Updates in the Law
Since March 30, 2020, the U.S. Treasury Department (“Treasury Department”) and the Small Business Administration (“SBA”) have issued rules and guidelines regarding the implementation of the small business loan provisions of the CARES Act, including, but not limited to an interim final rule issued by the SBA on April 2, 2020.
These new rules and guidelines significantly modify the terms of the CARES Act regarding small business loans. This update explains how these new rules and guidelines impact the small business loan provisions of the CARES Act.
Under the CARES Act, small business loan assistance is provided to small business owners through the following two programs:
Pursuant to rules published by the Treasury Department, applications for Paycheck Protection Program (“PPP”) loans may be submitted by small businesses and sole proprietorships on April 3, 2020. Starting April 10, 2020, independent contractors and self-employed individuals may apply. Applications for Economic Injury Disaster Loans were allowed immediately after the enactment of the CARES Act.
The Paycheck Protection Program or “PPP” is a loan program administered through the SBA. It is intended to allow businesses to continue operating while maintaining their current workforce during the period of uncertainty caused by the COVID-19 Pandemic. The program is expected to provide up to $349 billion in loans to eligible entities.
In evaluating the eligibility of an applicant, a lender shall consider the following:
On March 31, 2020, the Treasury Department published the PPP loan application form. The application inquires about whether the applicant:
Accordingly, these factors may also be considered by a lender when determining whether an applicant qualifies for a loan.
Good Faith Certification
An applicant must also provide the lender with a good faith certification that:
PPP loan proceeds may be used for:
CARES Act states that the maximum amount of a PPP loan is the lesser of 2.5 times the average amount of monthly payroll costs during the year prior to the loan, or $10,000,000. For seasonal employers, the average total monthly payments for payroll to be used for this calculation shall be based upon the 12-week period beginning February 15, 2019, or at the election of the borrower, March 1, 2019 and ending on June 30, 3019. For employers which were not in business from February 15, 2019 through June 30, 2019, the average total monthly payments for payroll to be used for this calculation shall be based on the period of January 1, 2020 to February 29, 2020.
Forgiveness Period – 8 Weeks
Borrowers are eligible for loan forgiveness (not to exceed the loan principal amount) for qualifying expenses incurred and paid during the eight (8) week period after the loan origination date.
Pursuant to guidance issued by the SBA and Treasury Department on April 10, 2020, the 8-week period after the loan origination date begins on the date the lender makes the first disbursement of the PPP loan to the borrower.
Payments Subject to Forgiveness
The SBA and Treasury Department have stated that not more than 25% of the loan forgiveness amount may be attributable to non-payroll costs.
Employee Retention Requirement
The eligible forgiveness amount will be reduced proportionally based upon the number of employees who are not retained or rehired during the “covered period” as defined in Section 1106 of the CARES Act (8-weeks after loan origination), based upon the formula set forth below.
The qualified forgiveness amount (before reductions) multiplied by one of the two following amounts as selected by the borrower:
1. The average number of full-time equivalent employees (FTEs) per month during the covered period under Section 1106 of the CARES Act (8 weeks after loan origination) divided by the average number of FTEs per month from February 15, 2019 – June 30, 2019 (Seasonal Employers must use this option);
2. The average number of FTEs per month during the covered period under Section 1106 of the CARES Act (8 weeks after loan origination) divided by the average number of FTEs per month from January 1, 2020 – February 29, 2020.
Salary Reduction Test
The qualifying forgiveness amount will be reduced by the amount of any salary/wage reduction occurring during the eight (8) week period following the loan origination date that is greater than 25% of an employee’s salary/wages during the most recent full quarter for which the employee was employed prior to February 15, 2020.
Rehires and Wage/Salary Re-stabilization
Employee or salary reductions that occur between Feb. 15, 2020 – April 26, 2020 (30 days after enactment of the Act), will NOT be considered in reducing the qualifying forgiveness amount if:
Excluded from Gross Income
Amounts forgiven will NOT be considered gross income for federal tax purposes.
Loan Forgiveness Application
All current SBA 7(a) lenders are eligible lenders.
Section 1110 of the CARES Act amends prior requirements relating to Economic Injury Disaster Loans (“EIDL”) under Section 7(b) of the Small Business Act and also provides an option for an emergency grant.
Loan and Grant Availability
Please note that the SBA and Treasury Department continue to develop these loan programs and provide additional guidance as to how they will be carried out. This article has been updated through April 16, 2020.