The Paycheck Protection Program in the CARES Act

The Paycheck Protection Program contained in the recently-passed Coronavirus Aid, Relief, and Economic Security (CARES) Act allocates $350 billion to provide 100% federal guaranteed loans to small businesses under the SBA’s 7(a) loan program. Loans are available to employers who maintain their payroll during the COVID-19 emergency. Specifically, these loans can be completely forgiven if a borrower maintains its payroll during the COVID crisis or restores its payroll afterwards.

Businesses that are eligible:

• Small businesses with fewer than 500 employees (regardless of full-time, part-time or other status);
• A small business who otherwise meets the SBA’s size standard;
• 501(c)(1) with fewer than 500 employees;
• An individual who operates as a sole proprietor;
• An individual who operates as an independent contractor;
• An individual who is self-employed who regularly carries on any trade or business;
• A tribal business concern that meets SBA size standards;
• A 501(c)(19) Veterans Organization that meets SBA size standards

There are also some additional rules to make certain other businesses eligible during this time:

• A business in the accommodation or food services sector, may apply the 500-employee rule on a per physical location basis;
• A business operating as a franchise or receiving financial assistance from an approved Small Business Investment Company is not subject to the SBA’s normal affiliation rules

Evaluation Eligibility
Since lenders will not be able to assess a small business’s ability to repay the loan in the ways they would under normal economic circumstances, lenders have been directed to consider whether the borrower was in operation before February 15, 2020 and whether they had employees for whom they paid salaries and payroll taxes or paid independent contractors.

Lenders will also ask borrowers for a good certification of the following:

• The uncertainty of the current economic conditions makes the loan request necessary to support ongoing operations;
• The borrower will use the loan proceeds to retain workers and maintain payroll or make mortgage, lease, and utility payments;
• The borrower does not have an application pending for a loan duplicative of the purpose and amounts applied for here;
• From February 15, 2020 to December 31, 2020, the borrower has not received a loan duplicative of the purpose and amounts applied for here.

For independent contractors, sole proprietors, or self-employed individuals, there will be certain other documents the lender will ask for—such as payroll tax filings, 1099 forms, and income and expense statements. The final set of requirements will be announced by the federal government in the coming days.

Amount Borrowed
A small business can received up to 2.5x the borrower’s average monthly payroll costs, but the amount is capped at $10 million. Payroll costs are equal to the sum of included payroll costs less the sum of excluded payroll costs.

Included Payroll costs for employers is the sum of payments of any compensation with respect to employees that is a:

• Salary, wage, commission, or similar compensation;
• Payment of cash, tip or equivalent;
• Payment for vacation, parental, family, medical, or sick leave
• Allowance for dismissal or separation;
• Payment required for the provision of group health care benefits, including insurance premiums;
• Payment of any retirement benefit;
• Payment of state or local tax assessed on the compensation of the employee.

Included payroll costs for a sole proprietor, independent contractor, or self-employed individual is 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 compensation and that is in an amount not more than $100,000 in one year, as pro-rated for the covered period.

Excluded Payroll costs for employers, sole proprietors, independent contractors, and self-employed individuals includes:

• Compensation of an individual employee in excess of an annual salary of $100,000, as prorated for the period February 15 to June 20, 2020;
• Payroll taxes, railroad retirement taxes, and income taxes;
• Any compensation of an employee whose principal place of residence is outside the United States;
• Qualified sick leave wages for which a credit is allowed under section 7001 of the Families First Coronavirus Response Act (see supra Emergency Paid Leave and Paid Sick Leave—Families First Coronavirus Response Act) or qualified family leave wages for which a credit is allowed under section 7003 of the Families First Coronavirus Response Act.

Loan Terms
The Paycheck Protection Program also sets certain terms for 7(a) loans. The maximum interest rate is 4% and ensures borrowers are not charged pre-payment fees. Borrowers may also defer payments for at least six months, but not more than a year. Further, the maximum loanable amount for an SBA Express loan has been raised from $350,000 to $1 million through December 31, 2020.

Loan Forgiveness
Borrowers are eligible for loan forgiveness equal to the amount that the borrower spent on certain costs during the 8-week period beginning on the date the loan originated. Those costs include:

• Payroll costs (see the definitions in the preceding section);
• Interest on the mortgage obligation incurred in the ordinary course of business;
• Rent on a leasing agreement;
• Payments on utilities;
• For borrowers with tipped employees, additional wages paid to those employees.

However, the loan forgiveness cannot exceed the original principal amount of the loan. The amount that is forgiven will be reduced if the employer reduces the number of their employees or reduces wages paid to employees by more than 25%. For a more specific calculation of how forgiveness reduction will be determined, see Guidance from the U.S. Chamber of Commerce. However, reductions in employees and/or wages will not reduce the amount of loan forgiveness if, by June 30, 2020, the borrower eliminates any such reduction.

Given the evolving news and updates around the spread of COVID-19 (Coronavirus), Howard, Stallings, From, Atkins, Angell & Davis remains open for business, and our offices remain staffed appropriately to meet your needs.  While many of our attorneys and staff will be working remotely during the coming weeks, rest assured that we are still available to you, our phone numbers and emails are still the best way to reach us.  We understand that you may have legal questions as we forge the path ahead. We remain dedicated to your success and are here for you. Let us know how we can help.

For your reference, we are compiling and analyzing state and federal legal updates here, which may effect your business. Visit our Business Legal Resource Center for updates.