COVID-19 Update #4: CARES Act – Paycheck Protection Program
April 2, 2020
On Friday, March 27th, Congress approved, and President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The CARES Act is the largest economic and relief package in the Nation’s history. It is a comprehensive package that includes cash flow and tax relief for individuals and small businesses. One of the areas of the CARES Act that is the most interesting to small businesses is the Paycheck Protection Program (“PPP”). The Paycheck Protection Program covers the period beginning February 15, 2020, and ending on June 30, 2020. This key area of the CARES Act would allow small businesses to cover their operating costs during this pandemic while supporting the continued employment of their employees. This new SBA lending program is now 100% government-guaranteed through 12/31/2020. These guarantees reduce based on loan balances after 12/31/2020. Please see below for a summary of the details of the plan.
- For Profit Business
- Sole proprietorship
- Veterans organization
- Tribal Business Concern
- Less than 500 employees
The company must also certify that the current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.
Maximum Loan Amount and Terms
This is a formula-based approach that’s equal to the lesser of 2.5 x the average total monthly payroll paid one year prior to the loan date, or $10,000,000. It is very important to pay attention to the dates. If you have had a hiring shift in the last year, it could impact the loan balance eligibility. According to the CARES act, the interest rate cannot exceed 4%, and the term won’t exceed ten years. There is a payment deferral that will be no more than one year. The borrower is also not required to collateralize or guarantee these loans. The SBA will not charge any fees to the borrower on these loans. The Treasury Department has stated the interest rate with be .5%, the term is two years, and the deferral period will be six months.
Use of Proceeds
The proceeds of the Paycheck Protection Program can be used to cover the following expenses:
- Payroll Costs
- This does not include any individual excess earnings of $100,000 as pro-rated during the covered period or qualified sick leave or FMLA wages that are paid under the Family First Coronavirus Response Act.
- Group health insurance benefits
- Employee salaries, commissions, or similar compensations
- Mortgage interest payments
- Interest on debt obligations incurred before the protection period
The borrower will be eligible for forgiveness and cancellation up to the full amount of the loan. Unlike most loan forgiveness, this will not be subject to any income tax from the cancellation. The formula for the loan forgiveness is complicated. The total amount eligible for forgiveness is equal to the payments made during specific covered periods for payroll costs, payments of interest, rent payments, and utility payments. The SBA has stated that due to the high subscription value, it anticipates that not more than 25% of the forgiven amount may be for non-payroll costs.
The amount forgiven is reduced on a pro-rata basis for any reduction in the number of employees as compared to the same period in 2019 or for a reduction of employee salaries of more than 25%. There is a relief from the reduction if the borrower rehires employees or make up for the wage reductions by June 30, 2020.
Due to the complexity of this section, it is crucial to work with your lender, employment attorney, and accountant to ensure that you can maximize the amount of loan forgiveness available. You must verify the number of full-time equivalents between February 15, 2020, and June 30, 2020.
Process of SBA Loan
In order to start the process, you should contact your local bank or use the SBA Lender Match Program. The SBA just released the loan application on April 1st. The application for the Payroll Protection Program is two pages and includes general information, but you must provide specific information and support for:
- The average payroll
- Number of jobs (which appears to be Full-time Equivalents based upon the certifications)
- The company and each owner with greater than 20% are signing off on the certifications on the document.
These terms are complex, and we encourage you to work with people in banking, law, and accounting to ensure that you meet all the standards. Please reach out to us if we can help coordinate with other professionals in your network. We can also introduce you to people that we think can help you in this process.
If you have any questions, please do not hesitate to contact your Topel Forman professional.
Topel Forman LLC