The Coronavirus Aid, Relief, and Economic Security (CARES) Act allocated $350 billion to help small businesses keep workers employed amid the pandemic and economic downturn. Known as the Paycheck Protection Program, the initiative provides one hundred percent federally guaranteed loans to small businesses (businesses with fewer than 500 employees). Importantly, these loans may be forgiven if borrowers maintain their payrolls during the crisis or restore their payrolls afterward.
• A small business with fewer than 500 employees (The 500-employee threshold includes all employees: full-time, part-time, and any other status.)
• A small business that otherwise meets the SBA’s size standard
• A 501(c)(3) with fewer than 500 employees (The 500-employee threshold includes all employees: full-time, part-time, and any other status.)
• An individual who operates as a sole proprietor
• An individual who operates as an independent contractor
• An individual who is self-employed who regularly carries on any trade or business
• A Tribal business concern that meets the SBA size standard • A 501(c)(19) Veterans Organization that meets the SBA size standard.
In evaluating eligibility, lenders are directed to consider whether the borrower was in operation before February 15, 2020 and had employees for whom they paid salaries and payroll taxes or paid independent contractors.
Loans may be used for “Payroll Costs” defined as:
• Salary wages, commission or similar compensation
• Cash tips or equivalent
• Payments for vacation, parental, family, medical or sick leave
• Group healthcare benefits (including insurance premiums)
• Retirement benefits
• State or local assessed on the compensation of employees (not federal)
• Certain sole proprietor and independent contractor compensation
• Payments of interest on any mortgage obligation (but not prepayments)
• Rent, lease or utility costs
• Interest on any other debts obligations incurred before February 15, 2020
• Certain sole proprietor and independent contractor compensation
Loans may NOT be used for:
• “Payroll Costs” do not include the compensation for any employee on excess of $100k
• The compensation for any employee whose principal place of residence is outside the U.S.
• Qualified sick leave payments under the EPLSA
• Qualified sick leave payments under the E-FMLA
Loans can be up to 2.5 times the borrower’s average monthly payroll costs, not to exceed $10 million. million. For example, If a business has an average monthly payroll of $900,000 over the prior year, it would be eligible for a loan of $2.25 million ($900,000 average monthly payroll times 2.5). Details on how to calculate average monthly cost can be found HERE.
Small businesses and sole proprietorships can now apply. Starting April 10, 2020, independent contractors and self-employed individuals can apply. Entities can apply through any existing SBA 7(a) lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. Other regulated lenders will be available to make these loans once they are approved and enrolled in the program. Interested parties should consult with their local lender as to whether it is participating. All loans will have the same terms regardless of lender or borrower. A list of participating lenders as well as additional information and full terms can be found at www.sba.gov.
The amount of the loan forgiveness will be reduced by the reduction of the workforce during the 8 week period compared with either the average number of employees during the period of February 15 – June 30, 2019 or the period of January 1 – February 29, 2020. For reduction in employees, the borrower can use either comparison time period. The amount of any reduction in total salary or wages of any employee in excess of 25 percent of the total salary or wages of the employee during the most recent full quarter during which the employee was employed before the covered period. (Reductions to employees who make more than $100k do not affect forgiveness analysis.)
Avoidance of Loan Forgiveness Reductions
Any reduction in the amount of loan forgiveness will be completely avoided if the employer re-hires all employees laid off (going back to February 15, 2020) or increases their previously reduced wages, no later than June 30, 2020. These provisions are designed to provide an incentive to employers to not lay off workers (or rehire them) and to not decrease wages and instead utilize the loan amounts to pay payroll and other expenses.
For a tutorial on applying for the Paycheck Protection Program click HERE.
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