Broadly, the CARES Act creates an entirely new type of business loan by amending the Small Business Act (“SBA”) for the covered period of February 15, 2020, to June 30, 2020, to incentivize small businesses to maintain their workforces. The amendment provides for the Small Business Administration to provide strategic loans under the Paycheck Protection Program (PPP) to eligible businesses in order to pay for vital operating costs such as payroll, rent, mortgage interest, and utilities.
Eligible businesses are those that were operating on February 15, 2020 and employ no more than 500 employees, with certain exceptions based on industry. Further, certain eligible self-employed individuals, independent contractors, and sole proprietors may be eligible loan recipients as well. Not-for-profit business are eligible to apply for funds under this program.
All applicants must provide good faith certifications that include the following:
- The current economic uncertainty makes the loan necessary to support ongoing operations;
- The funds will be used to retain workers and maintain payroll or to make mortgage interest, lease, and utility payments; and
- The applicant has not and will not receive another loan under this program.
Loan amounts are subject to certain exclusions, but are determined generally at being the lesser of either:
- 2.5x the average total payroll costs of a company incurred in the year period prior to the loan being made, plus any outstanding amount of a loan made under the SBA Disaster Loan Program, net of any advance received under the SBA Disaster Loan Program but not to exceed $10,000,000 – OR –
- 2.5x the average total monthly payroll payments from January 1, 2020 to February 29, 2020 for businesses not in existence during the required period, plus the outstanding amount of a loan made under the SBA Disaster Loan Program, net of any advance received under the SBA Disaster Loan Program but not to exceed $10,000,000.
Additionally, all loans will carry fixed interest rates of 1% with 2-year repayment terms for amounts not forgiven. Borrowers may repay the loan with no prepayment penalties or fees. In an effort to expedite the loan process, any lenders already approved under the Small Business Administration’s existing umbrella are automatically approved to participate in the program. Other lending sources will be announced as determined by the Department of Treasury. Collateral and personal guarantee requirements normally required under such loan programs, along with borrower and lender fees, will all be waived.
Eligible borrowers may use loan amounts for the following business costs: Payroll including costs of salaries, paid time off (PTO), family, medical, or sick leave payments, payments for group health care benefits including insurance premiums, retirement benefits, state or local taxes assessed for compensation; interest on any debt obligations incurred prior to the covered period; mortgage or lease expenses; and utility expenses.
Borrowers are required to spend no more than 25% of the loan funds on rent, utilities, or mortgage interest payments with at least 75% spent on workforce/payroll and employee benefit expenses.
If a business has used the loans appropriately and maintained the average size of its full-time workforce, all of the loan will be forgiven. The exact amount of forgiveness calculation is the sum of any payroll expenses, mortgage interest payments, rent, and utilities incurred by the borrower business during an eight-week period starting from the loan’s origination date. Borrowers must spend at least 75% of the loan funds on payroll during the eight-week covered period in order to be eligible for forgiveness. Such forgiven amounts will be excluded from the business’ taxable income.
The amount that is forgiven is reduced if the business has decreased the number of full-time employees or reduced actual salary expenses during the eight-week covered period after the loan is disbursed. These two calculations are based on a business’s payroll. The first measurement looks at the number of Full Time Employee Equivalents (“FTEs”) the company employs per pay period falling within each month and the second looks at the total salary and wages of employees.
This forgiveness reduction is calculated proportionate to (1) the reduction of employees compared to historic employment levels or (2) a reduction of more than 25% of an employee’s wages.
Under the employee reduction calculation, a business divides the average number of FTEs per month for the eight-week period beginning on the loan’s origination by the average number of FTEs employed each pay period falling within each month during either (1) February 15, 2019, to June 30, 2019, or (2) January 1, 2020, to February 29, 2020. The loan amount used during the covered eight-week period should then be multiplied by this ratio to determine the total forgiveness amount.
Under the wage and salary reduction calculation, the total forgiveness amount will be reduced by any reduction in an employee’s salary or wages during the eight-week covered period. This formula is only applicable to employees making $100,000 or less per year. A pay reduction that exceeds 25% of the total salary or wages of an employee as measured against the most recent quarter that the employee worked prior to the loan’s origination will reduce the total forgivable amount dollar-for-dollar.
In an effort to promote the rehiring of laid off employees due to the crisis, companies will also receive full loan forgiveness if by June 30, 2020, the business completely eliminates employee or pay reductions for any employee or salary and wage deductions that occurred between February 15, 2020, and April 26, 2020.