THE PAYCHECK PROTECTION PROGRAM
$349 BILLION TO HELP SMALL BUSINESSES
Congress has passed an approximately $2 TRILLION stimulus package to confront the devastating economic impact of the coronavirus on our society. The legislation covers many sectors of the economy, but some of the provisions directly related to small business are summarized below. The package includes:
- $349 billion for 100% guaranteed SBA loans, a portion of which the SBA would forgive based on allowable expenses for the borrower, under the Paycheck Protection Program (see below);
- $10 billion for direct grants for businesses that do not qualify for the Economic Injury Disaster Loans program;
- $17 billion SBA to step in and make six months of principal and interest payments for all currently outstanding SBA backed business loans.
The foundation of the package for small business is the Paycheck Protection Program, summarized below.
THE PAYCHECK PROTECTION PROGRAM – $349 Billion
- Expands and is administered under the existing 7(a) SBA loan program to cover “Business Continuity Expenses” which include salaries and wages, health insurance, retirement benefits, paid sick leave, and other benefits, mortgage interest payments, rent expenses and utility expenses, to provide immediate access to capital for affected small businesses.
- The Principal Balance (not interest however) of these loans will be FORGIVABE (and not included as income) after June 30, 2020 if used for Business Continuity Expenses;
Obtaining loan forgiveness – Employers will need to provide their lender with the following:
a. Documentation verifying the number of full-time equivalent (“FTE”) employees on payroll and pay rates for the period of January 1, 2020 to June 30, 2020 (including payroll tax filings);
b. Documentation confirming rent, utilities or mortgage interest payment amounts;
c. Certification from the employer confirming the truth of the documentation; and
d. Any other documentation the SBA may request.
Limitations on forgiveness – For full loan forgiveness, employer must not reduce payroll
a. If headcount reduced during covered period (February 15, 2020 – June 30, 2020 the amount of principal eligible for forgiveness will be reduced.
b. If employer has already laid off employees prior passage of the CARES Act, that employer will have to rehire its employees or otherwise close the gap between its headcount on February 15, 2020 and its headcount on the date that is 30 days after passage of the CARES Act. This rehiring must occur no later than June 30, 2020.
c. Compensation reductions in excess of 25% of the employees’ compensation on February 15, 2020, shall also lead to a reduction in the amount of principal eligible for forgiveness, with exception of employees making more than $100,000, whose salary may reduced by more than 25% without reducing amount of loan forgiveness.
- Eligibility – Employers, the self-employed, independent contractors, and sole proprietors, with 500 or fewer employees; Hospitality businesses are eligible provided that they have fewer than 500 employees at any one location.
- Amount of Loans –
- The lesser of i) 2.5 times the average monthly payroll expenses for the year 2019, or at the election of the borrower, ii) 2.5 times the average monthly payroll expenses for the period of time from March 1, 2019 to June 30, 2019, or iii)$10,000,000.
- Seasonal employers to use an alternative calculation.
- What do Payroll Costs include:
a. Salary, wage, commission, or similar compensation;
b. Payment of cash tip or equivalent;
c. Payment for vacation, parental, family, medical, or sick leave;
d. Allowance for dismissal or separation;
e. Payment required for the provisions of group health care benefits, including insurance premiums;
f. Payment of any retirement benefit; or
g. Payment of State or local tax assessed on the compensation of employees.
- Payroll costs DO NOT include:
a. The compensation of an individual employee in excess of an annual salary of $100,000, as prorated for the “covered period” (March 1, 2020 to June 30, 2020);
b. Taxes imposed or withheld under chapters 21, 22, or 24 of the Internal Revenue Code during the covered period;
c. Any compensation of an employee whose principal place of business is outside the United States;
d. Qualified sick leave wages for which a credit is allowed under the Families First Coronavirus Response Act (the “FFCRA”); or
e. Qualified family leave wages for which a credit is allowed under the FFCRA.
- How to Participate in the Program
a. Apply through any existing SBA 7(a) approved lender (note additional lenders may be approved by Treasury and SBA to expedite access)
b. Employers will be required to self-certify that:
1. he uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the employer;
2. the funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments;
3. the employer does not have an application pending for a Paycheck Protection Program loan for the same purpose and duplicative of amounts applied for or received under an existing Paycheck Protection Program loan; and
4. during the period beginning February 15, 2020 and ending on December 31, 2020, that the employer has not already received amounts under the Paycheck Protection Program.
- Personal guarantees not required.
- Inability to obtain credit elsewhere requirement waived.
- Interest rate capped at 4%.
- Principal and interest payment deferment for at least 6 months up to a year.
- No prepayment penalties.
- Does not preclude recipients of Economic Injury Disaster Loans from receiving loan for purposes other than payroll costs.