By: Marian A. Kornilowicz, Lane F. Kelman, and Jonathan Landesman
Last Friday, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law. The CARES Act is broad-ranging, with multiple provisions and potential economic relief possibilities, including loans for businesses regardless of the number of employees, expanded unemployment compensation, and payroll tax relief. The first portion of this law provides for loans to eligible small businesses and the forgiveness of such loans in certain circumstances. This loan program is called the “Paycheck Protection Program” and will be administered through the Small Business Administration (SBA). Lenders currently registered though the SBA are authorized to make these loans (called “covered loans”). The Paycheck Protection Program is an important component of the CARES Act and a unique opportunity for loan forgiveness for certain businesses.
Eligibility for the program is broad and not limited to the qualifications necessary for typical SBA loans. It includes small businesses under the SBA law but also any small business with less than 500 employees, non-profits, sole proprietors, independent contractors, and self-employed individuals. If you do qualify, there are substantial potential benefits.
Maximum Loan Amount
The loan amount available under the Paycheck Protection Program can be significant. The maximum amount is the lesser of (i) the average monthly “payroll costs” incurred during the one-year period prior to the date the loan is made multiplied by 2.5; or (ii) $10 million. Payroll costs include salary, wage, commission, or similar compensation; payment for vacation, parental, family, medical, or sick leave; an allowance for dismissal or separation; payment required for the provisions of group health care benefits, including insurance premiums; payment of any retirement benefit; and payment of state or local tax assessed on the compensation of employees. Expressly excluded from payroll costs are the “compensation of an individual employee in excess of an annual salary of $100,000, as prorated for the covered period,” federal taxes during the covered period, and benefits for which credit is given under the CARES Act.
Allowable Uses of Covered Loans
Permitted uses of the loans proceed are fairly broad. Covered loans can be used during the covered period (defined as the period from February 15, 2020 through June 30, 2020) for 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 (which shall not include any prepayment of or payment of principal on a mortgage obligation); rent; utilities; and interest on any other debt obligations that were incurred before the covered period. In short, the covered loan can be used to “keep the lights on” during the covered period.
Covered loans do not have many of the risks or costs that accompany most loans. Personal guaranties and collateral are waived, and there can be no personal recourse except to the extent that a covered loan is used for an unauthorized purpose. Fees are waived as are prepayment penalties and the requirement that a borrower is unable to obtain credit elsewhere. SBA affiliation rules are also waived. Interest cannot exceed 4% and covered loans may have a maximum maturity of ten years from the date borrower applies for loan forgiveness. Payments under covered loans can be deferred for not less than six months subject to guidance to be provided by the SBA Administrator.
Perhaps the most compelling incentive for utilizing the Paycheck Protection Program (and retaining employees) is the possibility that the covered loan would not have to be repaid.
Covered loans can be forgiven in a maximum amount equal to the sum of the following costs:
- “Payroll costs”
- Any payment of interest on any covered mortgage obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation)
- Any payment on any covered rent obligation
- Any covered utility payment.
These covered costs have to be incurred and paid by the borrower during the eight-week period commencing from the date of the covered loan. “Covered” costs generally relate to obligations existing before February 15, 2020. Any amounts forgiven shall not be included in the borrower’s taxable income.
Since the stated purpose of this program is keeping American workers paid and employed, the maximum amount of the loan forgiveness will be reduced if, during the eight-week period, the borrower reduces the number of full-time employees or reduces an employee’s total salary or wage in excess of 25%. The maximum loan forgiveness amount will be reduced by multiplying that amount by a number calculated by dividing the average number of full-time employees per month during the eight-week period by (at borrower’s election) (i) the average number of full-time employees per month during the covered period, or (ii) the average number of full-time employees per month from January 1, 2020 to February 29, 2020.
However, any reductions in the number of full-time employees or in salary and wages between February 15, 2020 and April 26, 2020 will not affect the maximum loan forgiveness amount if the terminated employees are rehired and the full wages and salaries restored not later than June 30, 2020.
The CARES Act authorized the amount of $349 billion for covered loans. Although the deadline for applications for covered loans is June 30, 2020 and $349 billion is a lot of money, we recommend that interested borrowers act as soon as possible and approach their lenders and begin the process of compiling the necessary information. Please contact Marian A. Kornilowicz, Lane F. Kelman, or Jonathan Landesman with any questions.