The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), among other things, established a loan program for small businesses that can immediately infuse working capital to pay certain payroll costs and other limited expenses and which may be eligible for full principal forgiveness.  Following is a summary of the Paycheck Protection Program provisions of the CARES Act.

Paycheck Protection Program Loans

For Paycheck Protection Program loans, the maximum loan is the lesser of up to 2.5 times average monthly payroll costs or $10 million.  The loan is from an SBA- approved lender, guaranteed 100% by the SBA.  The interest rate is less than 4%.  The loan term is up to 10 years.  Payments are subject to deferral.  Principal is subject to forgiveness.

Origination

Borrower requirements

Borrower is (i) any eligible small business concern under the SBA or (ii) any other of the following having, in most cases, fewer than 500 employees.  (Under special circumstances employers with more employees may qualify.)  For purposes of this calculation, “the term ‘employee’ includes individuals employed on a full-time, part-time, or other basis.”

1. business concern,
2. nonprofit organization (described in 501(c)(3) of the IRC and exempt from tax under 501(a));
3. veteran’s organization (described in in 501(c)(19) of the IRC and exempt from tax under 501(a)) or
4. Tribal business concern (a small business concern—(i) that is wholly owned by one or more Indian tribal governments, or by a corporation that is wholly owned by 1 or more Indian tribal governments; or (ii) that is owned in part by one or more Indian tribal governments, or by a corporation that is wholly owned by one or more Indian tribal governments, if all other owners are either United States citizens or small business concerns).

Certain self-employed individuals, independent contractors and sole proprietors are also eligible.

Maximum loan amount and terms

The lesser of (i) 2.5 times the average monthly payroll costs plus any disaster loan after January 31, 2020, to the date the PPPL could be refinanced or (ii) $10 million.

The interest rate is capped at 4%.  The loan term is up to 10 years.  The loans are unsecured, no guarantees are required, and there is no recourse against principals, except for misuse of proceeds.  The loans also have no prepayment penalty.

Periods of calculation:

Generally, average total monthly “payroll costs” is for the period of the year prior to the date of the loan.  But, if the borrower is a seasonal business “as determined by the Administrator” of the SBA, the period is the “12-week period” running from (i) February 15, 2019 or March 1, 2019 (borrower’s choice) to (ii) June 30, 2019.  Those are 19 and 21 weekly periods and are not precisely weeks, having an overhang at the end.  But that is the way the statute reads.  It is unclear what is a seasonal business “as determined by the Administrator.”

Total monthly “payroll costs”

Elements of average total monthly “payroll costs”:

‘‘(viii) the term ‘payroll costs’—

‘‘(I) means—

‘‘(aa) the sum of payments of any compensation with respect to employees that is a—

‘‘(AA) salary, wage, commission, or similar compensation;

‘‘(BB) payment of cash tip or equivalent;

‘‘(CC) payment for vacation, parental, family, medical, or sick leave;

‘‘(DD) allowance for dismissal or separation;

‘‘(EE) payment required for the provisions of group health care benefits, including insurance premiums;

‘‘(FF) payment of any retirement benefit; or

‘‘(GG) payment of State or local tax assessed on the compensation of employees; and

‘‘(bb) 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 and that is in an amount that is not more than $100,000 in 1 year, as prorated for the covered period; and

‘‘(II) shall not include—

‘‘(aa) the compensation of an individual employee in excess of an annual salary of $100,000, as prorated for the covered period;

‘‘(bb) taxes imposed or withheld under chapters 21 (Federal Insurance Contributions Act), 22 (Railroad Retirement Tax Act), or 24 (Collection of Income Tax at Source of Wages) of the Internal Revenue Code of 1986 during the covered period;

‘‘(cc) any compensation of an employee whose principal place of residence is outside of the United States;

‘‘(dd) qualified sick leave wages for which a credit is allowed under section 7001 of the Families First Coronavirus Response Act (Public Law 116–6 127); or

‘‘(ee) qualified family leave wages for which a credit is allowed under section 7003 of the Families First Coronavirus Response Act (Public Law 116–12 127);

Lender

The lender must be a SBA-approved lender.  The approved lender has delegated authority to underwrite, close, fund and service the loan.  In evaluating the eligibility of a borrower, the lender shall consider whether the borrower :

(i) was in operation on February 15, 2020; and

(ii) (A) had employees for whom the borrower paid salaries and payroll taxes; or

‘‘(B) paid independent contractors, as reported on a Form 1099–MISC.

Borrower requirements

The borrower must make a good faith certification that:

‘‘(I) that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the borrower;

‘‘(II) acknowledging that funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments;

‘‘(III) that the borrower does not have an application pending for a loan under 15 USC § 636(a) for the same purpose and duplicative of amounts applied for or received under a PPPL; and

‘‘(IV) during the period beginning on February 15, 2020 and ending on December 31, 2020, that the borrower has not received amounts under 15 USC § 636(a) for the same purpose and duplicative of amounts applied for or received under a PPPL.

The borrower will need to provide documentation to the lender demonstrating its eligibility and the calculation of the maximum loan amount.

Use of Proceeds

The following are permissible uses of the proceeds of the PPPL.  However, they are not the same as expenditures eligible for forgiveness.  See “Forgiveness” below for those qualifying expenditures.  For tracking purposes, the borrower should consider setting up a separate account to receive and disburse the loan proceeds.

(I) payroll costs;

(II) costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;

(III) employee salaries, commissions, or similar compensations; (I think this is duplicative as already included in “payroll costs”.

(IV) payments of interest (no prepayment and no payment of principal) on any mortgage obligation;

(V) rent (including rent under a lease agreement);

(VI) utilities; and

(VII) interest on any other debt obligations that were incurred before the period beginning on February 15, 2020, and ending on June 30, 2020.

Deferral

Any PPPL Borrower can request and receive deferment of principal, interest and fees for a period of not less than six months and not more than one year.  The Administrator of the SBA has 30 days to provide guidance regarding deferrals.

Forgiveness

Most businesses will want to take maximum advantage of forgiveness.  The requirements should be interpreted conservatively.  Forgiveness is of principal, not of interest.  The Administrator of the SBA has 30 days to provide guidance and regulations regarding forgiveness.

Principal forgiven is excluded from gross income for income tax purposes

Calculation of Eligible Amounts

Principal can be forgiven for the following expenditures made within eight weeks of the closing of the loan:

(1) Payroll costs (as defined above).  Additional wages paid to tipped worker qualify for forgiveness.

(2) Any payment of interest on any covered mortgage obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation).  A “covered mortgage obligation” means any indebtedness or debt instrument incurred in the ordinary course of business that—

(A) is a liability of the borrower;

(B) is a mortgage on real or personal property; and

(C) was incurred before February 15, 2020;

(3) Any payment on any rent obligated under a leasing agreement in force before February 15, 2020.  This does not specifically exclude personal property leases.

(4) Any payment for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.

Reduction in eligible amounts

Amounts eligible for forgiveness are reduced by a reduction in force and by certain reductions in salary.  Any amount not forgiven can be refinanced over 10 years at a rate of interest not to exceed 4%.

Reduction Based on Number of Employees

In order to determine the amount of principal forgiveness, divide:

(i) the average number of FTEs per month (by calculating the average number of FTEs for each pay period falling within the month) for the 8 week period following the date of a PPPL by

(ii) the number of FTEs per month in a prescribed period.  Generally, that prescribed period would be the more favorable of (a) the period from February 15, 2019 through June 30, 2019 or (b) the period from January 1, 2020 through February 29, 2020.  But, for a seasonal business “as determined by the Administrator” of the SBA, it must use the period from February 15, 2019 through June 30, 2019.

A reduction occurring between February 15, 2020 and 30 days after March 27, 2020 (April 26, 2020?) does not count if the reduction in number is eliminated by June 30, 2020.

Reduction Based on Salary

The amount of forgiveness is reduced by (i) the amount of any reduction in (ii) total salary or wages(iii)  in the 8 weeks following the loan (iv) that is in excess of 25% of (v) any employee who did not receive during any single pay period in 2019, wages or salary at an annualized rate of pay in an amount more than $100,000.

A reduction occurring between February 15, 2020 and 30 days after March 27, 2020 (April 26, 2020?) does not count if the reduction in salary or wages of the employee is eliminated by June 30, 2020.  It is unclear if back pay is required to eliminate the reduction or if it is on a going-forward basis only.

Required borrower documentation

The borrower must submit to the lender that is servicing the PPPL an application, which shall include—

(1) documentation verifying the number of fulltime equivalent employees on payroll and pay rates for the periods used to determine if any reduction is required, including—

(A) payroll tax filings reported to the Internal Revenue Service; and

(B) State income, payroll, and unemployment insurance filings;

(2) documentation, including cancelled checks, payment receipts, transcripts of accounts, or other documents verifying payments on covered mortgage obligations, payments on covered lease obligations, and covered utility payments;

(3) a certification from a representative of the eligible recipient authorized to make such certifications that—

(A) the documentation presented is true and correct; and

(B) the amount for which forgiveness is requested was used to retain employees, make interest payments on a covered mortgage obligation, make payments on a covered rent obligation, or make covered utility payments; and

(4) any other documentation the Administrator of the SBA determines necessary.