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Updates about the CARES Act Paycheck Protection Program

Details on SBA Issues Interim Final Rules on April 2, 2020

On April 2, 2020, the SBA issued new rules on the implementation of Paycheck Protection Program loans, which permits the SBA to guaranteed 100% of 7(a) loans with no personal guarantees or collateral required, under the Coronavirus Aid, Relief, and Economic Security Act (or CARES Act).

Here are some details that may impact your decision to apply for a Paycheck Protection Program (PPP) loan.

Loan Qualifications

PPP loans are available for small businesses, 501(c)(3) nonprofits, and tax-exempt veterans organizations with 500 or fewer employees.

  • You must certify you were in operation on February 15, 2020 and had employees for whom you paid salaries and payroll taxes to.
  • Individuals who operated under a sole proprietorship, as an independent contractor, or a self-employed individual are also eligible.
  • Funds are to be used to retain workers and maintain payroll, make mortgage or lease payments, and make utility payments.

Exclusions precluding a business from applying for a PPP loan:

  • Applicant has an owner with 20%+ of equity who is incarcerated, on probation, on parole; presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction; or has been convicted of a felony within 5 years.
  • Business or owners have obtained a direct or guaranteed loan from the SBA or any other federal agency that is currently delinquent or has defaulted within 7 years.

Loan Amount

Your PPP loan amount may be for a maximum of 2.5 times monthly payroll costs – the average for the 12 months preceding the loan and less than $10M.
Payroll costs include:

  • Compensation payments for salary, wages, or commissions; vacation, family, medical or sick leave and dismissal or separation allowance. Employees whose compensation exceeds $100,000 are only included in payroll costs up to the first $100,000.
  • Health care benefits payments for insurance premiums and retirement benefits.
  • State and local taxes assessed on employee compensation.

Independent Contractors Apply Separately

The new rules state that payroll costs do not include independent contractors. Independent contractors can apply a PPP loan. Requiring independent contractors to apply for a PPP loan is likely to increase the number of applications and slow down approvals.

First Come, First Served Basis – APPLY NOW

PPP loans will be approved on a first come, first served basis. It means you need to apply soon before applications exceed total lending limits of $349B. There may be more demand than funds available. The last day to apply for and receive a loan is June 30, 2020.

Loan Term and Interest Rate

The new SBA rules state that the PPP loan term shall be 2 years and deferral of payment is for a maximum of 6 months with an interest rate of 1%. You will not have to make any payments for 6 months following loan disbursement, however, interest will accrue during these 6 months.

Loan Forgiveness Eligibility

You may not be responsible for loan repayment if all the funds are used for forgivable purposes. Borrowers are eligible for loan forgiveness equal to the sum of the following costs incurred and payments made by the borrower during the 8 weeks following loan origination:

  • Payroll costs (not including independent contractors).
  • Mortgage interest payments on obligations incurred before February 15, 2020.
  • Rent payments for lease agreements in force before February 15, 2020.
  • Utilities payments for electricity, gas, water, transportation, phone or internet access for service which began before February 15, 2020.

PPP loan forgiveness shall be reduced as follows:

  • Reduced proportionately based upon the reduction in the average number of FTE employees during the 8 weeks following loan origination as compared to the average number of FTE employees per month from: 1) January 1, 2020 – February 29, 2020, or 2) February 15, 2019 – June 30, 2019 AND
  • Reduced by the aggregate amount that any employee’s total salary or wages are reduced in excess of 25% during the 8 weeks following loan origination compared to the most recent full quarter prior.

Limitations to loan forgiveness include:

  • Applies to the first $100K for employee compensation that exceeds $100K in 2019.
  • Compensation for employees whose place of residence is outside of the US are excluded.
  • Reduction in employees or salary may not be counted from February 15, 2020 – April 26, 2020. Furloughing employees may not affect the loan forgiveness amount if employees return to work no later than April 26, 2020.
  • Loan forgiveness applications must be completed with your loan application, including employment and payroll documentation. Lender approves or disapproves forgiveness within 60 days of application completion.
  • It appears that the amount of a PPP loan forgiveness will not generate a taxable event.
  • Only allow 25% of non-payroll costs to be forgiven. Utilizing a PPP loan for rent, utilities and business-related interest will not be forgiven when they exceed 25% of a PPP loan.

Loan forgiveness amounts may be significantly less than anticipated with the new limitations to only allow 25% of non-payroll costs and excluding independent contractors in payroll costs. 

Misuse of Funds is Fraud

  • If you use funds for unauthorized purposes, SBA will direct you to repay those amounts.
  • If you (including your shareholders, members or partners) knowingly use funds for unauthorized purposes, you’ll be subject to additional liability, such as fraud charges.
  • Making a false statement on a PPP loan application to obtain a SBA guaranteed loan is punishable under the law and may result in imprisonment and/or fines.
  • Each business must carefully document their use of PPP loan proceeds or face potential civil and criminal liability for any misuse of funds.

View SBA Interim Final Rules Issued April 2 >

Stuart SorkinAbout Author: Stuart Sorkin is the founder of Business & Legal Advisors, specializing in financial and legal protection of business owners and executives.

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