“Paycheck Protection Program” Highlights under CARES Act

Over the last two weeks, we’ve had several customers apply for Economic Injury Disaster Loans through the SBA. That loan was the best option at that time considering the crisis U.S. small businesses were facing.

Towards the end of last week, Congress passed the CARES Act. That act includes a new type of loan called the Paycheck Protection Program, under Sec. 190002 of the act. 

We thought it would be helpful to highlight a few of the critical points for small businesses. We encourage you to read it yourself and work with your banker. You will be applying for this loan type with a bank, not directly with the SBA.

This is not a comprehensive list, we have included items that we found are most relevant to our customers. 

Small Businesses Qualifications

• Maintains under 500 employees,

• Was in operation on February 15, 2020,

• Paid employees and related payroll taxes, and/or

• Paid independent contractors as reported on a Form 1099-MISC, and

• Is substantially impacted by public health restrictions related to the Coronavirus 2019 (COVID-19).

Covered Period

February 15 - June 30, 2020

The use of the proceeds of the loan must be used to pay for allowable costs so that you are keeping the same level of full-time equivalents (“FTEs”) through June 30, 2020 (See Borrower Requirements for more).

Maximum Loan Amount

Update: The Paycheck Protection Program Application Form clearly states the loan amount will be 2.5X your average monthly payroll. We have left the language from the Act itself for reference purposes.

During the covered period, the maximum loan amount is the lesser of:

• The product obtained by multiplying:

  • The average total monthly payments by the applicant for payroll costs, costs related mortgage payments, rent (including under a lease agreement), and utilities incurred during the 1-year period before the date on which the loan is made, except that, in the case of an applicant that is seasonal employer, as determined by the Administrator, the average total monthly payments for payroll shall be for the 12-week period beginning February 15, 2019, or at the election of the eligible recipient, March 1, 2019, and ending June 30, 2019; by

  • 4, or

• If requested by an otherwise eligible recipient that was not in business during the period beginning on February 15, 2019 and ending on June 30, 2019, the product obtained by multiplying:

  • The average total monthly payments by the applicant for payroll costs, costs related mortgage payments, rent (including under a lease agreement), and utilities incurred during the period beginning on January 1, 2020 and ending on February 29, 2020; by

  • 4, or

• $10,000,000.

Allowable Uses of Covered Loans

During the covered period, proceeds from the loan can be used on the below items.

• Payroll costs (see Payroll Costs below for more detail)

• Costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums

• Employee salaries, commissions, or similar compensation

• Mortgage payments

• Rent

• Utilities

• Interest on any other debt obligations that were incurred before the covered period.

Payroll Costs

The items below are included in the definition of “Payroll costs”.

• Salaries or wages

• Cash tips

• Vacation, family leave, medical or sick leave

• Allowance for dismissal or separation

• Group health care benefit plan provisions

• Retirement benefits

• State or local taxes assessed on the compensation of employees

• Sum of payments of compensation to sole proprietors or independent contractors that is a wage, commission, or similar compensation and that is not more than $100,000 in 1 year, as prorated for the covered period.

Exclusions include:

• Compensation of an employee in excess of $100,000 in annual salary, as prorated for the covered period

• Taxes imports or withheld under chapters 21, 22, or 24 of the IRS Code of 1986 during the covered period

• Compensation to employees whose principal residence is outside the U.S.

• Qualified sick leave wages for which a credit is allowed under section 7001 of the Families First Coronavirus Response Act

• Qualified family leave wages for which a credit is allowed under section 7003 of the Families First Coronavirus Response Act

Borrower Requirements

• Certify that

  • the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient; and

  • acknowledging that funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments.

• Maintain an average number of FTE equivalent employees (as defined in section 45R(d)(2) of the Internal Revenue Code of 1986) during the covered period that is not less than the average monthly number of full-time equivalent employees during the applicable period.

Loan Details

• Credit elsewhere. During the covered period, the requirement that a small business concern is unable to obtain credit elsewhere shall not apply to a covered loan.

• Collateral and personal guarantee requirements are not required for a covered loan.

• Maturity for loans with remaining balance after application of forgiveness. With respect to a covered loan that has a remaining balance after reduction based on the loan forgiveness amount under section 1105 of the CARES Act shall have a maximum maturity of 10 years from the date on which the borrower applies for loan forgiveness under that section.

• Interest rate requirements. During the covered period, a covered loan shall bear an interest rate not to exceed 4 percent.

• Deferral relief for impacted borrowers with covered loans for a period of less than 6 months, including payment of principal, interest, and fees.