CARES Act Allocates $350 Billion for Small Business Loans Under Paycheck Protection Program
In response to the COVID-19 pandemic, on March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law. As the single-biggest economic relief package in American history, the CARES Act provides for over $2 trillion in spending and tax breaks designed to maintain and support the U.S. economy.
The CARES Act is an unprecedented financial assistance package which contains many provisions aimed at supporting small and mid-size businesses. One such initiative is the Paycheck Protection Program, a Small Business Administration (SBA) loan program that helps businesses keep their workforce employed during the Coronavirus crisis by providing federally backed loans which may be used to fund payroll and related business expenses and which may be eligible for loan forgiveness.
Paycheck Protection Loans
Many businesses are already experiencing negative financial effects as a result of the Coronavirus crisis. This has already translated into record numbers of new unemployment claims, with the Department of Labor reporting that more than three million people filed for unemployment from March 15 to March 21. Unemployment claims for the period March 22 through March 28 exceeded six million.
The loans made through the Paycheck Protection Program (“PPP”) are designed to lessen the impact of these unfavorable economic conditions by providing a direct incentive for small businesses to keep their workers on the payroll. These small business loans of 2.5 times the average monthly payroll costs from the prior year (up to $10 million) can cover payroll and certain other expenses. Additionally, if a business maintains its workforce, SBA will forgive the portion of the loan proceeds used to cover the first 8-weeks of payroll and certain other expenses following loan origination.
The program guidelines cast a wide net for eligibility and include any small business with 500 or fewer employees (including sole proprietorships, independent contractors and self-employed persons), as well as 501(c)(3) organizations or 501(c)(19) veterans organizations affected by Coronavirus. That being said, businesses in certain industries which have more than 500 employees may still be eligible if they meet the SBA’s size standards for those industries. Small businesses in the hospitality and food industry with more than one location may also be eligible at the store and location level if the particular store employs 500 or fewer workers. Note that in order to be eligible, business must have been operating as of February 15, 2020.
The Loan Application Process
Small businesses and sole proprietorships can apply for and receive loans, starting April 3, 2020, while independent contractors and self-employed individuals can apply starting April 10, 2020. Businesses can apply through any existing SBA lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. Generally, business with established banking relationships may wish to consult with those lenders as to whether their institution is participating. In the meantime, businesses wishing to get a jump on preparing their loan application, can find it here. Businesses applying for a loan under the Paycheck Protection Program will be available to do so through June 30, 2020.
Loan Terms and Covered Expenses
Under the PPP, the maximum loan amounts will be equal to the lesser of (i) $10 million; or (ii) 2.5 multiplied by the average total monthly payments for payroll costs incurred by the business during the one-year period before the date on which the loan is made.
The loan is meant to cover the following expenses which were incurred (or will be incurred) between February 15, 2020 and June 30, 2020:
- Health care benefits and related insurance premiums;
- Employee compensation (some limitations for employees with salaries over $100k);
- Mortgage interest obligations (but not principal);
- Rent and utilities; and
- Interest on debt incurred prior to the loan that were incurred before February 15, 2020. (Note that the CARES Act and the current IRS guidance differ on this last item.)
One particular feature of these loans, which may be attractive to many businesses, is that the loans may be eligible for loan forgiveness up to the amount (not to exceed the loan principal) spent by the business during an 8-week period after the origination date of the loan on the following expenses:
- Payroll Costs;
- Interest payments on any mortgage incurred prior to February 15, 2020;
- Payment of rent on any lease in force prior to February 15, 2020; and
- Payment on any utility which services began prior to February 15, 2020.
However, businesses should take care to note that the following expenses are not included in the definition of payroll costs and thus cannot be used to calculate the maximum amount for the loan and may not be included in the amount which is forgiven:
- Social Security and Medicare taxes;
- Taxes assessed under the Railroad Retirement Tax Act;
- Federal income tax required to be deducted from employment income paid to employees;
- Compensation paid to employees who live outside the U.S.;
- Qualified sick leave wages for which a credit is allowed under section 7001 of the Families First Coronavirus Response Act (“FFCRA”); or qualified family leave wages for which a credit is allowed under section 7003 of the FFCRA.
Additionally, as the program is designed to incentivize businesses to keep employees on their payroll, there are consequences for businesses that reduce their workforce. With limited exception, the amount of loan forgiveness will be reduced if there is a reduction in the number of a business’ employees or a reduction of greater than 25% in wages paid to employees.
However, this reduction penalty does not apply if reductions in employment or wages that occur(ed) during the period beginning on February 15, 2020, and ending 30 days after March 27, 2020, IF by June 30, 2020 the business restores the reduction in employees or reduction in wages. This means that a business which reduced its work force, furloughed or otherwise laid off employees may still be eligible to receive a loan.
Other Notable Loan Provisions
In addition to the above, businesses should note these additional loan terms. All payments for these loans are deferred for 6 months. The loans will have 2 year terms, though businesses may also pay off their loan earlier without any prepayment penalties or fees. Also, unlike many SBA loans, no collateral or personal guarantee is required to receive a PPP loan.
- When applying for a loan, a business must certify:
- (i) the loan is necessary to support the ongoing operations of the business;
- (ii) that the funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments; and
- (iii) the business has not received a loan between February 15, 2020 to December 31, 2020, and does not have any other application pending for a loan for the same purpose.
Interaction With Other CARES Act Provisions
The Paycheck Protection Program is far from the only financial relief program made available recently in response to the COVID-19 situation. As such, businesses owners should be aware of how participation in the PPP may interact with other CARES Act programs. For example, a business that claims an Employee Retention Credit is not eligible to receive a loan under the PPP.
On the other hand, a business may qualify for a PPP loan and a loan under the SBA Disaster Loan Program, or EIDL. However the amount forgiven under a Paycheck Protection loan will be decreased by the amount of the $10,000 grant.
For more information about the Paycheck Protection Program, or for questions about how another CARES Act program may be able provide relief for your business, you can reach out to the attorneys at Atkinson, Andelson, Loya, Ruud & Romo.