More Guidance on Relief Available to Small Businesses Under the CARES Act

The CARES Act, signed by the president on March 27^th, authorizes up to $349BN to the Department of Treasury to create the Payroll Protection Program (“PPP”), and it allocates $10BN to the Small Business Administration Economic Injury Disaster Loan (EIDL) program for the specific purpose of providing COVID-19 relief. These small business assistance loan programs are intended to provide emergency relief that enables employers to retain their employees and pay other necessary operating expenses. On March 31^st, the Department of Treasury and Small Business Administration (SBA) provided much needed clarification on both of these emergency loan programs. Guidance is available here, here, and here.

Payroll Protection Plan

The PPP loan is intended to help employers with fewer than 500 employees get through 8 weeks of payroll costs and to cover rent, mortgage interest, utilities and other obligations. Accordingly, the loan amounts can be for up to two months of a borrowers average monthly payroll costs from the last year plus an additional 25% of that amount, with a $10MM cap. Seasonal and new businesses use different calculations.

According to the Department of Treasury fact sheet for borrowers: “[t]he loan amounts will be forgiven as long as:

• The loan proceeds are used to cover:
  • Payroll costs including;
    • Salary, wages, commissions, or tips (capped at $100,000 on an annualized basis for each employee);
    • Employee benefits including costs for vacation, parental, family, medical or sick leave; allowance for separation or dismissal; payments required for the provisions of group health care benefits including insurance premiums; and payment of any retirement benefit;
    • State and local taxes assessed on compensation; and
    • For a sole proprietor or independent contractor: wages, commissions, income, or net earnings from self-employment, capped at $100,000 on an annualized basis for each employer.
  • Interest on mortgage incurred before February 15, 2020;
  • Rent under lease agreements in force before February 15, 2020; and
  • Utility costs for which service began before February 15, 2020.

over the 8 week period after the loan is made; and

• Employee and compensation levels are maintained:
  • Loan forgiveness will be reduced if a borrower decreases its full-time employee headcount;
  • Loan forgivenss will be reduced if a borrower decreases salaries and wages by more than 25% for any employee that made less than $100,000 annualized in 2019; and
  • Borrowers have until June 30, 2020 to restore full time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020.

Importantly, (as indicated above) payroll costs are capped at $100,000 on an annualized basis for each employee and it is anticipated that not more than 25% of the forgiveness amount may be for non-payroll costs.

In sum, if the employer keeps its employees on payroll and the loan proceeds are used to cover payroll costs, rent, mortgage interest and utilities, then the loan is eligible for forgiveness. According to the IRS guidelines, the definition of payroll costs excludes paid leave payments made pursuant to the Families First Corona Virus Response Act (reimbursement of leave payments is made through the tax credit process enacted by the CARES Act), likely because of the payroll tax credit that employers receive for benefits paid out under the FFCRA, and forgiveness of such amounts would result in a windfall to borrowers.

Loan payments will be deferred for 6 months.

Borrowers may apply for loan forgiveness with documentation verifying the number of full-time equivalent employees and pay rates as well as the payments on eligible mortgage, lease and utility obligations that demonstrate how the loan proceeds were spent. Borrowers must certify that the documents are true and that the borrower used the forgiveness amount to keep employees and make eligible mortgage interest, rent and utility payments. The lender must make a forgiveness determination within 60 days. Those amounts that do not qualify for forgiveness are repayable over a 2 year term, at a 0.5% fixed interest rate, and the first payment is deferred for 6 months. Interest accrues during the deferral period. There is no collateral requirement, no personal guarantee, and there are no prepayment penalties. Interestingly, and in contrast to these details found on the Payroll Protection Plan page, the SBA Debt Relief page states that it will also pay the principal and interest of new 7(a) loans issued prior to September 27, 2020 and the SBA will pay the principal and interest of current 7(a) loans for a period of 6 months, which is more liberal than the above terms.

The PPP is available to any small business with fewer than 500 employees, including sole proprietorships, independent contractors and self-employed persons, private non-profit organizations or veterans organizations affected by COVID-19. Businesses in specific industries that have more than 500 employees may still qualify for a PPP loan if they meet one of the SBA size standards for their industry. Importantly, the SBA is waiving affiliation standards for small businesses in: (i) the hotel and food services industries (with a NAICS Code of 72), so that such businesses are eligible for a loan as long as they employ not more than 500 employees “per physical location”; (ii) are franchises in the SBA’s Franchise Directory; or (iii) that receive financial assistance from small business investment companies licensed by the SBA.

The PPP loans will be available from private lenders who are already approved by the SBA, known as an SBA 7(a) lender. The SBA lists the 100 most active SBA 7(a) lenders in the United States, which a prospective applicant can use to identify a PPP lender. Other regulated lenders will be approved and enrolled in the program and available to make these loans after the approval process. Thus, prospective PPP loan applicants can also reach out to their lenders to find out if they will be offering PPP loans. Lenders may begin processing PPP loan applications for small businesses as soon as April 3, 2020. Independent contractors and self-employed individuals can apply starting April 10^th.

The PPP loan form is available for prospective applicants in advance of the April 3^rd rollout date. Lenders will determine eligibility for the loans based on whether the business was operational as of February 15, 2020, had employees on payroll, and paid wages and payroll taxes. Applicants must provide the lender with payroll documentation. The program is open until June 30, 2020. Applicants must certify in good faith that:

• Current economic uncertainty makes the loan necessary to support your ongoing operations.
• The funds will be used to retain workers and maintain payroll or to make mortgage, lease, and utility payments.
• You have not and will not receive another loan under this program.
• You will provide to the lender documentation that verifies the number of full-time equivalent employees on payroll and the dollar amounts of payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities for the eight weeks after getting this loan.
• Loan forgiveness will be provided for the sum of documented payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities. Due to likely high subscription, it is anticipated that not more than 25% of the forgiven amount may be for non-payroll costs.
• All the information you provided in your application and in all supporting documents and forms is true and accurate. Knowingly making a false statement to get a loan under this program is punishable by law.
• You acknowledge that the lender will calculate the eligible loan amount using the tax documents you submitted. You affirm that the tax documents are identical to those you submitted to the IRS. And you also understand, acknowledge, and agree that the lender can share the tax information with the SBA’s authorized representatives, including authorized representatives of the SBA Office of Inspector General, for the purpose of compliance with SBA Loan Program Requirements and all SBA reviews

Unlike other SBA loans, there is no requirement for applicants to look for other loans from other sources before applying.

Economic Injury Disaster Relief

The CARES Act also established low-interest federal disaster loans for working capital to small businesses suffering substantial economic injury as a result of COVID-19 that are presently available in designated states and territories.

The EIDL loans offer up to $2MM with a 3.75% interest rate over a 30 year term for businesses, and can be used to pay fixed debts, payroll, accounts payable and other bills that can’t be paid because of COVID’s impact. Small businesses in all U.S. states and territories are currently eligible for this loan.

The COVID-19 EIDL application is online at the SBA website.

Grant – Economic Injury Disaster Advance Loan

Small business owners in all U.S. states, Washington D.C., and territories are eligible to apply for an Economic Injury Disaster Loan advance of up to $10,000. Funds will be made available within 3 days of a successful application, and do not need to be repaid.

A grant application can be made using the same EIDL form, above.