This article was also published on April 2, 2020 in the Portland Business Journal. Click here to view it on their website.
On March 27th, President Trump signed the “Coronavirus Aid, Recovery, and Economic Security Act,” also called the CARES Act.
The Act includes important financial support for Americans and businesses of all types. A pillar of the Act is its very first provision – a $350 billion appropriation for “paycheck protection” loans. These loans are designed to be originated and administered quickly and efficiently through the existing apparatus of the Small Business Administration. The loans are specifically tailored to provide an incentive to small businesses to keep people employed, but they also allow for a marginal loan amount that can be used by borrowers to pay rent or interest on existing mortgage or loan obligations. The biggest attraction is that the loans may be largely forgiven.
Eligibility: Any business concern or private or public nonprofit organization that has no more than 500 employees during the covered period from February 15, 2020 to June 30, 2020 is eligible. Self-employed individuals and independent contractors also are eligible.
Qualification: SBA loans are ordinarily available only to businesses that cannot obtain credit elsewhere. This requirement is waived for paycheck protection loans under the Act. The borrower must only (i) show that it was in business on February 15, 2015 and had employees or engaged independent contractors in its business and (ii) make a good faith certification that “the uncertainty of the current economic conditions makes necessary the loan request to support ongoing operations…”, acknowledging that the funds will be used to retain workers and maintain payroll or for other permitted uses. The borrower is presumed to be adversely impacted by COVID-19, and lenders need not inquire further.
Amount of Loan: A qualifying business can borrow 2.5 times its average monthly total payroll costs for the prior year (approximately 10 weeks’ payroll). Payroll costs include salary, wages, and commissions; cash tips; vacation, parental, family, medical or sick leave; group health insurance costs; retirement benefits; and the employer’s share of state and local taxes on compensation. Each employee’s annual compensation is capped at $100,000. Benefits are in addition to the cap amount. The loan amount cannot exceed $10,000,000.
Uses: The recipient business must use the loan proceeds for payroll costs; rent; utilities; or payment of interest on any mortgage obligation or other debt incurred prior to February 15, 2020.
Terms: Congress made these loans extremely attractive to allow businesses to continue employment:
- Interest cannot exceed 4% per annum.
- Payment is deferred for 6 to 12 months.
- No personal guarantees are required.
- No collateral is required.
- Any loan balance that is not forgiven can be repaid over time up to 10 years.
- There is no prepayment penalty.
- The SBA will pay the lender’s origination fee.
While these loan terms are favorable on their own, the overarching benefit of these loans is that they are largely forgivable and are more akin to grants than to loans. The maximum forgivable amount of the loan is equal to eligible costs that are incurred during the eight-week period commencing with the loan origination: payroll costs, utilities, rent paid pursuant to a lease in effect before February 15, 2020, and interest on a mortgage obligation incurred before February 15, 2020. Since the business can borrow an amount equal to 10 weeks of payroll costs, this forgiveness feature provides a margin approximately equal to two weeks of payroll costs that can be devoted to rent or mortgage interest payments.
For example, assume a business has monthly payroll costs averaging $50,000 and monthly rent of $10,000. The maximum loan amount is 2.5 times the average monthly payroll, or $125,000. During the eight-week measuring period, the employer will only use $100,000 for payroll costs (assuming payroll has not increased from the prior one-year average). That leaves $25,000 of the loan remaining, of which $20,000 can be applied to pay the rent that accrues during the eight-week period. The employer/borrower will have used $120,000 of the loan for eligible costs during the eight-week period, and this amount may be forgiven. The $5,000 remainder will have to be repaid if not applied to some other eligible cost (such as pre-existing mortgage interest or pay increases). Only the principal amount of the loan is forgiven, and any interest that accrues must be paid.
The forgivable amount of the loan is reduced if the employer cuts staff or reduces pay. Businesses that have already laid off employees can qualify by rehiring them prior to April 26.
To obtain the forgiveness, the borrower must only provide (i) documentation that the company’s employment and payroll levels were not reduced (or reduced corresponding to the reduction in the amount forgiven), together with (ii) an officer’s certificate that the loan was used to retain employees and pay other eligible costs, such as rent during the covered period. The lender is required to process the application for forgiveness within 60 days.
The Internal Revenue Code provides that debt forgiveness normally results in taxable income. Congress has made an exception for forgiveness of these paycheck protection loans, and there is no tax liability from their cancellation.
Congress intends for these loans to be processed quickly and easily. A list of local financial institutions that are SBA approved lenders can be found at sba.gov/content/portland-lender-list. The lending program expires June 30, 2020.
The information contained in this post does not constitute legal advice, and does not create an attorney-client relationship. We make no claims, promises or guarantees about the accuracy, completeness, or adequacy of the information contained in or linked to this post.