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Written By: Bryan S. Bailey

On Friday, March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) in response to the COVID-19 pandemic.  The CARES Act includes a forgivable small business loan program: the Paycheck Protection Program (PPP).  Under the PPP loan program, forgivable loans of up to $10 million will be available to qualifying small businesses.  Secretary Mnuchin has repeatedly stated that he wants PPP loans to being funding next week.  However, we will know more details when the Small Business Administration (SBA) issues regulations implementing the program, which the CARES Act requires within the next 15 days.

The following summarizes key provisions of the PPP loan program.  We will publish an update after the SBA publishes the implementing regulations.

WHO IS ELIGIBLE FOR A PPP LOAN?

The following businesses which were in operation February 15, 2020 are eligible for a PPP loan:

  • Businesses with 500 or less full-time and part-time employees;
  • Businesses in the hotel and restaurant/food service industries (i.e., with a NAIC system code that begins with 72) may have more than 500 employees, as long as each physical location of the business does not have more than 500 employees;
  • Non-Profit Organizations; and
  • Certain individuals who operate under a sole proprietorship, as an independent contractor or are self-employed.

WHAT AMOUNT IS AVAILABLE UNDER A PPP LOAN?

A qualifying business can receive a PPP loan up to the lesser of (a) $10 million or (b) 2.5 times the business’s total average monthly “payroll costs” during the one-year prior to the date of the loan – practically speaking, the regulations may interpret this as the one-year period before the date the business submits its loan application, excluding any employee’s annual compensation exceeding $100,000.  

“Payroll costs” include employees’ compensation (including tips), vacation, parental, family, medical, and sick leave (but excluding paid leave for which the business receives a tax credit under the Families First Coronavirus Response Act (FFCRA)), allowances for dismissal or separation, payments for group health care benefits, including insurance premiums, and retirement benefits.  

*Payroll cost calculations vary for seasonal businesses and businesses that were not in operation between February 15 and June 30, 2019.

HOW CAN PPP LOAN PROCEEDS BE USED?

PPP loan proceeds can be used for:

  • Payroll costs, excluding the prorated portion of any employee’s compensation above $100,000 per year;
  • Costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;
  • Rent or, if the business owns its building, mortgage interest (but not prepayments or principal payments);
  • Utilities – electricity, gas, water, transportation, telephone, and internet access for which service began before February 15, 2020; and
  • Interest on debt that existed as of February 15, 2020.

WHAT ARE THE PPP LOAN TERMS?

Businesses applying for PPP loans are not required to show that they cannot obtain credit elsewhere, but they must certify that:

  • The loan is necessary due to the uncertainty of current economic conditions;
  • They will use the loan proceeds to retain workers, maintain payroll, or make lease, mortgage, lease and utility payments; and
  • They are not receiving duplicative funds for the same uses.

The interest rate has not been published, but it will not exceed 4%.  PPP loans will be amortized over not more than 10 years after determination of the amount, if any, to be forgiven (see below).  PPP loan payments will be deferred for 6–12 months – the SBA will issue guidance on the terms of this deferral.  There are no SBA fees or prepayment penalties.

There are no collateral or personal-guaranty requirements.  Except to the extent PPP loan proceeds are used for an unauthorized purpose (i.e., for a reason other than payroll costs, rent, utilities, etc.), the owners of businesses receiving PPP loans will not be liable for non-payment.

WILL PPP LOANS BE FORGIVEN?

PPP loans can be forgiven if (or to the extent) the loan proceeds are used to pay the following costs incurred during the eight-week period after the loan is made:

  • Payroll costs, excluding the prorated portion of any employee’s compensation above $100,000 per year;
  • Costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;
  • Rent or, if the business owns its building, mortgage interest (but not prepayments or principal payments); and
  • Utilities – electricity, gas, water, transportation, telephone, and internet access for which service began before February 15, 2020.

However, the amount forgiven will be reduced proportionately to the extent:

  1. The average number of full-time equivalent (FTE) employees per month employed by the business during the “covered period” is less than the average number of FTEs per month employed by the business during either (a) 2/15/19 – 6/30/19 or (b) 1/1/20 – 2/29/20, as selected by the business.
  2. The compensation paid to an employee making less than $100,000 per year is reduced by more than 25% measured against the most recent full quarter.

The “covered period” is the 8-week period after the loan is made.

Reductions in the number of employees or compensation occurring between February 15, 2020 and 30 days after the CARES Act’s enactment generally will be ignored to the extent the reductions are reversed by June 30, 2020.  

Amounts forgiven will not constitute cancellation of indebtedness income for federal tax purposes.

Businesses must apply for loan forgiveness by submitting required documentation to their lenders.  Loan forgiveness decisions must be made within 60 days.

HOW DO I APPLY FOR A PPP LOAN?

We are waiting for the regulations regarding approved PPP loan lenders.  However, it is generally expected that FDIC insured banks will qualify.

PPP lenders will be delegated authority to make and approve PPP loans, with no additional SBA approval required.  Lenders are only required to consider whether an applicant was in operation on February 15, 2020, and either had employees for whom it paid salaries and payroll taxes or paid independent contractors.  Businesses are not required to show that credit is unavailable elsewhere or demonstrate repayment ability.

CAN I GET A PPP LOAN IF I RECEIVE AN SBA ECONOMIC INJURY DISASTER LOAN?

Yes, but only to the extent the disaster loan is used for a purpose other than those permitted for PPP Loans.  Disaster loans may be refinanced with proceeds of PPP loans, in which case the maximum available PPP loan amount is increased by the amount of disaster loans being refinanced.

WHO SHOULD I CONTACT ABOUT OBTAINING A PPP LOAN?

We recommend that you contact the bank with which you have an existing banking relationship.