Coronavirus Aid, Relief, and Economic Security Act (CARES Act): Paycheck Protection Small Business Loans
By Chisa Chervenick
The House is expected to pass what is commonly known as the "Cares Act". This may be the largest small business aid package in the history of our Country. Any small business under 500 employees and even sole proprietors can apply for it. The motivation here is to maintain employment because small businesses are the job creators. Most importantly, loans may be forgiven if employment is maintained. Banks will primarily administer the loans.
Overview
Provides 8 weeks of cash-flow assistance through 100% federally guaranteed loans to small employers who maintain their payroll during this national health emergency. If payroll is maintained, the portion of the loans used to cover payroll costs, interest on mortgage obligations, rent, and utilities would be forgiven.
The Act will be retroactive to 2/15/2020 - employees who have already been laid off may be brought back onto payroll.
The SBA will be required to pay all principal, interest, and fees on all existing SBA loan products for 6 months, including 7(a) Community Advantage, 504, and Microloan programs. This is not 6 months of forbearance; these amounts will not be due as a “balloon payment” at the end of 6 months.
The period of time covered by this loan (for purposes qualifying expenses for forgiveness) is 2/15/2020 through 6/30/2020.
Employers must have 500 or fewer employees, including full-time, part-time, or other basis/status, with few exceptions.
Employers who have multiple locations must have 500 or fewer employees per location; affiliation rules applicable to, for example, franchisees, have been waived.
Payroll costs eligible for forgiveness:
Salary, wages, commissions, cash tips, or equivalent;
Payment for vacation, parental, family medical, or sick leave;
Allowance for dismissal or separation;
Payments required for provision of group health benefits, including insurance premiums;
Payment of retirement benefits;
Payment of state or local tax assessed on employee compensation; and
The sum of payments of any compensation to (or income of) a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment, or similar AND that it is not more than $100,000 in 1 year (as prorated for the covered period).
Payroll costs not eligible for forgiveness:
Compensation of an individual employee in excess of $100,000 annual salary (as prorated for the covered period);
Certain taxes imposed or withheld under IRS chapters 21, 22, 24;
Compensation for an employee whose principle place of residence is outside of the U.S.;
Qualified sick leave wages or family medical leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Act.
Sole proprietors, independent contractors, and eligible self-employed individuals may obtain covered loans by submitting documentation to establish their eligibility, including payroll tax filings reported to the IRS, Forms 1099-MISC, and income and expenses from the sole proprietorship, as well as any other documentation deemed necessary by the loan administrator.
The maximum loan amount available is the lesser of $10,000,000 or the amount calculated using specified factors that include payroll costs and expenses incurred during the 1-year period of time preceding the loan (or alternative timeframe for newer businesses) and other outstanding SBA loan amounts.
Borrowers will be required to submit a good faith certification that the loan is necessary to support ongoing operations because of the current economic crisis, that funds will be used to retain workers and maintain payments (as discussed above), and that no duplicative loans have been applied for or obtained for the same purposes from 2/15/2020 through 12/31/2020.
Loans will be administered without fees and with a maximum interest rate of 4%. Lending requirements regarding personal guarantees, collateral required, and “credit elsewhere” have been waived. Loan administrators must provide complete deferment relief for borrows impacted by COVID-19 for a period of not less than 6 months and no more than 1 year, including payment of principal, interest, and fees. More guidance regarding deferment will be provided to lenders within 30 days of the Act’s enactment.
Businesses that have already applied for or obtained a SBA disaster loan between 1/31/2020 and the date on which these covered loans become available are not prohibited in obtaining a covered loan under this Act.
Forgiveness:
Forgiveness is available for covered loan balances equal to the sum of the costs incurred and payments made during the covered period for payroll costs, payment of interest on covered mortgage obligation (no prepayment of principal), payment on covered rent obligations, and covered utility payments.
The amount forgiven cannot exceed the principal amount of the covered loan.
Forgiveness amounts will be reduced:
For a reduction in the number of employees;
By the amount of any reduction in total salary or wages of any employee during the covered period that is in excess of 25% of the total salary/wages of the employee during the most recent full quarter that the employee was employed prior to the covered period.
Only applicable for any employee who did not receive, during any single pay period during 2019, wages or salary at an annualized rate of pay of more than $100,000.
Amount of forgiveness will not be reduced for borrowers that rehire workers previously laid off- no penalty for having a reduced payroll at the beginning of the covered period.
To apply for forgiveness, businesses will work through their lender. Documentation will be required to verify covered payroll costs and expenses for the covered period for the amounts for which forgiveness is requested. Forgiveness determinations will be made within 60 days of filing an application for forgiveness.
Emergency EIDL Grant
An eligible entity that has applied for an EIDL loan may request an advance on that loan of no more than $10,000, which the SBA must distribute within 3 days. If the applicant is subsequently denied a loan, this amount will not need to be repaid. If the applicant is approved for a loan under this Act, the amounts advanced will be subtracted from forgiveness amounts requested later.