CARES Act and the Paycheck Protection Program

Anyone who is a small business owner (i.e. 500 employees or less) has been anxiously waiting for aid from Washington, D.C. Our government responded with the passing of the Coronavirus Aid, Relief and Economic Security (CARES) Act and the new law included the much anticipated Paycheck Protection Program. In a nutshell, this program allows lenders to extend loans via the Small Business Administration to cover a variety of expenses including payroll costs (as described below), rent, utilities, mortgage interest (not principal) and interest on debt existing prior to February 15, 2020. In addition, this new program allows a portion of the loan to be forgiven and the forgiven portion will not be treated as taxable income. If you are small business owner and at all concerned about weathering the COVID-19 storm, I encourage you to immediately contact your bank and inquire about participating in the Paycheck Protection Program.

The remainder of this article will provide more details about the program.

Who is eligible to participate in the Paycheck Protection Program?
Eligible entities are those with less than 500 employees, including the following:

Businesses
501(c)(3) nonprofit organizations
Veterans organizations
Certain tribal business concerns
Eligible self-employed individuals
Independent contractors
Sole proprietorship
Businesses in the accommodation and food services industry (NAICS 72) that have less than 500 employees per physical location

What is the maximum loan amount?

Payroll costs exclude: compensation of an individual person in excess of $100,000 (as prorated for the period); federal employment taxes imposed or withheld taxes; compensation to an employee whose principal residence is outside of the U.S.; qualified sick leave for which a credit is allowed under the Families First Coronavirus Response Act; and qualified family leave wages for which a credit is allowed under the Families First Coronavirus Response Act.

Payroll costs include: employee salary, wages and commissions; payment of cash tips; payment of vacation; parental, family, medical or sick-leave; allowance for dismissal or separation; payment required for group health benefits (including insurance premiums); payment of retirement benefits; or payment of state or local tax assessed on employee compensation; and sole proprietor income or independent contractor compensation not in excess of $100,000.

In the case of seasonal employers, the employer may choose to calculate the average monthly payroll costs based on the 12-week period starting February 15, 2019 or the period starting March 1, 2019 through June 30, 2019. In the case of new employers not in business between February 15, 2019 and July 30, 2019, the average monthly payroll costs is calculated based on the period beginning January 1, 2020 through February 29, 2020.

Loans are available for the lesser of the average monthly payroll costs times 2.5 plus any emergency injury disaster loan received after January 31, 2020 that is refinanced under this new law or $10 million. Average monthly payroll costs are calculated based on the one-year period prior to the loan disbursal date except for seasonal employers and employers not in business between February 15, 2019 and July 30, 2019.

What are the loan terms?
Loans are available for up to a 10-year term (amortized) at 4 percent interest, with six months (and up to one year) deferral of principal and interest payments. Notably, certain SBA requirements are waived. Loans are available with:

No personal guaranties of shareholders, members or partners
No collateral
No proving recipient cannot obtain funds elsewhere
No SBA fees (may still have to pay lender processing fee)
No prepayment fee

What is the application process?

Eligible entities may file applications with an SBA-approved lender. Lenders have been delegated authority to make loans without SBA review. Eligible applicants will have been in operation on February 15, 2020, and will have paid employees and payroll taxes or independent contractors.

Applicants will need to certify that the loan is necessary and will be used to retain workers and pay eligible expenses. Applicants will further need to certify that no other application for a loan for the same purpose is pending and that the entity has not received any other loan for the same purposes through December 31, 2020.

What portion of the loan will be forgiven?

The key aspect of this new law is the loan forgiveness provisions. Under the CARES Act, the forgiven amount will be equal to the amount actually paid for payroll costs, salaries, benefits, rent, utilities and mortgage interest during the eight weeks following disbursement of the loan. Additional wages paid to tipped employees may also be forgiven.

The forgiveness amount is subject to reduction if there is a workforce reduction or a reduction in the salary or wages of an employee.

The amount attributable to a workforce reduction will be equal to the initial forgiven amount multiplied by the quotient of average FTEs during the eight-week period divided by the average FTEs for the period from February 15, 2019 through June 30, 2019 or January 1, 2020 through February 29, 2020, as determined by the recipient.
The amount attributable to a salary or wage reduction will be the amount of any salary or wage decrease in excess of 25 percent of the total salary or wages during the most recent full quarter such employee was employed before the eight-week period. Only employees who did not receive, during any single pay period during 2019, wages or salary at an annualized rate of pay in excess of $100,000 are included in this calculation.

Reductions in workforce, salaries and wages that occur from February 15, 2020 to April 26, 2020 will be disregarded for purposes of reducing the forgiveness amount so long as the reductions are eliminated by June 30, 2020.

Borrowers must apply for forgiveness with the lender servicing the loan. Lenders have 60 days to review and make a determination. Any portion of the loan that is forgiven will be excluded from gross income.

What is your next step?
Call your bank and request to participate in this program. This program appears to be your best bet to get capital in the door, pay your payroll and have some or all of the loan forgiven.

If you have any questions regarding the CARES Act or how you should be responding to COVID-19, please contact Elizabeth Fritzinger. Berry & Fritzinger can help your business understand and utilize these new laws.