CARES Act Introduces Forgivable Loans With Paycheck Protection Program

On March 27, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act. While the sweeping legislation introduces a multitude of significant measures, the Paycheck Protection Program is a lifeline for small businesses, injecting capital when they need it most. However, the hallmark of the program is that the loans can be partially or fully forgivable, provided certain criteria are satisfied.

What Is the Paycheck Protection Program?

• The Paycheck Protection Program, which was allocated nearly $350 billion through the CARES Act, is an extension of the existing U.S. Small Business Administration (SBA) 7(a) Program.
• Loan applicants may be granted up to $10 million with an interest rate not to exceed 4%.
• The loans are nonrecourse, and collateral is not required to secure the loan.
• The loan is forgivable if the employer maintains certain levels of full-time equivalents (FTEs) and payroll. The amount forgiven is based on a sliding scale through a compliance period.
• Loan forgiveness under this program is non-taxable.
• The new program waives the SBA’s “credit elsewhere” requirement, which determines whether the borrower has the ability to obtain some or all of the requested loan funds from alternative sources without causing undue hardship.

Is My Business Eligible?

• Generally, businesses and certain nonprofits with no more than 500 employees are eligible.
• Affiliated entity considerations apply, and aggregation may be required for entities under common control.
• The program provides an exception for businesses with a North American Industry Classification System (NAICS) code of 72 – Accommodation and Food Services. For these hospitality and restaurant businesses, the 500-employee limitation is determined by location.

What Are the Borrower Requirements?

Borrowers must make a good faith certification to the following:

• Uncertainty of economic circumstances makes the loan request necessary to support ongoing operations.
• Funds will be used to retain workers and maintain payroll or to make mortgage, rent, and utility payments.

What Is the Maximum Loan Amount I Could Receive?

• The maximum loan amount for any recipient is $10 million.
• Loans will be formula-driven: the average monthly payroll costs over the prior 12 months multiplied by 2.5.
  • In this calculation, payroll costs are categorized as follows:

Included	Excluded
Salary, wages, and commission	Compensation for an employee that exceeds $100,000 (prorated over the covered period from Feb. 15, 2020, to June 30, 2020)
Cash tips or equivalents	Compensation to an employee with a principal residence outside the U.S.
Vacation or other leave	Qualified sick wages or family leave wages paid under Families First Coronavirus Response Act for which the payroll credit is permitted
Allowance for dismissal or separation
Payments for group health (insurance premiums)
Retirement benefits
Payment of state or local tax assessed on compensation

 

How Can I Use the Loan Proceeds?

The loan proceeds can be used for the following:

• Payroll
• Continuation of group healthcare benefits during periods of paid sick, medical, or family leave
• Employee salaries, commissions, or similar compensation
• Interest on mortgage obligations
• Rent
• Utilities
• Interest on other debt obligations that were incurred before Feb. 15, 2020

How Much of My Loan Will Be Forgiven?

Maximum Forgiveness Amount

• Borrowers are entitled to loan forgiveness equal to the sum of the following expenses paid during the eight-week period, which begins on the loan origination date:
  • Payroll costs
  • Covered utility payments, including electric, gas, water, transportation, telephone, and internet access for which service began before Feb. 15, 2020
  • Covered rent obligation, including rent obligated under a leasing arrangement in force before Feb. 15, 2020
  • Covered mortgage interest obligation, including a mortgage on real or personal property incurred prior to Feb. 15, 2020

• The loan forgiveness amount will not exceed the amount of the loan.

Reduction of Forgiveness Amount

• The loan forgiveness amount will be reduced if there is a reduction in the number of FTEs. This reduction percentage is calculated at the election of the borrower by either of the following:
  • Average number of FTEs per month (over the eight-week period)
    Average number of FTEs between Feb. 15, 2019, and June 30, 2019
  • Average number of FTEs per month (over the eight-week period)
    Average number of FTEs between Jan. 1, 2020, and Feb. 29, 2020

• The loan forgiveness amount will be reduced by any reduction in total salary or wages of any employee that is in excess of 25%. This applies only to employees that received a 2019 annualized salary of less than $100,000.
• There is a special rule for a reduction in seasonal employees.
• Employers can mitigate – or eliminate these reductions – if they restore the number of FTEs and total salary by June 30, 2020.

Any balance remaining after the loan forgiveness would have a maximum maturity of 10 years.

Loan Forgiveness Application

Documentation is critical for loan forgiveness. Here is a list of documentation that would need to be submitted to your lender:

• Verification of FTEs and pay rates
• Payroll tax filings
• State income, payroll, and unemployment insurance filings
• Documentation that covered mortgage, rent, and utility obligations were made
• A certified statement that the amount of forgiveness was required to retain employees or meet the covered obligations

Lenders will have 60 days to render a forgiveness determination.

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