2020 CARES Act Paycheck Protection Program
June 2020 Update: Regarding PPP Flexibility Act
For basic information regarding the Paycheck Protection Program (PPP) please visit https://www.starnlaw.com/news/sba-loan-programs-to-assist-hawaii-businesses/. Please note that the last day to apply for a PPP loan is June 30, 2020. There is no guarantee that this deadline will be extended.
The Paycheck Protection Program Flexibility Act of 2020 was signed into law by President Trump on June 5, 2020, and supplemented by a new Interim Final Rule issued by the SBA June 11, 2020, to give borrowers more time to spend loan funds and still obtain forgiveness. Collectively the following updates have been made:
- Loan Maturity: Increases maturity of PPP loans. Minimum maturity of 5 years for PPP loans made on or after June 5, 2020 with a remaining balance after forgiveness. Although PPP loans made before June 5, 2020 still have a maturity of 2 years, borrowers and lenders may mutually agree to extend to maturity of such loans to 5 years.
- Covered Period: Extends the covered period during which a loan recipient may use such funds for certain expenses while remaining eligible for forgiveness. The covered period now ends 24 weeks after the date the loan was originated or on December 31, 2020, whichever is earlier. This extended period allows borrowers more time to restore their workforce to pre-COVID-19 levels in order to obtain full forgiveness.
- Loan Proceeds: Lowers amount of PPP loan proceeds which must be used for payroll costs. Rather than 75%, now only 60% of all PPP loan proceeds must be used for payroll costs.
- Loan Forgiveness: Raises the non-payroll portion of a forgivable covered loan from 25% up to 40%. Meaning that in order to receive full loan forgiveness, at least 60% of a borrower’s forgivable amount must be spent on payroll costs. However, borrowers that spend less than 60% of loan proceeds on payroll costs may still be eligible for partial loan forgiveness.
- Time Limit for Forgiveness Applications: Includes a provision that suggests borrowers must apply for forgiveness within 10 months after the last day of the coverage period.
- Payroll Taxes: Allows businesses that took a PPP loan to delay paying their payroll taxes.
- Inability to Restore Workforce: Created two exceptions that allow borrowers to receive full PPP loan forgiveness even if they do not fully restore their workforce. Borrowers can reduce workforce requirements (1) based on the inability to find qualified employees, or (2) if they were unable to restore operations to February 15, 2020 levels due to COVID-19 restrictions (these exceptions are in addition to previous guidance that let borrowers exclude workers who turned down good-faith re-employment offers).
April 24, 2020 Update
On April 24, 2020, the President signed into law H.R. 266, the Paycheck Protection Program and Health Care Enhancement Act. This enhancement authorized: (a) an additional $310 billion for loans under the Paycheck Protection Program; and (b) an additional $50 billion for Economic Injury Disaster Loans and an additional $10 billion for the $10,000 emergency grants.
In an effort to better support small businesses, Congress allocated $30 billion for loans through medium-sized banks and credit unions with between $10 billion and $50 billion in assets, and $30 billion for loans through community financial institutions, small banks, and credit unions with less than $10 billion in assets.
The Small Business Administration will resume accepting Paycheck Protection Program applications from participating lenders on Monday, April 27, 2020 at 10:30 am EDT.
PPP Loan Program Overview (please review the updates above for amendments to the program)
The Coronavirus Aid, Relief, and Economic Security (CARES) Act creates a new Small Business Administration (SBA) loan program, called the “Paycheck Protection Program” (PPP). The PPP facilitates federally backed loans of up to $10,000,000 to help cover up to 8 weeks of payroll and other operating expenses, including rent, utility costs, and mortgage interest.
Small businesses (defined as having no more than 500 employees, with a special rule for hospitality and food service businesses with no more than 500 employees per location), sole proprietors, independent contractors, and self-employed individuals who have been impacted by the COVID-19 pandemic and related economic downturn are eligible for a loan.
Loan payments will be deferred for 6 months. No collateral or personal guarantees are required. Neither the government nor lenders will charge small businesses any loan fees.
Subject to certain conditions, loans may also be forgivable. Any canceled indebtedness will not be taxable to the borrower. The amount of loan forgiveness will be reduced if the borrower’s number of full-time equivalent employees declines, or if salaries and wages decrease.
Starting April 3, 2020, small businesses can apply. Starting April 10, 2020, independent contractors and self-employed individuals can apply. Loans will be provided on a first-come, first-served basis, and there will be a funding cap, so applicants should apply as soon as possible. A sample loan application form is now available on the SBA’s website.
Additional regulations and guidance are expected to be issued on an ongoing basis.
Who is Eligible?
- Your business must have been in operation on February 15, 2020.
- If you have already furloughed or laid off employees or reduced salaries, you may still be eligible for the loan forgiveness if, by no later than June 30, 2020, you restore the number of “full-time equivalent” (FTE) employees that was in place prior to February 15, 2020 and/or have reversed any salary reductions.
- Small businesses
- 501(c)(3) nonprofit organizations
- 501(c)(19) veterans organizations
- Tribal concerns
- Businesses with no more than 500 employees (includes full-time, part-time, and those employed on other bases), or no more than the applicable size standard number of employees for the North American Industry Classification System (NAICS) industry that covers the business, as provided by the SBA, whichever is higher.
- The following types of businesses are eligible even if they have more than 500 employees overall, so long as they employ no more than 500 employees at each physical location:
- Businesses in the accommodation and food services industries with NAICS codes beginning with 72;
- businesses operating as a franchise that are assigned a franchise identifier code by the SBA; and
- Businesses that receive funding through a Small Business Investment Company under section 301 of the Small Business Investment Act of 1958.
When Should I Apply?
- Starting April 3, 2020, small businesses can apply.
- Starting April 10, 2020, independent contractors and self-employed individuals can apply.
- Loans will be provided on a first-come, first-served basis. A sample loan application form is now available on the SBA’s website.
- Loans are available through June 30, 2020.
- The covered period extends from February 15, 2020 to June 30, 2020. Borrowers can choose which 8-week period they want to count towards the covered period, which can start as early as February 15, 2020.
What is the Maximum Loan Amount?
The lower of: (a) $10,000,000; or (b) two months of your average monthly payroll costs from the last year plus an additional 25% of that amount. If you are a seasonal or new business, you will use different applicable time periods for your calculation. Payroll costs will be capped at $100,000 annualized for each employee.
What are the Interest Rate and Loan Term?
- The CARES Act provides that the interest rate on PPP loans will not exceed 4% per annum. The Department of the Treasury has released a fact sheet that indicates that the interest rate for PPP loans will be fixed at 1.00% per annum.
- If the full principal of the PPP loan is forgiven, the borrower is not responsible for the interest accrued during the 8-week covered period.
- The remainder of the loan that is not forgiven will operate according to the loan terms agreed upon by the borrower and the lender.
- All payments are deferred for 6 months; however, interest will continue to accrue over this period.
Maximum Loan Term
The CARES Act provides that the maximum PPP loan term is 10 years. The Department of the Treasury has released a fact sheet that indicates that the term for PPP loans will be 2 years, and that there will be no prepayment penalties or fees.
How Do I Apply?
Where to Apply
- You can apply for a PPP loan at any lending institution that is approved to participate in the program through the SBA 7(a) lending program and additional lenders approved by the Department of Treasury. There are thousands of banks that already participate in the SBA’s lending programs, including numerous community banks.
- You do not need to visit any government institution to apply for the program. Both existing SBA lenders and new lenders meeting SBA’s lender qualifications may loan under the PPP.
Borrowers must make the following good-faith certifications:
- Current economic uncertainty makes the loan necessary to support your ongoing operations.
- The funds will be used to retain workers and maintain payroll or to make mortgage, lease, and utility payments.
- You have not and will not receive another PPP loan.
- You will provide to the lender documentation that verifies the number of full-time equivalent employees on payroll and the dollar amounts of payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities for the eight weeks after getting this loan.
- Loan forgiveness will be provided for the sum of documented payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities. Due to likely high subscription, it is anticipated that not more than 25% of the forgiven amount may be for non-payroll costs.
- All the information you provided in your application and in all supporting documents and forms is true and accurate. Knowingly making a false statement to obtain a loan under this program is punishable by law.
- You acknowledge that the lender will calculate the eligible loan amount using the tax documents you submitted. You affirm that the tax documents are identical to those you submitted to the IRS. And you also understand, acknowledge, and agree that the lender can share the tax information with the SBA’s authorized representatives, including authorized representatives of the SBA Office of Inspector General, for the purpose of compliance with SBA Loan Program Requirements and all SBA reviews.
Waiver of Personal Guarantee, Collateral, and Alternative Funding Source Requirements
- No personal guarantee or collateral will be required for the covered loan.
- The SBA is waiving the usual requirement that borrowers try to obtain some or all of the loan funds from other sources.
Will Loan Payments Be Deferred?
- Businesses that were operating on February 15, 2020 and that have a pending or approved PPP loan application are presumed to qualify for complete payment deferment relief (for principal, interest, and fees) for 6 months, according to guidance from the Department of the Treasury.
- Lenders are required to provide such relief during the covered period (if secondary market investors decline to approve a lender’s deferral request, the Administration must purchase the loan).
How Much of My Loan Can Be Forgiven?
Uses Eligible for Loan Forgiveness
Under Section 1106 of the CARES Act, a loan is forgiven in an amount equal to the following costs incurred and payments made during the covered period:
- Payroll costs (see definition below), capped at $100,000 of annualized compensation for each employee;
- Cost related to the continuation of group health care benefits during periods of paid sick, medical or family leave, or insurance premiums;
- Employee salaries, commissions, or similar compensation;
- Interest (but not principal) payments due under a mortgage that was in place before February 15, 2020;
- Rent due under a lease agreement that was in effect before February 15, 2020;
- Utilities (electricity, gas, water, transportation, telephone or internet) for which service began before February 15, 2020; and
- Interest on any other debt obligations that were incurred before the covered period.
PPP loans may be used for other business-related expenses, like inventory, but any portion of the loan that is used on non-eligible expenses will not be eligible for loan forgiveness under Section 1106 of the CARES Act.
Definition of “Payroll Costs”
- salary, wages, commissions, tips, or similar compensation (capped at $100,000 on an annualized basis for each employee);
- employee benefits including costs for vacation, parental, family, medical, or sick leave;
- allowance for dismissal or separation;
- payments required for the provisions of group health care benefits, including insurance premiums;
- payment of any retirement benefit;
- State or local tax assessed on the compensation of employees;
- for a sole proprietor or independent contractor: wages, commissions, income, net earnings from self-employment, or similar compensation, capped at $100,000 on an annualized basis per individual.
- compensation of an individual employee in excess of an annual salary of $100,000, as prorated for the covered period;
- taxes imposed or withheld under chapters 21, 22, or 24 of the Internal Revenue Code of 1986 during the covered period;
- any compensation of an employee whose principal place of residence is outside of the United States;
- qualified sick leave wages for which a credit is allowed under section 7001 of the Families First Coronavirus Response Act (Public Law 116–127);
- qualified family leave wages for which a credit is allowed under section 7003 of the Families First Coronavirus Response Act (Public Law 116–127).
Reduction in Amount of Forgiveness
The amount of PPP loan forgiveness is subject to reduction if the borrower reduces the number of employees, employee salaries, or both during the covered period, which is the 8-week period beginning on the origination date of the loan.
- Loan forgiveness will be reduced if you decrease full-time employee headcount.
- Loan forgiveness will also be reduced if you decrease salaries and wages by more than 25% for any employee that made less than $100,000 annualized.
- You have until June 30, 2020 to restore full-time employment and salary levels for any changes already made between February 15, 2020 and April 26, 2020.
How Do I Apply for Loan Forgiveness?
Borrowers seeking forgiveness of amounts must submit to their lender:
- Documentation verifying full time employees on payroll and their pay rates;
- Documentation on covered costs/payments (e.g., documents verifying mortgage, rent, and utility payments);
- Certification from a business representative that the documentation is true and correct and that forgiveness amounts requested were used to retain employees and make other forgiveness-eligible payments; and
- Any other documentation the Administrator may require.
Where Can I Find More Information?
- SBA Economic Injury Disaster Loans (EIDLs) and Emergency Advances
EIDLs are working capital loans made directly by the SBA to help small businesses and non-profit organizations directly affected by a disaster. Unlike PPP loans, EIDLs are not subject to loan forgiveness and cannot be used to refinance long-term debts. Borrowers may apply for and receive both a PPP loan and an EIDL.
Under the SBA’s EIDL program, small business owners are also eligible to apply for an emergency advance of up to $10,000. Advances will be paid quickly (in as little as 3 days) and do not need to be repaid, even if the application for an EIDL is denied. The borrower will need to repay any other amounts received under an EIDL.
When to Apply
- Applications are now being accepted online.
Eligibility and Requirements
- Applicants must have a credit history acceptable to the SBA and show the ability to repay the loan.
- Collateral is required for all EIDL loans over $25,000. The SBA takes real estate as collateral when it is available. The SBA will not decline a loan for lack of collateral but will require the borrower to pledge collateral that is available.
- Applicants who have not complied with the terms of previous SBA loans may not be eligible for EIDLs. This includes borrowers who did not maintain required flood insurance and/or hazard insurance on previous SBA loans.
- The interest rate is determined by formulas set by law and is fixed for the life of the loan.
- The maximum interest rate for this disaster is 3.75%.
- The interest rate for non-profits is 2.75%
Up to a maximum of 30 years. The SBA will determine an appropriate installment payment based on the financial condition of each borrower, which in turn will determine the loan term.
Maximum Loan Amount:
The maximum EIDL loan amount is $2,000,000. However, the SBA has indicated that it may be limiting initial loan disbursements to $15,000 per applicant (in addition to the $10,000 emergency grant). The actual amount of each loan is limited to the economic injury determined by the SBA, less business interruption insurance and other recoveries. If a business is a major source of employment, the SBA may waive the limit.
The SBA may require you to obtain and maintain appropriate insurance.