CARES Act – The Small Business Paycheck Protection Program Loan
House Bill H.R. 748
Status: President signed on March 27, 2020
WHAT TIME PERIOD (COVERED PERIOD) DOES THE SBA PAYCHECK PROTECTION PROGRAM LOAN APPLY TO?
Beginning on February 15, 2020 and ending on June 30, 2020.
WHO ARE ELIGIBLE FOR THE SMALL BUSINESS PPP LOANS DURING THE COVERED PERIOD?
Generally, eligible employers include those with not more than 500 employees (or those which qualify under size standard of the SBA) and who are:
Private or public nonprofit organizations;
Independently owned and operated;
Not dominant in their fields of operation;
Sole proprietorship
Independent contractors
Eligible self-employed
ARE BORROWERS RESPONSIBLE FOR A DOWN PAYMENT FOR THE LOAN?
No. The government will provide 100% of the loan without requiring a down payment.
HOW IS THE MAXIMUM LOAN AMOUNT CALCULATED UNDER THE ACT?
Maximum loan amount guaranteed for applicants during the covered period is the lesser of:
$10,000,000; or,
The sum of:
5 multiplied by the average total monthly amount of “payroll costs” for 1-year period before the closing of the loan (different for seasonal employers), and
Outstanding amount of a loan under section 7(a) of the Small Business Act made during the period from January 31, 2020 to June 30, 2020 (exceptions may apply)
WHAT ARE PAYROLL COSTS?
Subject to exclusions discussed below, “payroll costs” is the total sum of payments of any compensation to an employee that is a:
salary, wage, commission, or similar compensation;
payment of cash, tips or equivalent;
payment for vacation, parental, family, medical or sick leave,
allowance for dismissal or separation;
payment for costs of group healthcare benefits (including insurance premiums)
payment of any retirement benefit;
payment of state and local tax assessed on employee compensation;
payments of any compensation to a self-employed and independent contractors that is
wage, commission, income, net earnings or similar compensation more than $100k in one year (prorated for the covered period)
on April 15, 2020, SBA, by regulation, excluded payments of any compensation to an independent contractor or sole proprietor as eligible payroll costs for purpose of calculating the loan amount.
Payroll costs do not include:
Compensation of an individual employee or self-employed/independent contractor in excess of an annual salary of $100,000 (as prorated for the covered period);
FICA and Federal Income Tax; and,
Payments of qualified emergency sick leave and family & Medical leave under Family First Coronavirus Relief Act
For self-employed and independent contractors, “payroll costs” is defined as any compensation to or income that is a:
Wage, commission, income, net earnings or similar compensation from self-employment that is not more than $100,000 in 1-year (prorated for the covered period)
HOW IS THE TERM “EMPLOYEE” DEFINED?
Employees is defined as full-time, part-time or other basis.
WHAT ARE THE ALLOWABLE USES OF THE PPP LOAN PROCEEDS?
In addition to the allowable uses set forth in section 7(a) of Small Business Act (e.g., for plant acquisition, construction, conversion, or expansion, including the acquisition of land, material, supplies, equipment, and working capital), during the covered period, employers may use the loan proceeds for
Payroll costs;
Costs of continuation of healthcare benefits during paid sick, medical or family leave and insurance premiums;
Employee salaries, commissions or similar compensations;
Mortgage interest payments (not payments of mortgage premiums);
Rent;
Utilities; and,
Any other debt obligations that were incurred before the covered period
WHO CAN QUALIFY FOR A SMALL BUSINESS LOAN DURING THE COVERED PERIOD?
Eligible borrowers are those:
in operation on February 15, 2020; and,
with employees for whom the borrower paid salaries and payroll taxes or
paid independent contractors as reported on 1099-MISC.
Loans made under Section 7(b)(2) of the Small Business Act during the period beginning on January 31, 2020 and February 14, 2020 may be refinanced to be considered a covered loan.
DOES SBA REQUIRE BUSINESS OWNERS TO PERSONALLY GUARANTEE THE COVERED LOANS?
No. For the loans obtained during the covered period, the Administration has waived the requirements for personal guarantees and collateral.
WHAT HAPPENS IF A BUSINESS CANNOT REPAY THE SBA LOAN?
Eligible loans provided during the covered period will not require personal guarantee of the owners and the Administration will have no recourse for against any individual shareholder, member, or partner recipient of a covered loan for nonpayment of any covered loan, except when the loan was not used for its allowable purposes.
However, before receiving the loan, the loan applicant shall make a good faith certification that:
the uncertainly of current economic conditions makes necessary the loan request to support ongoing operations;
acknowledging that funds will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments and utility payments;
that the applicant does not have an application pending for a loan under this subsection for the same purpose and duplicative of amounts applied for or received under a covered loan; and,
that the applicant has not received duplicative amounts of the covered loan during the period between February 15, to December 31, 20202.
DOES SBA CHARGE ANY FEES FOR THE SMALL BUSINESS LOANS TAKEN DURING THE COVERED PERIOD?
During the covered period, Small Business Administration shall eliminate the following fees:
The yearly fee (a/k/a ongoing servicing fee) under section 7(a)(23) of the Small Business Act; and,
The upfront guaranty fee under section 7(a)(18) of the Small Business Act.
IS THERE A PAYMENT DEFERRAL PROGRAM UNDER THE SMALL BUSINESS LOANS DURING THE COVERED PERIOD?
Yes. The Acts provides for a maximum 1-year deferral of loan payments for impacted borrowers.
CAN BUSINESSES WHICH HAVE AVAILABLE CREDIT ELSEWHERE (E.G. FROM NON-FEDERAL SOURCES ON REASONABLE TERMS AND CONDITIONS) APPLY FOR SMALL BUSINESS LOANS DURING THE COVERED PERIOD?
Yes.
WHAT IS THE MAXIMUM MATURITY OF THE PORTION OF THE LOAN REMAINING AFTER ANY FORGIVEN AMOUNT?
The remaining balance of a covered loan shall continue to be guaranteed by the Administration and shall have a maximum of 10 years from the date on which the borrower applies for loan forgiveness.
WHAT IS THE INTEREST RATE FOR A COVERED SBA LOAN?
The interest rate shall not exceed 4%.
IS THERE A PREPAYMENT PENALTY ON THE SBA LOAN?
No. There are no prepayment penalties on covered loans.
IS IT POSSIBLE TO REQUEST FOR EXPRESS LOANS?
Yes. Until January 1, 2021, an eligible borrower can apply to receive an express loan for a maximum amount of $1,000,000.
WILL THE ADMINISTRATION DEFER LOAN PAYMENTS FOR THE COVERED LOANS?
Yes. During the covered period, the Administration shall provide deferment of payment of principal, interest and fees to impacted borrowers with covered loans for:
Not less than 6 months or more than 1-year.
All eligible recipients of SBA loans during the covered period are considered to be “impacted borrowers.”
WILL THE SMALL BUSINESS PPP LOANS BE FORGIVEN?
Yes, expected forgiveness amounts is the sum of:
Payroll costs (as defined above)
Payments of interest on any covered mortgage obligations
Payments of any covered rent obligations
Payments of any covered utility payments
IS THE AMOUNT FORGIVEN CONSIDERED TAXABLE AS A CANCELED INDEBTEDNESS?
Yes. The amount forgiven is considered canceled indebtedness for tax purposes. However, the amount of canceled debt will not be included in the gross income.
IS THERE A MAXIMUM LIMIT ON HOW MUCH OF THE SBA LOAN AMOUNT CAN BE FORGIVEN?
Total amount of SBA loan forgiveness shall not exceed principal.
CAN THE FORGIVENESS AMOUNTS BE SUBJECT TO REDUCTIONS?
Yes. Generally, the total forgiveness amounts can be reduced (but not increased) based on
Reduction of the average number of full-time employees retained over the covered period as compared to other equivalent time periods; and,
Average salary reduction in excess of 25% during the covered period (highly paid employees are not included in this calculation).
WHAT KIND OF DOCUMENTATION SHOULD A BUSINESS MAINTAIN TO DEMONSTRATE QUALIFICATION OF LOAN FORGIVENESS?
Businesses intending to apply for loan forgiveness should maintain documentation verifying the number of full-time equivalent employees on payroll, and pay rates for the qualifying periods, including:
Payroll tax filings reported to the IRS;
State income, payroll and unemployment insurance filings;
Documentations including cancelled checks, payment receipts, transcripts of accounts, or other financial statements verifying payment of covered mortgage obligations, payment on covered lease obligations, and covered utility payments.
A certification of authentication and accuracy of documents presented and the amount was used property for covered purposes; and
Any other documentation required by the Administration
SBA loan forgiveness is prohibited if the borrower is unable to provide the necessary documentation as listed above.
About the Author: Reza Ghafoorian, MD, JD is the founder and Principal attorney at G2Z Law Group, PLLC, a health care law firm established in 2012. Dr. Ghafoorian focuses his practice in the fields of provider health law and patent law, representing health care entities and professionals.
