CARES Act Paycheck Protection Program

UPDATED: April 3, 2020 - 10:30 a.m.

On Thursday, April 2, 2020, the Small Business Administration (SBA) issued its Interim Final Rule regarding the Paycheck Protection Program loans available to businesses, nonprofits, sole proprietors and independent contractors under the CARES Act. Funds for such loans are limited, so businesses should act now if they intend to apply for this loan.

Some key areas of note are:

• The interest rate is now 1% instead of .5%
• Loan origination fees will be paid by the SBA to the lender
• Loans are going to be disbursed on a “first-come, first-served” basis
• Accrued interest on loans is also eligible to be forgiven
• Not more than 25% of loan forgiveness can be attributable to non-payroll costs

The following terms still apply per the guidance issued on March, 31, 2020:

• All payments are deferred for 6 months
• Loan term is 2 years

Small businesses, nonprofits, and sole proprietorships can apply starting April 3, 2020 and independent contractors and self-employed individuals can start applying on April 10, 2020.

ORIGINAL POST: March 27, 2020 - 11:03 a.m.

Late on the night of March 25, 2020, the Senate passed the CARES Act to provide emergency assistance to individuals and businesses impacted by the coronavirus pandemic. The $2 trillion bill passed unanimously and is now going to the House of Representatives where House Speaker Nancy Pelosi is expected to bring it to a vote soon.

One of the key features of the bill is the expansion of Small Business Act to include the “Paycheck Protection Program.” The Senate bill authorizes up to $349 billion in loans for this program designed to provide immediate liquidity to businesses impacted by the coronavirus. 

Eligibility

The “Paycheck Protection Program,” modifying Section 7(a) of the SBA act, is available to businesses, nonprofit organizations, veterans organizations or Tribal businesses with 500 or fewer employees (or, if higher, the standard number employees established by the SBA for certain industries). In addition, sole proprietor, independent contractors, and eligible self-employed individuals are eligible to participate in the program. Businesses in the restaurant and hospitality industry have less restrictive rules for determining their employee count.

An eligible recipient receiving a loan must make a good faith certification that the uncertainty of prevailing economic conditions makes the loan request necessary to support ongoing operations and that the funds will be used to retain workers, maintain payroll, pay group healthcare benefits including insurance premiums, or make mortgage, lease, or utility payments. In addition, the borrower cannot receive both a loan under this program and an economic injury disaster loan for the same purpose but they may be eligible to refinance the loan into the program.   

Taxpayers receiving loans under this program are not eligible for the employee retention credit provided for in the CARES Act.

Loan Amount and Loan Period

This article was originally posted with the number five rather than the two-point-five shown below. The correct multiple is two-point-five.

The loan amount available to a business is the sum of:

• 2.5 times the average total monthly payments for payroll costs incurred during the 1-year period before the date the loan is made (with special rules and measurement dates available for seasonal employers), and
• The outstanding loan amount under subsection 7(b)(2) concerning the SBA Loans for Disaster Recovery Act related to Covid-19 that was made during the period beginning on January 31, 2020, and ending on the date the loan is made.

Special rules exist to determine the average wages if the business was not in existence beginning February 15, 2019 and ending June 30, 2019. The maximum loan amount under the program is $10 million. Loans eligible for the program are loans made between February 15, 2020, and ending on June 30, 2020. 

For purposes of determining the maximum amount of the loan, payroll costs means:

• the sum of compensation with respect to employees that is a:
  • salary, wage, commission or similar type of compensation;
  • payment of cash tip or equivalent;
  • payment of vacation, parental, family, medical, or sick leave;
  • allowance for dismissal or separation;
  • payment requirement for the provisions of group health care benefits including insurance premiums;
  • payment of any retirement benefit; or
  • payment of state or local tax assessed on the compensation of employees; and
• the sum of payments of any compensation or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment, or similar compensation, and
• shall not include compensation for an individual employee (or self-employed individual) in excess of $100,000 as prorated for the covered period; employment taxes; compensation of an employee whose principal place of residence is outside the US; qualified sick leave or qualified family leave for which a credit is allowed under the Families First Coronavirus Response Act.

Loan Forgiveness

A loan under the Paycheck Protection Program is eligible to be forgiven in an amount equal to the sum of the payroll costs; payment of interest on a covered mortgage obligation; rent obligations (in place before February 15, 2020); and utility payments (if service began before February 15, 2020) incurred during the 8-week period following receipt of the loan. 

The forgiven amount shall not exceed the principal amount of the loan. In addition, the amount of the loan eligible to be forgiven is:

• reduced proportionately based on the reduction in the average number of employees;
• further reduced to the extent the total salary of any employee is reduced in excess of 25%.

If, within 30 days of enactment of the law, the employer re-hires employees there is an exception to the reduction in the portion of the loan forgiven.

Employers who receive loan forgiveness under this program are not eligible for the employer or self-employed payroll tax payment deferral provided for in the CARES Act.

Any loan amount in excess of the amount forgiven shall be payable over 10 years at an interest rate not in excess of 4%. Also, the loan forgiven under this section is excluded from taxable income.

Next Step

Businesses and other organizations who are interested in this program should contact their banker or a lender approved to make loans guaranteed by the Small Business Administration for more information.