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Paycheck Protection Program

Paycheck Protection Program

What is the CARES Act?

The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law on March 27, 2020. The CARES Act includes major relief for small business owners through the new “Paycheck Protection Program,” among other changes. The Paycheck Protection Program creates major changes to the Small Business Administration’s Section 7(a) Loan Program for a short while. The Act expands who can qualify to apply for a 7(a) Loan, expands how much can be borrowed thereunder, allows for deferment of loan payments, and allows for forgiveness of some loan amounts where borrowers utilize the monies borrowed for certain purposes. The CARES Act also provides for a new Employee Retention Credit. However, Business owners are not eligible for the Employee Retention Credit if they take the 7(a) Loan. Therefore, business owners must understand the available programs and how they interact to find the best relief for their business.

Who is Eligible for a 7(a) Loan under the Paycheck Protection Program?

During the covered period of February 15, 2020 – June 30, 2020, any business, non-profit, veterans’ organization, or Tribal business, that has 500 employees or less (or where applicable, that has the size standard in the number of employees established by the SBA) can apply for a SBA 7(a) Loan under the Small Business Act (15 U.S.C. 632). Also, individuals who operate under a sole proprietorship or as an independent contractor and certain self-employed individuals are eligible. Also eligible to apply is any business concern that employs not more than 500 employees per physical location of the business concern and that is assigned a NAICS code beginning with 72 at the time of disbursal.

Note, the CARES Act, unlike the Economic Injury Disaster Loan Program (EIDL), does not required businesses to prove losses or require any specific percentage of losses to qualify for a loan. The CARES Act, as to loan forgiveness, only requires a business owner to affirm, “that the uncertainty of current economic conditions justifies the loan request to support the ongoing operations of the borrower, and acknowledges that funds will be used to retain workers and maintain payroll.”

If I Take the Employee Retention Credit Am I Eligible for SBA 7(a) Loan?

No, Business owners are not eligible for the Employee Retention Credit if they take the SBA 7(a) Loan under the CARES Act.

Can I Get a 7(a) Loan as a Sole Proprietor or Self Employed Person

Yes.

If I had an EIDL not Related to COVID-19, Am I eligible for the SBA 7(a) Loan?

Yes.

When and How Do I Apply?

Pursuant to the CARES Act, to qualify under the expanded qualifications, the borrower must apply for a 7(a) Loan before June 30, 2020. However, there is not yet an available application process. The CARES Act requires that by April 11, 2020, Regulations be issued to implement the application process for the Paycheck Protection Program. It is expected the application process will be implemented earlier though.

How Much Can I Borrow?

The CARES Act provides for a loan with a maximum 10-year maturity date at a maximum of 4% interest. It provides that an applicant can borrow the lesser of:

  • 2.5 times the average total monthly payments by the applicant for payroll costs,
  • the outstanding amount of a loan Sect. 7 (b)(2) that was made on or after January 31, 2020 through the date when covered loans are made available to be refinanced under the covered loan, or
  • $10,000,000.00
What is included in Monthly Payroll Costs?

If choosing (a), business owners should know exactly what is allowed to be considered as “Payroll Costs.” Pursuant to the CARES Act, “payroll costs” include all of the following:

  • the sum of payments of any compensation with respect to employees that is a salary, wage, commission, or similar compensation (but not compensation of an individual employee in excess of $100,000.00 as prorated for the covered period); payment of cash tip or equivalent; payment for vacation, parental, family, medical, or sick leave (Not Families First Corona Virus Response Act Leave); allowance for dismissal or separation; payment required 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 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 that is not more than $100,000 in 1 year, as prorated for the covered period.

However, “Payroll costs” specifically exclude compensation of an employee whose principal place of residence is outside of the United States and taxes under the IRS Code of 1986 Chapters 21, 22 or 24.

The average monthly payroll costs must be determined from the 12-month period prior to the date the loan was made. But, for those not in business from February 15, 2019 through June 30, 2019, they may use the average payroll costs from January 1, 2020 through February 29, 2020.

What Can I Use the Money On?

Pursuant to the CARES Act, the PPL loan can be used on expenses the business incurred from February 15, 2020 through June 30, 2020 on Payroll Expenses, as defined above, employee salaries, commissions, or similar compensations, costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums; payments of interest on any mortgage obligation; rent (including rent under a lease agreement); utilities; interest on any other debt obligations that were incurred before the covered period.

How Much Do I Have to Pay Back?

The CARES Act states that a portion of the PPA loan may be forgiven, up to the total loan amount, if certain terms are met, subject to the reductions below. Also, the CARES Act allows a six-month deferral on portions not forgiven, before borrowers are required to begin making payments on any interest or principal. Specifically, amounts spent on the following during the 8-week period following the date of the loan may be forgiven, subject to the reductions:

  1. Payroll costs as defined earlier;
  2. Any payment of interest on any mortgage liability by the borrower incurred prior to February 15, 2020.
  3. Rent obligated under a leasing agreement in force before February 15, 2020;
  4. Payment for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020
Reductions

The first type of reduction requires that the amounts available to be forgiven (the “Total Forgiveness Eligibility Amount”) shall be reduced by the amount that is the Total Forgiveness Eligibility Amount times the quotient of the average number of full-time equivalent employees during the 8-week period after the loan date/ (Avg. No. full-time equivalent employees from Jan. 1, 2020 – Feb. 29, 2020 or, Avg. No. full-time equivalent employees from Feb. 15, 2019 – June 30, 2019). The average number of full-time equivalent employees is determined by calculating the average number of full-time equivalent employees for each pay period falling within a month.

Example:
Loan Date: June 1, 2020
Forgiveness Eligibility: $100,000.00
8 – Week Period: June 1, 2020 – July 31, 2020
Avg. Employees During 8-week Period: 5
Jan. 1, 2020 – Feb. 29, 2020: Avg. employees: 13
Feb. 15, 2019 – June 30, 2019: Avg. Employees: 10

$100,000.00 * (5/10) = $50,000.00
Here, the total average employees during the 8-week period is 5. This is divided by the lowest number of average employees during the available periods, which was 10. This total (5/10) was then multiplied by the Total Forgiveness Eligibility Amount of $100,000.00. Therefore, the total reduction of the Total Forgiveness Eligibility Amount is $50,000.00.

The second type of reduction requires that the amount of loan forgiveness be reduced by the same amount as the total amount in reduction in total salary incurred by employees over the 8-week period after the loan date. However, this only applies as to employees who were making $100,000.00 or less in 2019, and where such decrease is over 25% of the employee’s total annual salary, as based on the last full-quarter before the loan date.

Example:
Loan Date: June 1, 2020
Forgiveness Eligibility: $100,000.00
8 – Week Period: June 1, 2020 – July 31, 2020
Avg. Employees During 8-week Period: 5, Three Employees Salaries Stayed the Same
Two employees went from making $90,000.00 to $60,000.00 a 331/3% decrease in salary for each. Therefore, as to each employee, 25% of a decrease in salary would be $67,500.00. This is the lowest amount the employees could have been paid for the employer to avoid a reduction.
However, here, the employees were each paid $60,000.00. So, $7,500.00 is the difference between the 25% reduction and the actual salary paid. Because two employees had their salaries reduced, the total of the reduction would be $15,000.00 total to the Employer, for this portion of the reduction calculation.

Combining the examples,
Loan Date: June 1, 2020
Forgiveness Eligibility: $100,000.00
8 – Week Period: June 1, 2020 – July 31, 2020
Avg. Employees During 8-week Period: 5
Avg. Employees During 8-week Period: 5, Three Employees Salaries Stayed the Same
Jan. 1, 2020 – Feb. 29, 2020: Avg. employees: 13
Feb. 15, 2019 – June 30, 2019: Avg. Employees: 10

Here, the Total Forgiveness Eligibility amount of $100,000.00 is reduced by $50,000 based on reduction type 1, to $50,000.00 remaining. It is then further reduced by $15,000.00 based on reduction type 2, to $35,000.00.

Can I Re-Hire to Avoid Reductions?

Yes, pursuant to the CARES Act, an Employer that reduces either number of employees or the salaries of employees during the time period of Feb. 15, 2020 through April 26, 2020, shall not be subject to the reduction provisions to the forgiveness amounts if the number of employees and amount of salaries are returned to the levels on February 15, 2020, by June 30, 2020.