To be eligible, a forgiveness application must be submitted to the lender, which shall include documentation verifying the number of full-time equivalent employees on payroll and pay rates for the relevant period, including: (1) (a) payroll tax filings reported to the IRS and (b) State income, payroll, and unemployment insurance filings; (2) documentation, including cancelled checks, payment receipts, transcripts of accounts, or other documents verifying payments on covered mortgage obligations, payments on covered lease obligations, and covered utility payments; and (3) a certification that (a) the documentation presented is true and correct and (b) the amount for which forgiveness is requested was used to retain employees, make interest payments on a covered mortgage obligation, make payments on a covered rent obligation, or make covered utility payments. The lender must issue a decision on the application within 60 days.
Additional guidance on the loan forgiveness provisions is expected shortly.
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1 The term “payroll costs” means the sum of payments of any compensation with respect to employees that is a (A)(i) salary, wage, commission or similar compensation, (ii) payment of cash tips or equivalent, (iii) payment for vacation, parental, family, medical or sick leave, (iv) allowance for dismissal or separation, (v) payment required for the provisions of group health care benefits, including insurance premiums, (vi) payment of any retirement benefit, or (vii) payment of State or local tax assessed on the compensation of employees, and (B) the sum of any payments of 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 in an amount that is not more than $100,000 in 1 year. Payroll costs shall not include the compensation of an individual employee in excess of an annual salary of $100,000, as prorated for the covered period; taxes imposed or withheld under chapters 21, 22, or 24 of the Internal Revenue Code of 1986 during the covered period; any compensation of an employee whose principal place of residence is outside of the United States; qualified sick leave wages for which a credit is allowed under Section 7001 of the Families First Coronavirus Response Act (Public Law 116- 6 127); or qualified family leave wages for which a credit is allowed under Section 7003 of the Families First Coronavirus Response Act.