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Paycheck Protection Program, a SBA Loan Program Expanded in CARES ACT

March 27, 2020
Public Finance Advisory

UPDATE: On April 2, 2020 the SBA issued an interim final rule regarding the Paycheck Protection Program (PPP) that contains material changes and additional guidance that borrowers must be aware of in order to properly apply for the PPP. Please see our updated advisory: SBA Issues Interim Rules on and Final Application for the $349 Billion Paycheck Protection Program

SBA LoanOn March 27, the Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law, providing an unprecedented level of emergency assistance for individuals, families and businesses affected by the coronavirus epidemic.

The legislation includes a new loan program, the Paycheck Protection Program administered through the SBA, that provides up to $349 billion in loans to eligible entities, with such loans being subject to forgiveness under certain circumstances. The 100 percent federally-guaranteed loans are available under a new subsection (36) of Section 7(a) of the Small Business Act.

The application form is available at https://www.sba.gov/sites/default/files/2020-04/PPP%20Borrower%20Application%20Form.pdf, and the interim rules issued by the SBA are available at https://www.sba.gov/sites/default/files/2020-04/PPP--IFRN%20FINAL_0.pdf.

The loans may be used for a variety of purposes, including payroll costs (as described below), rent, utilities, mortgage interest (not principal) and interest on debt existing prior to February 15, 2020; however, not more than 25 percent of the loan proceeds may be used for non-payroll costs.

Eligibility

Eligible entities are those with less than 500 employees, including the following:

  • businesses
  • 501(c)(3) nonprofit organizations
  • veterans organizations
  • certain tribal business concerns
  • eligible self-employed individuals
  • independent contractors
  • sole proprietorships
  • businesses in the accommodation and food services industry (NAICS Sector 72) that have less than 500 employees per physical location

For the purposes of determining the 500 employee threshold, applicants should include full-time, part-time and other basis employees. General SBA affiliations apply except such rules are waived with respect to:

  • businesses in the accommodation and food services industry (NAICS Sector 72),
  • franchises assigned a franchise identifier code and
  • business licensed under Section 301 of the Small Business Investment Act

Maximum Loan Amount

Loans are available for the lesser of the average monthly payroll costs times 2.5 plus any EIDL received after January 31, 2020 that are refinanced under subsection (36) OR $10 million. Average monthly payroll costs are calculated based on the one-year period prior to the loan disbursal date except for seasonal employers and employers not in business between February 15, 2019 and July 30, 2019.

In the case of seasonal employers, the employer may choose to calculate the average monthly payroll costs based on the 12-week period starting February 15, 2019 or the period starting March 1, 2019 through June 30, 2019.

In the case of new employers not in business between February 15, 2019 and July 30, 2019, the average monthly payroll costs are calculated based on the period beginning January 1, 2020 through February 29, 2020.

Payroll costs include: employee salary, wages or commissions; payment of cash tips; payment of vacation, parental, family, medical or sick leave; allowance for dismissal or separation; payment required for group health benefits (including insurance premiums); payment of retirement benefits; payment of state or local tax assessed on employee compensation; and sole proprietor income or independent contractor compensation not in excess of $100,000.

Payroll costs exclude: compensation of an individual person in excess of $100,000 (as prorated for the period); federal employment taxes imposed or withheld taxes; compensation to an employee whose principal residence is outside of the U.S.; qualified sick leave for which a credit is allowed under Section 7001 of the Families First Coronavirus Response Act; and qualified family leave wages for which a credit is allowed under Section 7001 of the Families First Coronavirus Response Act.

Terms

Loans are available for a two-year term (amortized) at one percent interest, with six months deferral of principal and interest payments. Notably, certain SBA requirements are waived. Loans are available with:

  • no personal guaranties of shareholders, members or partners
  • no collateral
  • no proving recipient cannot obtain funds elsewhere
  • no SBA fees (may still have to pay lender processing fee)
  • no prepayment fee

Application Process

Eligible entities may file applications with a SBA-approved lender. Lenders have been delegated authority to make loans without SBA review. Eligible applicants will have been in operation on February 15, 2020 and will have paid employees and payroll taxes or independent contractors.

Applicants will need to certify that the loan is necessary and will be used to retain workers and pay eligible expenses. Applicants will further need to certify that no other application for a loan for the same purpose is pending and that the entity has not received any other loan for the same purposes through December 31, 2020.

Loan Forgiveness

Section 1106 outlines forgiveness of loans obtained under the act.

The forgiven amount will be equal to the amount actually paid for payroll costs, salaries, benefits, rent, utilities and mortgage interest during the eight weeks following disbursement of the loan; however, not more than 25 percent of the loan forgiveness amount may be attributable to non-payroll costs. Additional wages paid to tipped employees under Section 3(m)(2)(A) of the Fair Labor Standard Acts may also be forgiven.

The forgiveness amount is subject to reduction if there is a workforce reduction or a reduction in the salary or wages of an employee.

  • The amount attributable to a workforce reduction will be equal to the initial forgiven amount multiplied by the quotient of average FTEs during the eight-week period divided by the average FTEs for the period from February 15, 2019 through June 30, 2019 or January 1, 2020 through February 29, 2020, as determined by the recipient.
  • The amount attributable to a salary or wage reduction will be the amount of any salary or wage decrease in excess of 25 percent of the total salary or wages during the most recent full quarter such employee was employed before the eight-week period. Only employees who did not receive, during any single pay period during 2019, wages or salary at an annualized rate of pay in excess of $100,000 are included in this calculation.

Reductions in workforce and salaries and wages that occur from February 15, 2020 and ending April 26, 2020 will be disregarded for purposes of reducing the forgiveness amount so long as the reductions are eliminated by June 30, 2020.

Borrowers must apply for forgiveness with the lender servicing the loan. Lenders have 60 days to review and make a determination.

Any portion of the loan that is forgiven will be excluded from gross income.

As is often the case with complex legislation, Varnum anticipates certain technical corrections to the CARES Act, and we are proactively assisting representatives in that work with respect to the Paycheck Protection Program.

Additional PPP Advisories

SBA Issues Final Rules for PPP Loan Forgiveness and Loan Review Procedures
Public Finance Advisory, May 27, 2020

SBA Issues PPP Forgiveness Application and New Interim Rule on Eligibility
Public Finance Advisory, May 18, 2020

SBA Issues New Guidance on Certification Relating to PPP Necessity
Public Finance Advisory, April 23, 2020

SBA Issues Interim Rules on and Final Application for the $349 Billion Paycheck Protection Program
Public Finance Advisory, April 3, 2020

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