** This blog was updated on 4/3/20 as a result of changes made by the CARES Act **
The Paycheck Protection Program included in the expansion of the SBA 7(a) loan program is designed to allow forgiveness of small business loans that help keep employees on the payroll and help small businesses from closing due to economic losses caused by the COVID-19 pandemic. Proceeds from these loans can be used for payroll, healthcare, interest on mortgage obligations, rent, utilities and other debt obligations to keep the business in operation.
On Thursday April 3, 2020, the SBA issued final rules that allow for immediate implementation of the SBA 7(a) loan program based on language provided in the CARES Act. These rules could change down the road, but, for now, banks can implement these rules to start the loan application process.
The guidance confirms that these loans will be funded on a first come/first serve basis. The SBA will allow lenders to rely on certifications of the borrower to determine eligibility and loan forgiveness. The lender will be responsible for determining the loan amount based on tax documents received from borrower.
>> Read “CARES Act Offers 14 Areas of Potential Tax Relief for Taxpayers”
The program is available for any business, nonprofit organization, veterans’ organization, tribal business, sole proprietorship, self-employed individual or independent contractor that:
- Employs no more than 500 employees (full-time and part-time), or
- Meets the SBA size standards for their industry, and
- Was in operation on February 15, 2020.
Below are more details on how the program works:
- Maximum loan amount is the lessor of the average total monthly payments for payroll costs incurred during trailing 12 months multiplied by 2.5 or $10 million and the outstanding amount of a loan under subsection 7(b)(2) SBA Economic Injury Disaster Loan that was made between January 31, 2020 and the date on which the covered loans are made available to refinance. There is a special rule for seasonal employers that would use the measurement period of February 15, 2019, through June 30, 2019.
- Payroll costs are defined as:
- Salary, wage, commission, or similar compensation
- Payment of cash, tip, or equivalent
- Payment for vacation, parental, family, medical, or sick leave
- Allowance for dismissal or separation (severance pay)
- Payment for group health care benefits including insurance premiums
- Payment of any retirement benefit
- Payment of state and local taxes assessed on the compensation of employees
- Payroll costs are reduced by:
- Any compensation of an employee whose principal place of residence is outside the U.S.
- Annualized salary above $100,000
- FICA taxes and income taxes withheld from employees between February 15, 2020, and June 30, 2020
- Qualified sick leave and family leave wages (Family First Coronavirus Response Act eligible for credit)
- Proceeds can be used for payroll costs, healthcare, interest on mortgage obligations, rent, utilities and interest payments on other debt obligations that were incurred prior to February 15, 2020.
- Banks can lend the money, and they have the delegated authority to approve.
- For approval, the business must have:
- Been in operation on February 15, 2020
- Had employees for whom the borrower paid salaries and payroll taxes, or
- Paid independent contractors, as reported on form 1099-MISC
- A loan under section 7(b)(2) SBA Economic Injury Disaster Loan issued on January 31, 2020, through April 3, 2020, can be refinanced as part of covered loan and must be refinanced if the proceeds were used for payroll costs. Proceeds from an Economic Injury Disaster Loan grant will be deducted from the loan forgiveness amount.
- 75% of the proceeds must be used for payroll costs.
>> Read “Is Your Business a Small Business for the SBA Economic Injury Disaster Loan Program?"
- Must certify that uncertainty of economic conditions make it necessary to support ongoing operations, acknowledge funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments and utility payments and you have not received double benefits for the same costs elsewhere.
- Credit elsewhere required is waived for this loan and no personal guaranties or collateral required.
- Federal government is guaranteeing the loan to the bank.
- Complete payment deferment for six months, which starts at the date of disbursement.
- Express loan limits have increased from $350,000 to $1 million during covered period.
- Remaining balance after debt forgiveness will have a maturity of two years from the date applied for loan forgiveness and a maximum interest rate of 1%.
- No prepayment penalty.
- Loan forgiveness (expenses incurred during the eight-week period from the origination of the loan).
- For payroll costs excluding:
- Compensation above annualized salary of $100,000
- Qualified sick leave (Family First Coronavirus Response Act eligible for credit)
- Qualified family leave (Family First Coronavirus Response Act eligible for credit)
- Limited to:
- Total payroll costs incurred by eligible recipient incurred during the eight-week period
- Payments of interest made on mortgage obligations, rent and utilities in place as of February 15, 2020, that were incurred during the eight-week period and limited to 25%
- Reduced by:
- A percentage based on a reduction of the average number of full-time equivalents from the prior year’s average over the period February 15, 2019, through June 30, 2019; or if elected January 1, 2020, through February 29, 2020
- A reduction in excess of 25% of salary and wages in the most recent full quarter versus the prior year’s same period
- There is a special rule related to rehiring employees where if the monthly full time employee (FTE) during the period February 15, 2020, until 30 days after March 27, 2020, is less when comparing to FTEs as of February 15, 2020 and the employer rehires employees to eliminate the reduction, then the reduction of the forgiveness based upon number of employees is ignored. There is a similar provision for applicants who make up the decrease in wages by June 30, 2020. This was designed to not penalize businesses for reducing payroll prior to the enactment of the law.
- Proper documentation will be needed to apply for the debt forgiveness
- Cancelled indebtedness will be excluded from gross income
This program is designed to get $349 billion into the hands of business owners to help them make it through the next two and half months. The SBA is hoping businesses will use this cash to retain employees while the market is essentially shut down and, if the rules are followed, the entire loan will be forgiven. SBA Lender banks will have a high hurdle to get this capital deployed fast enough.
Contact Adam Hill at firstname.lastname@example.org, Dave Sobochan at email@example.com or a member of your service team to discuss this topic further.
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Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.