This is Part Two of a series of three blogs devoted to helping businesses understand federal, state, and local rules and legislations related to COVID-19.
On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act” or “Act”) into law. The CARES Act is the third piece of legislation from Congress in response to the COVID-19 pandemic. The CARES Act provides an unprecedented $2 trillion aid package.
This summary is not intended to be an exhaustive review of the CARES Act, but rather will hit on two key provisions of the Act that provide relief for small businesses.
Paycheck Protection Program
The Paycheck Protection Program (“PPP”) provides $349 billion in 100% federally guaranteed loans to small businesses, nonprofits, veteran’s organizations, and tribal businesses for the period beginning February 15, 2020 through June 30, 2020 (the “Covered Period”). The purpose of the PPP is to help small businesses keep their workers employed during the height of the COVID-19 pandemic. The PPP greatly expands a business’s eligibility for a United States Small Business Administration (“SBA”) loan.
Generally, businesses with fewer than 500 employees will be eligible for a PPP loan. The 500-employee threshold includes full-time and part-time employees. Further, a PPP loan does not require the borrower to provide collateral for the loan or sign a personal guaranty. The borrower is also not required to show that they sought and were unable to obtain credit elsewhere. Additionally, the typical SBA loan fees are waived under the PPP.
The CARES Act requires that lenders confirm a borrower was in business before February 15, 2020 and had employees or paid independent contractors. Furthermore, a borrower will be required to sign a certification that the PPP loan is needed to support its ongoing business operations due to the uncertainty of the current economic conditions and that the loan proceeds will be used to retain workers and spent on the qualified expenses outlined in the Act.
An eligible borrower may only use PPP loan proceeds for the following expenses:
- Payroll costs
- Continuation of employee health care benefits
- Employee compensation (of those making less than $100,000)
- Mortgage interest obligations
- Interest on debt incurred before the Covered Period
The maximum amount of a PPP loan is 2.5 x the borrower’s average monthly payroll costs or $10,000,000, whichever is less. The calculation is generally based off the 12-month period immediately preceding the origination of the PPP loan. However, there are adjusted calculations for seasonal businesses and new businesses.
Payroll costs include, but are not limited to:
- Employee salaries, wages, commission
- Payment of cash tips
- Payment for personal time off
- Payments for group health care benefits
- Payment of retirement benefits
- Payment of state or local taxes assessed on employee compensation
The following are excluded from payroll costs:
- Compensation to individual employees in excess of an annual salary of $100,000
- Payroll taxes and income taxes
- Compensation of an employee whose principal place of residence is outside the U.S.
- Qualified sick and family and medical leave under the FFCRA (see more about that here.)
A borrower is eligible for forgiveness of the PPP loan in an amount equal to the amount the borrower spent on qualified expenses during the 8-week period beginning on the origination date of the loan. The forgiveness amount will be reduced if the borrower reduces the number of employees or reduces wages paid employees by more than 25% during the Covered Period. If businesses can rehire employees that were laid off or increase reduced salaries on or before June 30, 2020 (if these changes were made between February 15, 2020 and April 26, 2020) then the forgiveness amount will not be reduced.
If there is a remaining balance on the loan after the forgiveness reduction, then the remaining balance will continue to be guaranteed by the SBA. The loan shall have a maximum maturity of 2 years from the date the borrower applies for forgiveness and the loan will bear interest at a rate of no more than 1%.
An eligible borrower can apply for a PPP loan through private lenders approved by the SBA.
Emergency Economic Injury Disaster Loans
On top of the PPP loan, the CARES Act also expands the SBA’s Economic Injury Disaster Loans (EIDL) program. From January 31, 2020 through December 31, 2020, the Act expanded EIDL eligibility to cover more types of small businesses including businesses with fewer than 500 employees, sole proprietorships, and independent contractors.
The CARES Act waives the following EIDL requirements: (1) the requirement of a personal guaranty for loans under $200,000, (2) the requirement that the borrower must have been in business for a year, and (3) the requirement that the borrower establish the borrower was unable to obtain credit elsewhere.
The expanded EIDL program includes a grant program which allows an applicant to request an advance of up to $10,000 within three days of submitting an application to the SBA. The $10,000 advance can be used for payroll, mortgage, rent, and other allowable purposes specified in §7(b)(2) of the Small Business Act. This advance does not have to be repaid, even if the EIDL loan request is ultimately denied.
Intersection of PPP Loan Forgiveness and EIDL Grants
If a small business receives a PPP loan and an EIDL grant, the forgiveness deduction for the PPP loan will be reduced by the amount of the EIDL grant.
Small Business Debt Relief Program
The CARES Act also provides relief for small businesses with non-disaster SBA loans. Specifically, the SBA will cover all loan payments on SBA 7(a) loans (excluding PPP loans discussed above), 504 loans, and microloans for a period of six months. Loan payments include principal, interest and fees. This relief will also be available to new borrowers who take out qualifying loans within six months of March 27, 2020.