The Paycheck Protection Program . . . a brief summary

Part of the relief package passed by the federal government (the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act includes the Paycheck Protection Program.  The Paycheck Protection Program will provide cash to support emergency loans to qualifying businesses. Through the Program, the Small Business Administration (“SBA”) has the authority to provide 100% federally backed loans through December 31, 2020 to help eligible businesses pay operational costs such as payroll, rent, and utilities. If a business satisfies certain conditions, portions of the loans are forgivable!

Who is Eligible?

Generally, businesses (including, sole-proprietors, independent contractors, and other self-employed individuals) with fewer than 500 employees, that were in operation on February 15, 2020, and paid (salaries, compensation, and payroll taxes) employees or independent contractors are eligible for the Paycheck Protection Program. The 500-employee threshold includes all employees, including full-time, part-time and any other status. There are some limited exceptions to the 500-employee eligibility requirement for certain industries, such as businesses in the hospitality and food sectors that have multiple locations, which can have up to 500 employees per physical location of the business.

What is the maximum loan amount?
During the Covered Period (February 15, 2020 through June 30, 2020),  an eligible business’s maximum loan amount is based upon the business’s average total monthly payroll costs incurred during the one-year period before the date of the loan. (There is an adjustment for a seasonal workforce). For the period, an eligible business may receive up to 2.5 times its average monthly payroll costs subject to a $10 million limitation.

When determining what the “average total monthly payroll costs” are, the following are excluded:

• Individual employee compensation over $100,000;
• Payroll and income taxes;
• Compensation for an employee with a principal place of residence outside the United States; and
• Qualified sick leave or family leave wages for which a business will receive a credit under the Families First Coronavirus Response Act.

What can the loaned funds be used for?
During the Covered Period, an eligible business can the founds for the following:

• Payroll costs;
• Cost related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;
• Employee salaries;
• Interest payments on any mortgage;
• Rent and utility payments; and
• Interest payments on any other debt obligations that were incurred before February 15, 2020.

This loan might forgiven?!!!
A loan through the Program is eligible for loan forgiveness. The amount of forgiveness cannot exceed the principal amount of the loan, but may equal up to a business’s costs during the 8 weeks following the date of the loan’s origination for the following categories of expenditures:

• Payroll costs;
• Interest on real or personal property mortgage obligations in existence before February 15, 2020 and incurred in the ordinary course;
• Rent under a lease agreement in force before February 15, 2020; and
• Utility payments, including electricity, gas, water, transportation, telephone or internet, for which service began before February 15, 2020.

The amount of loan forgiveness is subject to reduction based on a business’s decline in headcount or wages. Declines in headcount or wages between February 15, 2020 and April 26, 2020 will not trigger a reduction in loan forgiveness if the business reverses the decline and returns to pre-decline levels by June 30, 2020. Loan forgiveness will not be included in a business’s taxable income.

What else?

• Collateral and a personal guarantee are not required (except if the funds are used for non-allowable uses).
• SBA loan fees are waived for a loan.
• Payments of principal and interest on a loan are deferred for a period of six months to one year.
• There is no prepayment penalty.
• The maximum rate of interest that can be charged for a is four percent; the maximum term is ten years from the date on which the business applies for loan forgiveness.

How does this program work with the Payroll Tax Credits under the FFCRA (for paid sick leave and emergency FMLA)?

A business that gets a loan through the program will not be able to use the payroll tax credits available under the FFCRA.

As per all these emergency laws, more guidance is forthcoming from the SBA!