On March 27, 2020, Congress approved the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). One of the most noteworthy provisions of the Act is a new $349,000,000,000 Paycheck Protection Program of loans to be made by your local bank to small businesses, guaranteed by the Small Business Administration (“SBA”). Incredibly, qualifying borrowers do not have to repay the loan to the extent of the small business’ payroll costs, rent, and utilities expenses paid during the 8-week period following loan closing!
Under the program, which the SBA has indicated will be available beginning Friday, April 3, 2020, small businesses and other business concerns that generally have fewer than 500 employees, self-employed, sole proprietors, and independent contractors and businesses in the accommodation and food service sector with fewer than 500 employees per location are eligible for SBA Section 7(a) small business loans to cover payroll, health care costs, mortgage interest payments, rent and utility payments, and interest on pre-existing debt obligations. The amount of the loan cannot exceed the sum of 2.5 times the borrower’s average monthly payroll cost during the year prior to the loan.
Loans are fully guaranteed to the lender by the federal government. Collateral and personal guaranties are not required. To be eligible, a borrower must have been in operation on February 15, 2020, and must have paid employee salaries and payroll taxes.
Loans are available to eligible borrowers under the program only through June 30, 2020, so time is of the essence in submitting a loan application.
Although the small business can borrow up to 2.5 times the average monthly payroll cost for the prior year, the loan is eligible for forgiveness, meaning there is no obligation to repay it, in an amount equal to the documented payments by the business for payroll (a maximum of $100,000 annualized per employee), rent, utilities and mortgage interest during the 8 weeks after the loan closing. The SBA’s program overview released on March 31, 2020 states that at least 75% of the forgiven amount must have been used for payroll. This requirement is not in the text of the CARES Act itself, so borrowers should continue to monitor evolving guidance. The SBA’s program overview is available here: https://www.sba.gov/funding-programs/loans/paycheck-protection-program-ppp
The amount forgiven will be reduced by a percentage related to layoffs or salary or wage reductions. For example, for layoffs, the amount forgiven is calculated by multiplying the 8 week qualifying expenses by a fraction, the numerator of which is the average number of full time equivalent employees per month during the period February 15, 2020 through June 30, 2020, and the denominator of which is either (to be elected by the borrower): (a) the average number of full time equivalent employees per month employed during the period February 15, 2019 and ending June 30, 2019; or (b) the average number of full time equivalent employees per month employed during the period January 1, 2020 and ending February 29, 2020. So, if a borrower lays off workers in April and May, 2020, for example, the lower numbers for those two months will draw down the value of the numerator, i.e., the average from the period February 15 through June 30, and negatively affect the amount forgiven.
However, if the borrower lays off workers during the period February 15, 2020 through April 27, 2020, but calls back all workers employed as of February 15, 2020, with such workers back on the job by June 30, 2020, there will be no reduction in the amount forgiven. This rule encourages the recall of all laid off workers by June 30, 2020.
The local lender – not the SBA -- will process the loan forgiveness requests and is required to do so within 60 days. The amount forgiven is not considered taxable income to the borrower.
The portion not forgiven must be repaid, but payments are deferred by at least six months but not more than one year.
Before closing on a Paycheck Protection Program loan, the borrower should examine whether an employee retention tax credit also found in the CARES Act provides a greater benefit. The Act allows an eligible employer to claim a tax credit against its quarterly payroll tax obligations of 50% of each employee’s “qualifying wages” of up to $10,000. However, the employee retention credit cannot be taken by businesses which also have received a paycheck protection loan. An employer can potentially qualify for one but not both.
Given the expected high number of loan applications to be submitted Friday April 3, 2020 and thereafter, and the program’s June 30, 2020 termination date, we recommend that interested small businesses promptly determine whether a Paycheck Protection Program loan benefits them and, if so, file an application as soon as practicable.