On Friday, March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law. As a part of the initiative, the Paycheck Protection Program was included within the Act to provide $350 billion in emergency loans to small businesses. In general, the loans can be utilized by small businesses to pay for such things as payroll, mortgage interest, rent, and utilities. Importantly, the loans may be wholly forgiven under certain circumstances.
Who is Eligible under the Paycheck Protection Program?
- Available to those small businesses that were already eligible for a small business administration loan prior to the COVID-19 pandemic;
- All businesses that employ less than 500 employees;
- An individual who operates as a sole proprietor or independent contractor;
- 501(c)(3) non-profits that employ less than 500 employees; and
- Also applies, in limited circumstances, to certain industries where they employ more than 500 employees, but where no more than 500 employees are located at a given physical location (e.g., restaurants and hotels).
What is the Criteria for a Loan?
- Loans must be capped at the lesser of:
- $10,000,000; or
- 2.5 times the average total monthly payments for “payroll costs” incurred during the one-year period before the date the loan is made. If the business was not in operation in 2019, then it is 2.5 times the average total monthly payroll costs incurred for January and February of 2020.
- “Payroll costs” include salary, wages commissions, vacation, PTO, retirement benefits, health benefits, and allowances for dismissal or separation of an employee. In determining the amount of the loan, rent, mortgage interest, and utilities are not included.
- Interest is capped at 4%;
- Loan payments are deferred for at least six months, but cannot be deferred for man than one year;
- Unlike traditional SBA loans, borrowers do not need to establish that they are unable to secure credit elsewhere;
- Businesses will not need to establish creditworthiness or the ability to repay; rather, the relevant inquiry is whether it was in business as of February 15, 2020, and it was paying employees at that time; and
- Unlike traditional SBA loans, no collateral or personal guarantees are required to secure the loan.
What are the Acceptable Uses of the Loan?
- Payroll costs;
- Some notable exceptions include:
- Individuals making more than $100,000 per year;
- Withholding taxes; and
- Sick leave that is already provided for by the FFCRA.
- Some notable exceptions include:
- Group health care benefits during periods of paid sick, medical or family leave and insurance premiums;
- Employee compensation;
- Mortgage interest payments (but only if the mortgage was in place prior to February 15, 2020);
- Rent (but only if the lease was in effect prior to February 15, 2020); and
- Utilities.
Do I Have to Repay the Loan?
- Generally speaking, the amount of the loan forgiveness may not be 100%. Rather, only the following counts towards loan forgiveness:
- Payroll costs (during the eight weeks following the loan origination date);
- Mortgage interest (but only if the property was purchased before February 15, 2020);
- Rent (but only if the lease was in place before February 15, 2020); and
- Utility payments (during the eight weeks following the loan origination date).
- The amount of forgiveness may also be subject to reduction if your workforce headcount is less during the relevant period (February 15, 2020 to June 30, 2020), as opposed to the same time last year (2019):
- If you have already laid off employees, you will not be penalized if you rehire them back;
- Similar reductions of the amount of loan forgiveness may also be triggered if you reduce your employees’ compensation during the relevant period when compared to the same period last year;
- Employers will need to fill out paperwork to establish the amount of the loan forgiveness; and
- Any amounts remaining after forgiveness must be repaid no later than ten (10) years after being borrowed (at an interest rate not to exceed 4%).
If you have any questions about the CARES Act or your business needs, please do not hesitate to contact us at (941) 954-4691.
