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What Small Businesses Need to Know – The CARES Act Small Business Assistance – Paycheck Protection Program Loans

Brenda Barrett

By Brenda Barrett | April 06, 2020

Corporate & Commercial Law, Credit Union Representation

On March 27, 2020, the President signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act which provides for, among other things, the Paycheck Protection Program (PPP) loans program to be administered by the Small Business Administration.  These loans are intended to provide much needed funds to small businesses to meet short term capital needs for operations.  Borrowers will not be required to repay portions of loan proceeds specifically used for certain purposes and those amounts will be forgiven. Congress appropriated $349 billion for the PPP loans program. The PPP covers loans made between February 15 and June 30, 2020.

Here’s a quick overview of some key provisions that are important for businesses to know:

Eligible Businesses. Those eligible for the PPP loans include:

  • small business concerns, including sole proprietors, independent contractors, and eligible self-employed individuals,
  • non-profit organizations,
  • veterans organizations, and
  • tribal business

Applicants should have been in operation on February 15, 2020 and had employees for whom it paid salaries and payroll taxes or independent contractors paid for services rendered. The business must have less than 500 (full time and part time) employees or more if they meet SBA’s size standards for their industry.

Loan Amounts. The maximum amount an organization is eligible to receive is 2.5 times the average total monthly payments for “payroll costs” for the one year period before the date the loan is made plus the outstanding amount of any SBA Economic Injury Disaster Loan made between January 31, 2020 and the date the loans are available.  The total amount for which a business is eligible is capped at $10 million.

For purposes of the calculation “payroll costs” for employees equals the sum of payments of any compensation to employees (salary, wages, commission, or similar compensation), payment of cash tip or equivalent, payment for vacation, parental, family, medical or sick leave, allowance for dismissal or separation, payment for healthcare benefits (including insurance premiums), payment of any retirement benefits, and payment of any state or local tax on the compensation of employees. For sole proprietors or independent contractors, it is the sum of payments of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment, or similar compensation not to exceed $100,000 in one year, as prorated for he covered period. Excluded from these amounts are compensation to an employee in excess of an annual salary of $100,000, federal employment taxes withheld between February 15, 2020 and June 30, 2020, compensation to employees whose principal place of residence is outside or the U.S., and qualified sick leave wages and qualified family leave wages allowed under the Families First Coronavirus Response Act.

Loan Terms. The maximum rate of interest for these loans is 1% and the maturity date is two years.  There are no collateral or personal guaranty requirements.  Payments due on the loans will be deferred for a period of six months.

Application Process.  The borrower must make a certification at the time of the application of its good faith belief that the uncertainty of current economic conditions makes the loan request necessary to support ongoing operations and acknowledging that the funds will be used to retain workers and maintain payroll or make mortgage, lease and utility payments and with respect to any other PPP applications or 7(a) applications for the same purpose.  The Department of Treasury has released the Paycheck Protection Program application and supplemental information, all available on their website.

Allowed Use of Proceeds subject to Forgiveness.  While loan proceeds can be used for many purpose, only those amounts that are used for certain purposes will be eligible for forgiveness. Those include:  payroll costs, costs related to continuation for group health care benefits during periods of paid sick medical or family leave and insurance premiums, employee salaries, commissions or similar compensations, payment of interest on any mortgage obligation, rent, utilities, interest on any other debt incurred before the covered period, and refinancing of an Economic Injury Disaster Loan made between January 1, 2020 and the date the covered loan is made available to be refinanced.

Forgiveness.  The actual amount of the loan forgiveness will depend on payroll costs and payments of rent, mortgage payments and utilities over the eight week period following disbursement. Not more than 25% of the loan forgiveness amount may be attributable to non-payroll costs.  Amounts forgiven will be considered canceled indebtedness by the lender but will not be considered as income to the borrower and will not be taxed.  The amount forgiven will be decreased for certain reductions in the number of employees following disbursement. Additional guidance on the forgiveness process is forthcoming.

Lenders may begin processing applications for these loans beginning April 3. Businesses are encouraged to get applications in as soon as possible as funds will be limited and there is expected to be a high demand for these loans.  Interested businesses should reach out to their lender as soon as possible to start the application process. Additional information about the program and these loans can be found here.

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