CARES Act Paycheck Protection Program: Open for Applications
CARES Act Paycheck Protection Program: Open for Applications
On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act. This sweeping law includes assistance to small businesses reeling from the financial consequences of COVID-19 by authorizing a financial package of $349 billion to be provided to small business owners through the newly adopted Paycheck Protection Program (“PPP”) in the form of loans with liberal loan forgiveness provisions.
On March 31, 2020, the U.S. Department of Treasury posted the Paycheck Protection Program loan application form and program application information for borrowers, here.
Existing Small Business Administration (“SBA”) lenders under SBA’s 7(a) program can start accepting PPP loan applications from small businesses and sole proprietorships on Friday, April 3, 2020, and from independent contractors and self-employed individuals on Friday, April 10, 2020. The program is open for applications through June 30, 2020, but we recommend filing your application as soon as possible due to likely oversubscription. A list of the one hundred most active SBA 7(a) lenders can be found here.
Below is a summary of the new program’s notable provisions, including eligibility requirements, permitted uses of the loan proceeds, and the loan forgiveness features. The U.S. Department of Treasury’s PPP information sheet also provides a very useful summary, here.
Paycheck Protection Program and Loan Forgiveness:
Critical to small businesses, the PPP authorizes loans of up to $10,000,000 to small businesses for use towards specified business expenses discussed in more detail below. To be eligible, a business generally must employ no more than 500 employees (which includes individuals employed on a full time, part time, or other basis). Individuals who operate under a sole proprietorship or as an independent contractor, and eligible self-employed individuals also are eligible to receive a loan under the program. Additionally, businesses in the accommodation and food service classification that employ not more than 500 employees per physical location, as well as businesses operating as a franchise with no more than 500 employees, also may qualify.
- PPP loan amount: An eligible small business may seek a PPP loan in an amount that is the lesser of either (1) $10,000,000, or (2) the sum of (i) the product obtained by multiplying the average total monthly payments for payroll costs incurred during the one-year period before the date that the loan is made, by 2.5, plus (ii) the outstanding amount of certain SBA loans to the small business made after January 31, 2020, if any. The Program provides alternative methods for calculating average payroll costs for seasonal employers and for small businesses that were not in business between February 15, 2019, and June 30, 2019.
- Determining qualified payroll costs for purposes of PPP loan sizing: Small business owners who are considering eligibility need to be aware that the Program specifies those costs that are (and are not) permissible when calculating payroll costs for purposes of PPP loan underwriting. By way of example, qualified payroll costs expressly exclude compensation of an individual employee in excess of an annual salary of $100,000, as well as compensation of employees whose principal place of residence is outside of the United States.
- Permitted uses of PPP loan proceeds: PPP loan proceeds may be used towards payroll costs, costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums, employee salaries or commissions, payments of interest on any mortgage obligation, rent, utilities, or interest incurred on any debt incurred before February 15, 2020.
- PPP loan interest rate, repayment terms, and underwriting requirements. The maximum interest rate of a PPP loan is 4 percent, the maximum term is 10 years, and lenders are required to provide complete payment deferment relief for at least six months but not more than a year. No personal guarantee shall be required. No collateral is required. PPP loans are nonrecourse against individual shareholders, members, or partners of the small business, except to the extent the loan proceeds are used for an unauthorized purpose. There is no prepayment penalty for any payment made for a PPP loan.
- Financial hardship certification requirement. Recipients of PPP loans must make a good faith certification that the uncertainty of the current economic conditions makes the loan request necessary to support the recipient’s ongoing operations; acknowledging that funds will be used to retain workers, and maintain payroll or make mortgage payments, lease payments, and utility payments; that the applicant does not have an application pending for a duplicative loan; and that during the period beginning February 15, 2020, and ending December 31, 2020, the eligible recipient has not received amounts for the same purpose and duplicative of amounts applied for or received under a covered loan. Notably, many of the existing eligibility requirements for SBA loans remain in place, although certain requirements have been waived in light of COVID-19, including, for example, the traditional requirement that the applicant must demonstrate that it cannot obtain credit elsewhere.
- PPP loan forgiveness. PPP loan borrowers are eligible for loan forgiveness for amounts spent during the eight-week period after the loan’s origination date for rent, defined payroll costs, mortgage interest, and utility payments, not to exceed the principal amount of the loan. However, the U.S. Treasury Department’s March 31, 2020 Borrower information sheet notes that “[d]ue to likely high subscription, it is anticipated that not more than 25% of the forgiven amount may be for non-payroll costs.” A party seeking forgiveness must submit to the SBA lender that is servicing the loan a number of required documents, including documentation verifying the number of employees on payroll and their pay rates, documents verifying claimed mortgage, lease, or utility payments, and a certification. The amount of the loan forgiveness can be reduced if the loan recipient reduces the number of employees, or salaries and wages, during the eight-week period following the origination of the loan. If, however, the recipient restores their workforce count and salaries or wages by June 30, 2020, there is no reduction penalty.
- Tax treatment of PPP loan forgiveness. The CARES Act provides that any amounts forgiven will not be treated as income to the loan recipient, for U.S. federal income tax purposes. The PPP is federal law and this treatment presumably only applies for state income tax purposes to the extent the federal law is incorporated into state income tax law. For California income tax purposes, the income exception may not apply unless and until California adopts this income forgiveness provision.
Small business owners should be aware that the CARES Act provides other forms of monetary assistance other than the PPP, including Economic Injury Disaster Loans, for which applications may be submitted now directly through the SBA at www.SBA.gov/disaster. These loans have traditionally been available to small businesses in the event of a disaster but only now have become available for a pandemic event. These loans are generally available for up to $2 million for a term of 30 years and at interest rates of 3.75% for small businesses. Importantly, as mentioned above, an eligible small business may apply for and obtain both an Economic Injury Disaster Loan now and a PPP loan once available, so long as the loans are not used for a duplicative purpose (i.e., used to cover different categories of expense).