Updated March 30, 2020 - CARES Act: Paycheck Protection Program (SBA 7(a) Covered Loans) and Loan Forgiveness

March 26, 2020

The CARES Act signed by the President, creates a new loan product within the Small Business Administration’s 7(a) Loan Program called "Paycheck Protection Loans". The expressed intention of the program is to assist and incentivize businesses to keep their doors open and keep as many employees employed during the crisis, by providing them low-interests, partially forgivable loans, to cover expenses like rent, payroll, employee health insurance benefits, and the paid leave impose on them under the Families First Act. Below is a summary of the program.

Lenders

SBA-approved lenders will have delegated authority to process, close, and service a covered loan without SBA review, which should assist with the expedition. Importantly, these loans will be guaranteed by the SBA, and no personal guarantee or collateral will be required. Additionally, the SBA shall not have recourse against any individual shareholder, member, or partner or an eligible recipient of the covered loan for non-payment of any covered loan under most circumstances.

Permissible Uses

Covered loans can be used to cover payroll costs, including costs related to the continuation of group health benefits during periods of paid sick, medical or family leave, and insurance premiums, employees’ salaries, commissions, or similar compensation, payments of interest on any mortgage obligation, rent, utilities and interest on any other debt obligations that were incurred before Feb. 15, 2020.view and gather information on your payroll costs.

Eligibility

Generally speaking, businesses eligible to receive the loans are businesses, 501(c)(3)'s, veterans organizations, and Tribal business with not more than 500 employees and which meet certain other statutory requirements. Also eligible are: (1) any business that employs not more than 500 employees per physical location and is assigned a North American Industry Classification System code beginning with 72 (The Accommodation and Food Services sector); (2) any business operating a franchise that is assigned a franchise identifier code by the Administration; and (3) any business that receives financial assistance from a company licensed under section 301 of the Small Business Investment Act of 1958.

Loan Amounts

The maximum loan amount shall be the lesser of $10 million dollars or 2.5 times the average monthly payroll based on the prior year’s payroll. Payroll calculation to determine the maximum loan amount shall exclude the compensation of an individual employee in excess of an annual salary of $100,000.00, as prorated for the covered period of February 15, 2020 to June 30, 2020. Covered loans will have an interest rate of 4%, provide complete payment deferment relief for a period of not less than 6 months, including payment of principal, interest and fees, and have a maturity of 10 years from the date the borrower applies for loan forgiveness (for any remaining balance after reduction based on the loan forgiveness). All borrower and lenders fees for the covered loans will be waived. 

Loan Forgiveness

Loan recipients will be eligible for loan forgiveness in an amount equal to the sum of the costs incurred and payments made during an 8-week period beginning on the date of origination of the loan.  Costs incurred shall include: (1) defined payroll costs (note: excluding those making an annual salary in excess of $100,000.00 as prorated during the covered period), (2) payments of interest on any mortgage obligation (being the liability of borrower, mortgage on real or personal property and incurred before Feb. 15, 2020) (not including any prepayment or payment of principal on a covered mortgage obligation), (3) any payment on any covered rent obligation, and (4) any covered utility payment.

The amount of loan forgiveness shall be reduced proportionally by: (1) any reduction in employees retained compared to the prior year; and/or (2) by the reduction in pay of any employee beyond 25% of their prior year compensation. The loan forgiveness program provides flexibility for businesses that re-hire workers that were previously laid off.

Borrowers must file an application for forgiveness with their lender.  The lender must issue the decision on forgiveness no later than 60 days after the date on which a lender receives the application.  For purposes of the IRS, amounts forgiven shall be excluded from gross income.  Additionally, with respect to the IRS and Employee Retention Credit provided for under the CARES Act, any employer that receives a Paycheck Protection Loan shall not be eligible for a credit against employment taxes for qualifying wages to each employee or delay of payment for applicable employment taxes. It is recommended that you consult your payroll tax advisor for the effect of any Paycheck Protection Loan on payroll tax payments.

Action Item

SBA approved lenders are now waiting for the SBA to issue the pertinent regulations so applications can be submitted before lending can occur.  This could take weeks. We recommend you reach out to your banker/lending provider to see if they are now an SBA approved lender (if not find a bank or lender that is) and start to review and gather information on your payroll costs.

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