The president signed into law, on Friday, March 27, 2020, the “Coronavirus Aid, Relief, and Economic Security Act (CARES Act) to address the unprecedented public health and economic crisis related to COVID-19. The law provides relief for individuals and businesses in various ways including tax relief, increased loan funding to provide cash flow to businesses, relief for state and city governments and health provisions to address the coronavirus crisis. The focus of this blog will be on the Small Business Administration (SBA) $349 billion Paycheck Protection Program law for small and mid-size businesses including self-employed individuals and “gig economy” workers and certain nonprofits, including 501(c)(3) organizations and 501(c)(19) veteran organizations; and tribal businesses with under 500 employees.
What is a “paycheck protection” loan and how much of a loan can I obtain?
The “paycheck protection program” (PPP) law will provide loans to businesses with 500 or fewer workers. The loan’s size is 250% of the employer’s average monthly payroll costs. The maximum loan is $10 million.
What are “payroll costs”?
Payroll costs include the following:
-Salary, wages, and payment of cash tips up to annual rate of $100,000 per employee;
-Payment for vacation, parental, family, medical or sick leave;
-Allowance for dismissal or separation;
-Payment required for the provision of group health care benefits; and
-Payment of any retirement benefit.
Is there loan forgiveness associated with the loan? How does that work?
Generally, the loan is forgiven if the money is used for payroll costs, mortgage interest or rent/utilities during the eight-week period after the loan is obtained. The amount of forgiveness can be reduced in certain circumstances as explained in the next paragraph.
The amount forgiven will be reduced proportionally by any reduction in employees retained compared to the prior year, and by any reduction in pay of employee beyond 25% of their prior year compensation. To encourage employers to rehire any employees who have already been laid off, borrowers that re-hire workers previously laid off will not be penalized for having a reduced payroll at the beginning of the period.
What happens to the portion of loan that is not forgiven?
The remaining balance will maintain a 100% guarantee and have a maturity of not more than 10 years. Loan payments are deferred at least six months. The maximum interest rate is 4%.
Who makes and approves the loans?
The loans will be 100% backed by the government, but the authority to make and approve loans is delegated to local banks and credit unions. Financial institutions that are already approved SBA 7(a) lenders would be automatically eligible to participate. The bill also directs the Treasury Department to create a streamlined process for becoming an approved lender so more financial institutions can participate. Without going through all of SBA’s channels, lenders can make determinations on a borrower’s eligibility and creditworthiness. Instead of determining the ability for the businesses to repay, lenders will simply determine whether a business was operational on February 15, 2020, and whether it had employees for whom it paid salaries and payroll taxes, or a paid independent contractor.
What information does my business need to provide as part of the loan application process?
Documentation of your payroll costs needs to be provided. The starting point for this information would be your federal payroll tax filings and your state income, payroll and unemployment insurance filings. You may need to talk with your payroll company, human resource department and retirement plan administrator for assistance in determining the other items that make up payroll costs.
An applicant for a covered loan is required to make a good faith certification that includes the following:
- The uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the applicant; and
- Acknowledging that funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments and utility payments.
What information does my business need to provide in order to apply for loan forgiveness?
Information should include the following:
-Payroll costs (including the number of full-time equivalent employees and pay rates for the relevant pay periods); and
-Documentation verifying payments on covered mortgage obligations, covered lease obligations and covered utility payments.
A borrower will also need to have a representative provide certification that:
-The documentation presented is true and correct; and
-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.
What else should I know about the PPP?
Personal guaranty, collateral requirements and the “credit elsewhere” requirements are waived for the covered loan.
If a business already has an Economic Injury Disaster Loan (EIDL) and it is using the funds for the same purposes as outlined for the PPP loans, then it is limited in obtaining a PPP loan. However, a business can apply for a PPP loan with an option to refinance the EIDL loan into the PPP loan.
Since the law has just become effective, we expect our clients will have many more questions as the financial institutions put processes into place and professional advisors start to advise their clients. Additionally, the SBA is required to issue regulations within thirty days of the President signing the bill into law. In addition to your Henry+Horne professional adviser, your legal counsel and banker should be consulted as part of a team effort in addressing the requirements and implications of the loan program.
Phil McCollum, CPA