CARES Act – Paycheck Protection Program

By Bill Claffey, Esq., Partner, Tax & Advisory Services
Mar 28, 2020

UPDATED April 7, 2020

On March 27, 2020, the House passed and President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (CARES ACT).  Title I, the Keeping American Workers Paid and Employment Act provides one of the key provisions of this Stimulus legislation, the Paycheck Protection Program (PPP) which will be administered by the Small Business Administration (SBA) and infuse $349B of emergency lending pursuant to its 7(a) lending program.  As noted below, certain loan obligations may be forgiven if used to maintain employees and payroll costs.  We expect logistics to roll out within the next several days. Below are key provisions of the Paycheck Protection Program: 

Who is Eligible? 

  • Small businesses – this is measured by the Small Business Administration in its size standard index, however, all businesses with less than 500 employees are eligible.  The size standard index may allow for businesses with over 500 employees to qualify   
  • 501(c)(3) non-profit organization 
  • 501(c)(19) veteran organization 
  • Tribal businesses pursuant to Section 31(b)(2)(C) 
  • Sole proprietorships or individuals acting as independent contractors 
  • Self-employed individuals 

* Businesses in the Food and Accommodations Sector (i.e. NAICS Code beginning in 72) are measured per location for purposes of the 500 employee rule. 

* Franchises – affiliation rules do not apply. 

* Affiliation rules – The SBA will utilize its ‘affiliation rules’ to determine whether a business is considered ‘small’.  Affiliation exists when one business controls or has the power to control another or when a 3rd party controls or has the power to control both businesses.  Affiliation rules are found within SBA 13 CFR 121.103.  Please also see FML’s post CARES ACT – Considerations for Venture Capital Backed Companies. 

* Waives collateral, eligible credit elsewhere, and personal guarantees generally required of most SBA loans. 

* Banks have reported to FML that loans will commence processing on April 3, 2020 and Sample Loan Applications appear to have been provided to Lenders along with other instructional materials.    

How much can I borrow? 

  • Loan equals 2.5 x the average monthly payroll costs (capped at $10m).   
    • Generally – Average monthly payroll costs are determined using average of prior 12 months before loan application 
    • If not operation in 2019, 2.5x average monthly payroll costs in January & February 2020  
    • Seasonal businesses – use a 12-week period beginning February 15, 2019 through June 30, 2019 
  • Payroll costs include for employers include: (1) salaries, commissions, or similar compensation, (2) tips, (3) vacation, parental, family, medical or sick leave (exclusive of HR 6201 leave), (4) allowance for dismissal or separation, (5) group health benefits including insurance premiums, (6) retirement benefits, (7) state and local tax assessed on employee compensation. 
  • Payroll costs for sole proprietors, independent contractors and self-employed individuals includes: wage, commission, income or net earnings from self-employment up to $100k.  
  • Excluded payroll costs include: (1) compensation in excess of $100k, (2) payroll taxes and income taxes, (3) compensation to an employee residing outside the U.S., (4) HR 6201 Sick and FLMA Leave.  HR 6201 is the mandated Sick and Family Leave related to Covid-19, see HR 6201-Paid Sick Time and Paid Family Medical Leave 

* FML is awaiting guidance regarding the application of the above rules for partnerships and LLC’s to determine whether such entities can include both employee payroll and partner/member guaranteed payments and other income in the calculation of payroll costs.   

What are the terms? 

  • 10 years 
  • Up to 4% interest 
  • No SBA loan fees 
  • 6 month loan deferral with possible extended deferral up to 1 year 
  • Possible loan forgiveness (see below) 

How can I use the loan proceeds? 

Loan proceed usage is limited to the following: 

  • Payroll costs (see above) 
  • Continuation of group health care benefits during periods of sick leave, medical, or family leave (this includes insurance premiums). 
  • Interest on any mortgage obligation 
  • Rent 
  • Utilities 
  • Interest on any other debt obligation entered into prior to February 15, 2020.  

What amount of the loan can/will be forgiven? 

PPP loans are eligible for forgiveness for qualified amounts spent during an 8-week period beginning with loan origination date.  Qualified amounts include: 

  • Payroll costs (see above) 
  • Interest on mortgage obligations (obligation in place prior to February 15, 2020) 
  • Rent (lease agreement in forced prior to February 15, 2020) 
  • Utilities (service began prior to February 15, 2020) 

Loan forgiveness will be reduced for either: (1) a reduction in employees during an 8 week period following loan origination or (2) reduction of greater than 25% to an employee’s wages making less than $100k.   

How is the reduction computed?   

  • Employee Reduction = Loan Forgiveness Amount * Average FTEs during 8-week period / Average FTE (per month) from February 15, 2019 through June 30, 2019. 
    • Denominator varies for seasonal employers or new businesses 
  • Reduction in salaries = Loan Forgiveness Amount (-) reduction in wages greater than 25% (for employees making less than $100k). 

* Reductions in employment or reductions in wages that occur during the period February 15, 2020 and April 26, 2020 shall not reduce the amount of the loan forgiveness IF by June 30, 2020 the borrower eliminates the reduction in employees or reduction in wages.  

* Loans forgiven will not be included in taxable income.   

* FML notes that there is some uncertainty regarding the CARES ACT language related to the calculation of the actual loan forgiveness amount.  The above represents what most published guidance is presenting, however, FML will continue to monitor official guidance from the Treasury and SBA and update this post as soon as possible.     

What is the interplay between the Paycheck Protection Program and other SBA Programs? 

Applicants can apply for other SBA loans including 7(a) loans, 504 loans, microloans and EIDL (Disaster Loans) and Paycheck Protection Program loans, however, borrowers cannot use the PPP loan for the same purpose.   

EIDL loans received between January 1, 2020 and June 30, 2020 may be refinanced into PPP loans.  If an Emergency Economic Injury Grant is allowed, such amount will be subtracted from the forgivable portion of the PPP loan.