On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) to “provide emergency assistance and health care response for individuals, families, and businesses affected by the 2020 coronavirus pandemic.” The CARES Act includes an expansion of the so-called 7(a) loan program administered through The United States Small Business Administration (the “SBA”) to include Paycheck Protection Program loans in the loan programs currently available under Section 7(a). The Paycheck Protection Program is designed to assist small businesses to respond to challenges caused by the coronavirus pandemic. Here are the highlights of the CARES Act as it relates to 7(a) SBA loans:
PAYCHECK PROTECTION PROGRAM LOAN DETAILS
Loans under the Paycheck Protection Program can be made beginning February 15, 2020, and ending June 30, 2020 (the “Covered Period”). During the Covered Period, any business, non-profit organization, veterans’ organization, or Tribal business with fewer than 500 employees is eligible to apply for the loans. The number of employees includes full-time, part-time, and those employed on any other basis. If the business is in the accommodation or food service industry (i.e., it has a North American Industry Classification System, or NAICS, code 72 designation) and has more than one (1) physical location, then the number of employees is calculated on a per physical location basis. Sole proprietors and independent contractors are also eligible for these loans. In addition, the business, non-profit, veterans’ organization, or Tribal business must have been in operation on February 15, 2020, and must have had employees and paid salaries and payroll taxes or paid independent contractors.
The affiliation rules where separate but related entities (such as entities under common control) are aggregated (including for purposes of counting employees) which apply to traditional Section 7(a) applicants will apply to Paycheck Protection Program loans except with respect to businesses in the accommodation and foodservice industry with a NAICS code 72 designation, a business operating as a franchise that is assigned a franchise code by the SBA, and any business that receives financial assistance from a company licensed under Section 301 of The Small Business Act.
The maximum principal amount of Paycheck Protection Loans is calculated by multiplying the borrower’s average monthly payroll costs by 2.5, and if the borrower has any outstanding loan under the SBA’s Disaster Loan Program obtained after January 31, 2020, the outstanding SBA Disaster Loan may be refinanced through the Paycheck Protection Loan. However, the maximum amount of the loan is capped at $10,000,000. Payroll costs include salaries, wages, tips, paid vacation, parental, family, medical, or sick leave, health care benefits including insurance premiums, retirement benefits, and state and local taxes assessed on employee compensation. However, payroll costs do not include the compensation of an individual employee in excess of an annual salary of $100,000.
Interest rates are capped at 4%. The loans have a maximum maturity of ten (10) years. The loans are unsecured and owners are not required to give a personal guaranty in support of the loans. Furthermore, the loans are non-recourse to the owners, so the loans may only be satisfied out of the assets of the business and not the assets of the owner. In addition, the borrower may obtain a deferral of payments on the loan of not less than six (6) months and up to one (1) year.
The loans may be used to pay payroll, costs related to the continuation of group healthcare benefits during periods of paid sick, family, or medical leave and including insurance premiums, employee salaries, commissions, or similar compensation, payment of interest on mortgage obligations (this does not include any payment or prepayment of principal), rent, utilities, and interest on any other debt obligations incurred before the Covered Period.
LOAN FORGIVENESS UNDER THE PAYCHECKS PROTECTION PROGRAM
The borrower may request forgiveness of the portion of the loan proceeds used during the eight (8) week period commencing on the date of the loan for payroll costs (determined in the same manner as described above not to exceed $100,000 per year for any employee, prorated for such 8 week period), payments of interest on covered mortgage obligations, rent incurred under leases in force prior to February 15, 2020, and utility expenses for utility services which were started prior to February 15, 2020. Covered mortgage obligations includes a liability of the borrower secured by a mortgage on real estate or personal property which was incurred before February 15, 2020, and only includes interest and not the payment or prepayment of principal. The amount forgiven is excluded from the borrower’s gross income and therefore is not subject to income tax.
However, the amount of loan forgiveness is limited. The forgiveness amount cannot exceed the principal amount of the loan. The amount of forgiveness is also subject to reduction if the borrower’s average number of full-time employees during the 8 week period is less than the average number of employees during either the period from February 15, 2019, to June 30, 2019, or January 1, 2020, to February 29, 2020, at the borrower’s election. The reduction in amount is calculated by multiplying the amount eligible for forgiveness by the quotient obtained by dividing the average number of full-time employees during the 8 week period by the average number of full-time employees during the 2019 or 2020 period above which the borrower elects.
In addition to a reduction of the forgiveness amount based on the number of employees, the forgiveness amount may be reduced by a reduction in salary and wages. The forgiveness amount is reduced by the amount of any reduction in excess of 25% in total salary or wages of any employee who did not receive during 2019 wages or salary at an annualized rate in an amount of more than $100,000.
A key exception to the foregoing reduction rules is that the amount of forgiveness is determined without regard to a reduction in the number of employees or a reduction in salary or wages for the period from February 15, 2020, to thirty (30) days after the adoption of the Cares Act if the borrower eliminates the reduction in the number of employees or in salary or wages by June 30, 2020. Consequently, a borrower who has furloughed or laid-off workers, can re-hire or replace them prior to June 30, 2020, and not be subject to the reduction of the forgiveness amount. The same would be true for salary or wage reductions.
The Banking and Finance attorneys at Dvorak Law Group have the knowledge and experience to efficiently assist our clients with financing needs. Please contact Dvorak Law Group for specific questions and recommendations regarding how SBA loans may assist your business.
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