Practice Areas

Paycheck Protection Program Loans under the CARES Act

March 27, 2020

By Phil Stanton and Laura Beckering

The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), was approved by the House of Representatives on March 27, 2020 and signed by President Trump. This appears to be one of the most important and extensive pieces of stimulus legislation in over a decade, potentially exceeding even the stimulus efforts during the Great Recession of 2008 and 2009. 

A key piece of the CARES Act will be expansion of the Small Business Administration’s (SBA) Section 7(a) Loan Program to get liquidity to qualifying businesses and, importantly, to encourage such businesses to keep employees on their payroll. Title I of the CARES Act creates a Paycheck Protection Program, which increases eligibility for Section 7(a) loans for certain small business and organizations, and provides terms that allow portions of the loans to be forgiven based on the borrower’s retention of employees. While the SBA will have to clarify many provisions in regulations, there are few key elements businesses need to understand now.

Which businesses qualify?

The following businesses are eligible for the expanded 7(a) Loan Program under the CARES Act:

  • businesses that already qualify as “small business concerns” under the Small Business Act, which is limited to independently owned and operated businesses operating in the US which meet certain size requirements, depending on the industry in which they operate
  • business concerns, including nonprofit organizations, veterans organizations, and Tribal business concerns, which employ less than 500 employees (unless the applicable SBA size standard for the industry in which the business operates allows greater than 500 employees)
  • sole proprietors, independent contractors, and eligible self-employed individuals
  • business concerns in the Accommodation and Food Services Sector, according to North American Industry Classification System (NAICS) Code 72 with more than one physical location, where each location employs less than 500 employees

The CARES Act also waives SBA affiliation rules for the following:

  • business concerns operating in NAICS Code 72 that have up to 500 employees;
  • business concerns operating as franchises with an SBA-assigned franchise code identifier; and
  • business concerns that receive financial assistance through the Small Business Investment Company (SBIC) program.

Affiliation rules as applied to small business concerns are also applied to eligible nonprofit and veterans organizations.

Loans are available under the program until June 30, 2020.

What are the terms of the covered loans?

The maximum loan amount is the lesser of:

  • the average total monthly payroll costs incurred in the one-year period before the date on which the loan is made multiplied by 2.5, plus the outstanding amount of any SBA Disaster Loans that the borrower wants to refinance and that was made between Jan. 31, 2020 and the date on which the covered loan is made available; or
  • $10 million.

Maximum maturity for a covered loan with remaining balance after reduction based on the loan forgiveness amount (see below) is 10 years from the date on which the borrower applies for loan forgiveness. The interest rate must not to exceed 4 percent, and payment deferment must be provided for a period of at least six months, and not more than 1 year.

Relaxed security requirements

No personal guarantee and no collateral shall be required for loans under the Paycheck Protection Program until June 30, 2020. It is unclear if this means that guarantees and collateral can be required after this date.

How may loan proceeds be used?

Recipients may use proceeds of a 7(a) covered loan for the following:

  • payroll costs;
  • costs related to continuation of group health care benefits during periods of paid sick, medical, or family leave;
  • insurance premiums;
  • employee salaries, commissions, or similar compensation; interest payments on mortgages;
  • rent;
  • utility payments;
  • and
  • interest payments on other debt obligations incurred before the covered period.

Additionally, an eligible recipient applying for a covered loan must make a good faith certification acknowledging that funds will be used to retain workers and maintain payroll or to make mortgage, lease, and utility payments.

Which portions are eligible for loan forgiveness?

A borrower is eligible for loan forgiveness for a portion of the loan in the amount equal to the following payments made during the eight-week period after the loan’s origination date:

  • payroll costs, not including compensation in excess of $100,000 per year for an individual employee;
  • interest payments on mortgages evidencing indebtedness incurred before Feb. 15, 2020;
  • rent payments for properties under a lease in force before Feb. 15, 2020; and
  • utility payments in service prior to Feb. 15, 2020.

Borrowers may also receive forgiveness for additional wages paid to tipped employees.

The amount of loan forgiveness is reduced in a pro rata fashion if the borrower terminates employees after receiving the loan. 

The amount of principal that is forgiven is reduced: (1) by the amount of any employee wage reductions in excess of 25 percent of an employee’s total wages, excluding employees who have an annualized salary in excess of $100,000; and (2) proportionally by any reduction in the number of employees retained compared to the prior year.

The CARES Act, however, provides that borrowers that re-hire workers who were previously laid off will not be penalized for having reduced employees at the beginning of the covered period. 

Importantly, the forgiven portion of a loan will not be treated as taxable income from canceled indebtedness for 2020.

The SBA is expected to issue guidance clarifying the provisions of the Payroll Protection Program within 30 days after the law is enacted.

Please visit Greensfelder’s COVID-19 Resources webpage for updates, and please do not hesitate to call your primary Greensfelder contact with any questions you may have.

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