The CARES Act amends the Small Business Act 15 USC 636 (a) to add the Paycheck Protection Program (“PPP”) to provide loans to small businesses, nonprofit organizations, veterans’ organizations, or Tribal businesses in an effort to keep workers employed during the COVID-19 pandemic.
Who is eligible?
Small Businesses & Nonprofits. Businesses, nonprofit organizations, veterans organizations, or Tribal businesses with less than 500 employees OR “the size standard in number of employees established by the Administration for the industry in which the business operates.” The SBA provides size standard tables, which may be located at: https://www.sba.gov/document/support–table-size-standards. The PPP provides that an “employee” for purposes of the program includes an individual employed on full-time, part-time, or other basis.
Sole Proprietors and Self-Employed Individuals. Sole proprietors, independent contractors, and eligible self-employed are eligible for PPP loans with documentation as determined necessary by the loan administrator, which will likely include:
- Payroll tax filings reported to IRS
- Forms 1099-MISC
- Income and expenses reports
Accommodation and Food Service Industries. Businesses with less than 500 employees per physical location AND in the accommodation and food service industry are eligible.
Maximum Loan Amount
Generally Based on Payroll Costs. The lesser of (1) the average of the total monthly “payroll costs” incurred during the 1 year period before the date on which the loan is made multiplied by 2.5, and (2) $10,000,000. Under the PPP, “payroll costs” include:
- Salary, wages, commissions and similar compensation
- Payment of cash tip or equivalent
- Payment for vacation, parental, family, medical, or sick leave
- Allowance for dismissal or separation
- Payment for the provisions of group health care benefits, including insurance premiums
- Payment of any retirement benefit
- Payment of state or local tax assessed on the compensation to employees
Payroll costs do NOT include:
- Compensation for an employee in excess of an annual prorated salary of $100,000
- Taxes imposed under Internal Revenue Code Chapters 21, 22, and 24 (i.e., Social Security, Medicare, and Medicaid taxes) for the covered period.
- Compensation for an employee whose principal residence is outside of the US
- Qualified sick leave for which a credit allowed is allowed under the Families First Coronavirus Response Act (the “FFCRA”)
- Qualified family leave for which a credit is allowed under the FFCRA
Special Rules for Start-up and Seasonal Companies.
Allowable Uses for PPP Funds
PPP funds may be used for:
- Payroll costs (see the definition above)
- Costs related to the continuation of group healthcare benefits during paid sick, medical, or family leave and insurance premiums
- Employee salaries, commissions and other compensation
- Payments of interest on any mortgage obligation
- Interest on other debt obligation incurred during covered period
Shareholders, members, or partners of borrowers may have personal liability for non-payment of loan amounts to the extent such shareholder, member, or partner uses PPP loan proceeds for a purpose not described above.
To obtain a PPP loan, the borrower must certify in good faith that:
- Uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the borrower;
- Acknowledge that the funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments or to pay utilities;
- Borrower does not have an application pending for a small business loan for the same purpose or duplicative of amounts applied for or received under a covered loan; and
- During the period beginning Feb 15, 2020 and ending on Dec 31, 2020, the borrower has not received amounts under this subsection for the same purpose or duplicative of amounts applied for or received under a covered loan.
PPP Loans Are Different From Other SBA Loans
The CARES Act waives fees typically required for SBA loans for PPP loans made between February 15, 2020 and June 30, 2020. There is no requirement that the borrower is unable to obtain credit elsewhere. PPP loans also don’t require a personal guaranty or collateral requirements. PPP loans made between February 15, 2020 and June 30, 2020 are deferred and up to 100% forgivable.
Loan Deferment and Forgiveness
Deferral of Principal and Interest Payments. The CARES Act requires that lenders provide complete payment deferment (including principal, interest, and fees) for at least 6 months and not more than 1 year. Under the CARES Act all borrowers are presumed to have been adversely impacted by Covid-19, and need not show it. .
Forgiveness. Borrowers of PPP loans are eligible for loan forgiveness. The amount which may be forgiven is the sum of: (1) payroll costs, (2) interest payments mortgage obligations for real or personal property incurred before February 15, 2020, (3) rent payments for obligations incurred before February 15, 2020, and (4) utilities payments for electricity, gas, water, transportation, telephone, or internet for service which began before February 15, 2020, wherein all of such costs and payments are paid during the 8 weeks after receiving the loan. The amount forgiven may not exceed the principal of the loan. Information published by the United States Department of the Treasury has indicated that due to likely high subscription of the PPP, it will be required that at least 75% of the forgiven amount must have been used for payroll costs.
The amount forgiven may be reduced based on a reduction in workforce or wages and salary. An objective of the PPP is to provide funds to businesses to keep workers employed. Reducing the forgiveness amount if a business reduces its workforce reinforces that objective.
Loan Terms and Balance Repayment
The remaining balance after the amount forgiven shall continue to be guaranteed by the Administration. PPP loans shall be due within 2 years. Interest on PPP loans shall be 1.0%* and accrues through the deferral period.
Please note that additional rules and regulations relating to the program are expected and we intend provide applicable updates as more guidance is available. Please contact a Shuttleworth & Ingersoll attorney if you have questions. *This article was updated on April 6, 2020 to reflect the most recent loan rate.
Betsy Souer represents companies and individuals in matters relating to intelletual property, real estate, and business as an associate attorney at Shuttleworth & Ingersoll. Betsy draws on her experience as an engineer in manufacturing and her real estate background. Betsy worked as a summer associate for Shuttleworth & Ingersoll in the summer of 2017. She earned her law degree from the University of Iowa College of Law in 2018.