UPDATE: On March 31, 2020, the Small Business Administration and the U.S. Treasury released the Application Form for the new SBA PPP Loan forgiveness program, which we have included at the end of this article.
President Trump signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act into law on March 27, 2020. In addition to providing relief to millions of workers, the CARES Act allocates approximately $350 billion to the Small Business Administration (SBA) to administer emergency loans through the Paycheck Protection Program (PPP).
Who is Eligible. Generally, any sole proprietor, for profit business, nonprofit 501(c)(3) organization, tribal business, or veterans’ organization employing fewer than 500 full-time, part-time, or “other” employees or who meets other recognized small business standards is eligible for a PPP loan. When counting employees, the SBA will apply customary affiliation rules (for example, employees of related entities under common ownership and control will be deemed to be employees of the same entity) with exceptions in the hospitality and dining industries and for franchises that are assigned a franchise code by the SBA. These definitions also may make loans available for independent contractors and gig economy workers.
Other Qualifications. In order to qualify for a PPP loan, a business must make a good faith certification that the loan is necessary to support the ongoing operations of the business through the environment created by COVID-19 and that funds will be used to retain workers, maintain payroll, or make mortgage interest payments, lease payments, and utility payments. Additionally, the business will have to certify that it is has no other duplicative loan applications for the same purpose.
How Much can be Borrowed. Eligible businesses can borrow 2.5 times their average monthly payroll costs over the last year plus the sum of any COVID-19 Emergency Injury Disaster Loan (“EIDL”), up to ten million dollars The calculation of payroll costs includes such things as the following: salary, wages, commissions, vacation, parental, family, medical, and sick leave; allowances for dismissal or separation; payments for group health care benefits, including insurance premiums; and retirement benefits and payment of state or local tax assessed on employee compensation. A few exclusions apply to this definition including compensation of greater than $100,000 to any employee in a year, payments to employees outside of the U.S. and payments under the new Families First Corona Relief Act for which a credit is allowed.
What Kind of Payment Terms can be Expected. Loans made under this program will contain a maximum interest rate of four percent and both loan and interest payments will be deferred between six months and one year from origination. Additionally, borrowers will not be charged any participation fees or prepayment fees. The loans will be non-recourse, will not require collateral, and will not be personally guaranteed. The loans may be prepaid at any time.
How Much of the Loan will be Forgiven. One of the critical features of these loans is that significant amounts of them can be forgiven, essentially turning the loan into a grant. Specifically, the amount borrowers spend during the eight-week period after loan origination on qualified costs (i.e. payroll, rent, utilities, and interest on other debt) may be forgiven if the employer maintains the same number of full-time equivalent employees during the covered period as compared to a look back period. To the extent this standard is not met, the amount forgiven will be reduced proportionately. However, if, prior to June 30, 2020, an employer rehires any workers who were laid off after February 15, 2020 (or hires new ones by June 30, 2020), further lost portions of forgiveness can be recaptured.
The amount of loan forgiveness is further reduced dollar for dollar by the amount of any reductions, after February 15, 2020, in salary and wages in excess of 25% for any employee (other than those making in excess of $100,000 annually). This reduction in forgiveness will not apply, however, if the employer eliminates the salary reduction for that employee by June 30, 2020. Additionally, the amount forgiven is not included in taxable income.
If you think your small business might be eligible for a Paycheck Protection Program loan, you should consult with your banking advisors as soon as possible as the loans will be on a first come first served basis. The attorneys at Coolidge Wall are also available to help guide you through the loan process.
David P. Pierce
J. Stephen Herbert
Visit our Coolidge COVID-19 Resource Center for more information.
Disclaimer: The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult an attorney for advice regarding your individual situation. We invite you to contact us and welcome your calls, letters and electronic mail.