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COVID-19

Paycheck Protection Program

On March 27, 2020 the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law.  The CARES Act provided unprecedent funding for businesses and individuals to recover from the economic hardships cause by the coronavirus pandemic, including $349 billion in funding to the Small Business Administration (“SBA”) for targeted loans.  One new program created by the CARES Act aimed at keeping businesses running and employees employed during the coronavirus pandemic is the Paycheck Protection Program.  Small businesses and sole proprietorships will be able to apply for a Paycheck Protection Loan on April 3, 2020, and independent contractors and self-employed individuals can begin applying on April 10, 2020.

The alert discusses the contours of the Paycheck Protection Program.  Linked below in this alert is a publication from the U.S. Chamber of Commerce summarizing key details of the Paycheck Protection Program, recent publication by the Treasury for borrowers, and the Paycheck Protection Loan application form (as of 3/30/20, which is subject to change).

What is the Paycheck Protection Program?

Generally, the Paycheck Protection Program is a new loan program administered by the SBA that allows businesses that employ 500 or fewer employees to obtain federally-backed, fully forgivable, loans.  Eligible businesses can obtain a loan for 2.5 times its average monthly payroll costs, up to a maximum amount of $10 million.  The loans can only be used for authorized purposes under the CARES Act, including payroll costs, rent, mortgage interest, and utilities.  The loans are eligible to be fully forgiven, subject to the forgiveness amount being reduced if the employer has reduced its workforce or wages.  Loans can be obtained directly from the SBA or from an SBA approved private lender. 

The Paycheck Protection Program is a new and separate loan program through the SBA.  Other SBA loans, including Disaster Loans, are available for businesses as an alternative to the Paycheck Protection Program.  We’ve described the Disaster Loan program separately on our website here.  The terms of the Paycheck Protection Program are discussed in more detail below.

Eligibility

  • Businesses, non-profits, veterans organizations, or tribal business concerns, that employ 500 or fewer employees (whether employed on a full-time, part-time, or other basis). 
  • Entities with more than 500 employees may qualify if the size standard for the industry in which the business operates, as established by the SBA, is in excess of 500 employees. 
  • Sole proprietors, independent contractors, and eligible self-employed individuals, subject to certain documentation requirements.
  • Certain restaurant and hospitality businesses that operate more than one location, but do not have more than 500 employees at any location, can qualify.

Borrowing Terms

  • Maximum loan amount: 2.5 times average monthly payroll costs (defined below), up to a maximum of $10 million.  Calculation of monthly payroll differs depending on whether the borrower has been in business for at least one year, and whether the borrower is a seasonal employer.  An SBA Disaster Loan issued on or after January 1, 2020 and ending on the date that Paycheck Protection loans are available, can be refinanced into a Paycheck Protection Loan, in which case the applicable loan amount would be increased by the prior Disaster Loan amount.    
  • Any portion of the loan that is not forgiven is payable over a term of two years, bearing fixed interest at 1.00%.
  • Payments, including principal, interest, and fees, are deferred for at least six months and up to one year.
  • Lenders may not require a personal guaranty or collateral for the loan.
  • Loans are fully-guaranteed by the SBA, but the SBA has no recourse against any individual shareholder, member, or partner of an eligible recipient, so long as the loan proceeds are used for an authorized use. 
  • Generally, loan fees, many borrower credit requirements, and the requirement that a borrower cannot find a loan elsewhere, are waived or reimbursed by the SBA.
  • The full amount of the loan can be forgiven.  The provisions regarding forgiveness are described in more detail below.

Authorized Uses

  • A Paycheck Protection Loan can be used to pay: payroll costs; costs related to the continuation of group health care benefits during periods of paid sick, medical or family leave, and insurance premiums; employee salaries, commissions, or similar compensations; payments of interest on any mortgage obligation (but not principal); rent; utilities; interest on any other debt obligations that were incurred before the covered period. 
  • Payroll costs, as defined under the CARES Act means:
    • salary, wages or similar compensation (but excluding compensation in excess of $100,000 per year, prorated for the covered period—February 15, 2020-June 30, 2020; and also excluding compensation paid to an employee whose principal place of residence is outside of the United States);
    • payment for vacation, parental, family medical or sick leave (but not emergency sick leave or emergency FMLA under the FFCRA;
    • payments required for provision of group health care benefits, including insurance premiums;
    • payment of any retirement benefit;
    • payment of state or local tax assessed on the compensation of employees (federal taxes imposed or withheld under Chapters 21, 22, or 24 of the Internal Revenue Code are expressly excluded); and
    • the sum of payments to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment, or similar compensation (but excluding compensation in excess of $100,000 per year, as prorated for the covered period—February 15, 2020-June 30, 2020).

Forgiveness Terms

  • A loan will be forgiven in an amount equal to the following costs paid or incurred during the 8-week period beginning on the date of the origination of the covered loan: payroll costs; interest on any mortgage existing prior to February 15, 2020; rent payments under a lease agreement existing prior to February 15, 2020; utility payments for utilities for which service began prior to February 15, 2020. 
  • The forgiveness amount can be reduced if the employer reduced its workforce or its salary and wages, however, if the reduction in workforce and salary/wages are restored no later than June 30, 2020, the reduction to the forgiveness amount can be mitigated.
  • Forgiven debt does not count as income for the borrower.
  • Any outstanding amount remaining after forgiveness remains guaranteed by the SBA, and will have a maximum maturity date of 10 years from the date on which the borrower applies for forgiveness. 
  • Due to likely high subscription, it is anticipated that not more than 25% of the forgiven amount may be for non-payroll costs.

Many details regarding the Paycheck Protection Program remain to be filled in by applicable federal regulations, however, one thing is clear: Paycheck Protection Loans provide an unprecedented opportunity to small businesses to combat the impact of the coronavirus pandemic.  While our office is closed pursuant to the Governor’s Business Closure Order, MacDonald Illig attorneys are working remotely and are available at any time via e-mail or cell phone. 

If you have any questions regarding the SBA Loan Programs available to you, whether a Paycheck Protection Loan or a Disaster Loan, please contact a MacDonald Illig attorney.

 

Legal Advice Disclaimer: The information presented on this website serves solely as general guidance and should not be construed as legal advice by MacDonald, Illig, Jones & Britton LLP as a replacement for seeking personalized legal counsel from a qualified attorney. MacDonald, Illig, Jones & Britton LLP does not assume liability for the accuracy or reliability of content hosted on any third-party websites accessible through links provided on this site.

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