PAYCHECK PROTECTION PROGRAM
FOR SMALL BUSINESS
(CARES ACT)
We have received multiple general summaries of the various sections of the CARES ACT. As a law firm that focuses on small business, we have dedicated our time to determining the details of the small business loan and the loan forgiveness aspects of the act. Below is the detail we have established so far. One area that is causing confusion is the application form. Others have said the SBA section 7(a) application form will be required. We do not expect that will be so. We expect the application will be a simpler form issued by the SBA in the next couple of weeks. We will publish it as soon as it is available. Please contact us with any questions when trying to navigate through this program. The link below will take you to a Google spreadsheet that will help small businesses estimate the amount of loan available to you and the possible amount of loan forgiveness.
Basics
Who is eligible:
Any business with fewer than 500 employees. Sole proprietors, independent contractors, and self-employed individuals are also eligible. Their eligibility is determined through documentation of income and expenses and payroll tax filings through a Form 1099-MISC. Additionally, businesses in the accommodation and food service industries with multiple locations may also qualify if each location does not have more than 500 employees. The affiliation rules which require including an affiliate’s employees and revenues for determining small business status are waived for:
1) accommodation and food service businesses with fewer than 500 employees,
2) franchises that have been assigned a franchise identifier code, and
3) businesses receiving financial assistance from a small business investment company.
How much is available:
The lesser of $10,000,000 or the average total monthly payments for payroll costs for the one year before the loan is made, multiplied by 2.5 plus the outstanding amount of a loan made after January 31, 2020 under the Disaster Loan provisions of the Small Business Administration Act (Section 7(b) loans).
For example, if your business has not obtained a disaster loan this year and for the last 12 months your average payroll was $100,000 then your maximum loan will be $250,000.
What is included in payroll costs:
Salary, wages, commissions, or cash tips; vacation, parental, family, medical or sick leave; group health care benefits; allowance for dismissal or separation; retirement benefits; state and local taxes on employee compensation; and the sum of any payments of any compensation of a sole proprietor or independent contractor that is a wage, commission, income net earnings from self-employment so long as it is less than $100,000 for one year, as prorated for the period between February 15, 2020 and June 30, 2020 (the “covered period”).
If some of your employees are compensated at over $100,000 per year, then for determining the maximum loan you may only take into account the first $100,000 paid to that employee.
What can loans be used for:
1) Payroll costs, including costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;
2) Employee salaries, commissions or similar compensation;
3) Payments of interest on any mortgage obligation;
4) Rent;
5) Utilities; and
6) Interest on any other debt obligations that were incurred prior to February 15, 2020.
Loan terms
Payment deferral
Lenders must provide complete payment deferral (including principal, interest and fees) for at least six months, and possibly up to one year.
Loan forgiveness
Loan forgiveness will be provided for the portion of the loan used during the eight-week period beginning on the date the loan originated for:
1) payroll costs;
2) interest payment on mortgages;
3) rent payments; and
4) utility payments.
The amount forgiven will be reduced under two circumstances:
1) if the business has reduced the number of employees in comparison to the number it had between February 15, 2019 and June 30, 2019; and
2) if any employee’s compensation (only for employees earning less than $100,000 annually) has been reduced by more than 25% compared to the most recent quarter prior to the beginning of the eight-week period.
If the business has reduced the number of its employees compared to the number of employees it had between either February 15, 2019 and June 30, 2019 or January 1, 2020 and February 29, 2020, the amount of the loan forgiven is reduced by an amount that is proportional to the number of employees reduced.
If the business has reduced compensation for its employees earning less than $100,000 annually, then the amount forgiven is reduced by the amount of reduction that exceeds 25% of the employee’s compensation.
Example No. 1: If during February 15 through June 30, 2019 your business had 10 employees and during the eight-week period after you take out the loan you maintain 7 employees then only 70% of your loan will be eligible for forgiveness.
Example No.2: If three of your employees were paid $80,000 annually between January 1 and March 31, 2020, and if during the eight-week period after obtaining the loan to reduce the three employees salaries to $60,000, then you still receive 100% loan forgiveness. If, however, you reduce the salaries by $30,000 each, then $30,000 ($10,000 x 3 employees) will not be forgiven.
However, if a business has either laid off employees or reduced compensation by more than 25% and then rehires them or restores the compensation levels by June 30, 2020, then the amount of loan forgiveness is not reduced.
In order to obtain loan forgiveness, the borrower must submit to its lender an application (not at the time of loan application) which includes documentation verifying the number of full-time equivalent employees on payroll and pay rates for the eight-week period and include:
1) Payroll filings reported to the IRS;
2) State income, payroll, and unemployment insurance filings;
3) Documentation, including cancelled checks, payment receipts, transcripts of accounts, or other documents verifying payments on covered mortgage obligations, payments on covered lease obligations, and covered utility payments;
4) A certification from a representative authorized to make the certification that:
a. The documentation presented is true and correct;
b. The amount for which forgiveness is requested was used to retain workers, make interest payments on a mortgage, make a rental payment, and make utility payments.
5) Any other documentation the Administrator determines necessary.
Lenders must make a decision on loan forgiveness within 60 days of receiving a borrower’s application for forgiveness. Canceled indebtedness will be excluded from gross income for income tax purposes.
Interest
The interest rate shall not exceed four percent.
Fees
The yearly fee and the guarantee fee for SBA loans during the covered period is eliminated. There are no prepayment penalties for prepayment of covered loans.
Guarantee
The balance of the loan shall be 100% guaranteed by the Small Business Administration during the deferment period, (which will be either six months or one year) and thereafter will be guaranteed up to 85% for loans under $150,000 and up to 75% for loans exceeding $150,000.
Term
The balance of the loan will have a maximum term of ten years from the date on which the borrower applies for loan forgiveness.
Application
SBA lenders have the authority to make and approve loans based on an evaluation of the eligibility of the borrower. The lender can only consider whether the borrower was in operation on February 15, 2020 and had employees for whom the borrower paid salaries and payroll taxes or paid independent contractors, as reported on a 1099 form. Borrowers will not be required to demonstrate that they cannot obtain credit elsewhere and will not be required to provide personal guarantees, nor will collateral have to be provided for the covered loan.
The borrower applying for a covered loan must:
1) Certify that the uncertainty of the current economic conditions justifies the loan request to support the ongoing operations of the borrower
2) Acknowledge that funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments
3) Certify that the borrower does not have an application pending for a loan under the CARES Act for the same purpose and duplicative of amounts applied for or received under a covered loan; and
4) Certify that the borrower has not received, during the period between February 15, 2020 and December 31, 2020, amounts under the CARES Act for the same purpose and duplicative of amounts applied for or received under a covered loan.
It is likely that a streamlined application will shortly be made available by the SBA.
SBA lenders in Florida include (not an exhaustive list):
SunTrust Bank and BB&T Bank, now Truist
JPMorgan Chase Bank, National Association
Fairwinds Credit Union
Regions Bank
Wells Fargo Bank National Association
BankUnited, National Association
Seacoast National Bank
The Act, however, directs the Treasury Department to establish criteria for other lenders to provide the CARES Act loans, as well as to issue regulations and guidance on the interest rates, and the other requirements imposed by the CARES Act, such as loan deferrals, fee waivers, maximum amounts to be loaned, and borrower eligibility.
This is not intended as legal advice nor should it be considered a solicitation for legal representation