Small Business Paycheck Protection Program Under the CARES Act

President Trump signed into law on Friday (March 27, 2019) the CARES Act “Coronavirus Aid, Relief, and Economic Security Act” and Section 1102 of the CARES Act creates the paycheck protection program to assist small businesses during this uneasy time.   According to a spokesperson for Senator Marco Rubio, they anticipate this program will be up and running within two weeks. Please check with your bank as the program could start as early as this week.

What is the paycheck protection program?

The government has promised $349 billion for this program and it is aimed to provide relief for small businesses and non-profit organizations.  The loans are 100% guaranteed by the federal government and will be administrated through SBA authorized lenders.  The program is currently scheduled to run through June 30, 2020.

Who is Eligible for these loans?

The program provides that to be eligible for these loans, the business needed to be operating on or before February 15, 2020 and employ less than 500 employees. All types of businesses are eligible as well as non-profits, sole proprietors, independent contractors, and self-employed individuals.  

What is the maximum loan amount a business can receive?

The maximum loan amount for any one business is the lessor of 2.5 times the average total monthly payroll costs (with some limitations) incurred during the 1-year period before the date of which the loan is made any loans advanced after January 31, 2020 through the date of this loan application that are eligible to be refinanced by this loan program and $10 million. For seasonal employers, the average total monthly payroll costs used in the above calculations are the 12-week period beginning February 15, 2019 (March 1, 2019 if the borrower elects) and June 30, 2019.  

For sole proprietors, independent contractor, and self-employed individuals the payroll costs will include the sum of payments of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment, or similar compensation and that is an amount that is not more than $100,000 in one year as pro-rate for the covered period.

What can I use the loan proceeds for?

According to the CARES Act, the proceeds of the loan can be used for payroll costs, employee health care costs, employee salaries, commissions, or similar compensations, payment of interest on pre-existing debt (including mortgage obligations), rent and utilities.  

How do I apply for the loan?

The loans will be administrated through SBA authorized lenders at the current time and the Federal government is requesting additional lenders be added within a one to two week period.  Check your bank’s website first to see if they are a SBA authorized lender and if the application process is available.  The banks are working to implement the application process as soon as possible. If you have any questions give us a call as we are here to help with the process in any way we can.

What is required for the loan application?

The application does not require personal guarantees or have collateral requirements.  The loan is based on a good faith certification for the amount of the loan (based on average monthly payroll costs, and other eligible costsdiscussed above), a declaration of why the funds are necessary, and that the proceeds will be used to retain employees, pay the related payroll costs; pay utilities; rentpayments; or mortgage payments.

Will the loan be forgiven?

The loan can be forgiven if the proceeds were used to pay payroll costs, interest on mortgage obligations, rent, utilities and additional wages for tipped employees. The loan forgiveness is based on the amount spent on the items mentioned above during the 8 week period starting at the origination of the loan.  However, the loan forgiveness cannot exceed the original loan principal.

The amount of the loan being forgiven will be proportionally reduced if the work force is reduced or if the employee salaries have been reduced by more than 25%.  However if all employees are rehired and full salaries restored prior to June 30, 2020 then there will be no reduction in the loan.

According to the CARES Act, any loan forgiven is excluded from taxable income and is tax free for federal purposes.  

What if the loan has a remaining balance after forgiveness?

If the entire loan was not forgiven, the remaining balance will still be guaranteed by the Federal Government and will carry a maximum maturity of 10 years from the date the loan was applied for and will carry an interest rate not to exceed 4%.

The Administration also require the lenders to provide the borrower some deferment relief for a period between six months and a year before payments of the loans are to start.

In conclusion, this program will benefit a great number of small businesses in various industries throughout the country.  The bill provides many details and nuances specific to particular circumstances that we are not able to cover in this overview.  Additionally, we expect that over the next week or so there will be clarification from the SBA on certain points that are not well defined in the Act.  Rest assured we will be watching for and studying any new regulations pertaining to the CARES Act and will update you as warranted.  We invite you to reach out to us to discuss your particular situation and the best way for you to take advantage of any government assistance available to you and your business.  CironeFriedberg is ready and able to assist you in taking full advantage of this program as we all work to manage through these difficult economic

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