CARES Act Stimulus Programs: Paycheck Protection Program and Emergency Economic Injury Disaster Loans
Coronavirus Aid, Relief, and Economic Security Act (CARES Act)
The Paycheck Protection Program (PPP)
On March 27, 2020, President Donald Trump signed into law the Coronavirus Aid, Relief, and Economic Stability Act (CARES Act) to help small businesses. The CARES Act amends the Small Business Act by adding the Paycheck Protection Program (PPP), amending the existing Economic Injury Disaster Loan (EIDL)Program and adding the
Emergency Economic Injury Grants program.
These changes are intended to:
- help small businesses cover their near-term operating expenses; and
- provide a strong incentive for employers to retain their employees.
Some businesses may be eligible to receive a loan of up to $10 million, including total forgiveness in the event businesses maintain or restore their payroll. This would essentially convert the loan into a government grant. The loans will be available through U.S. Small Business Administration (SBA) approved lenders until June 30, 2020.
The PPP loans will be critical for businesses that are evaluating layoffs to stay viable as result of the economic impact of the COVID-19 pandemic
The following explains the program in more detail.
What businesses are eligible?
Most employers with less than 500 employees or the applicable size standard for the industry as provided by the SBA who were in business on 2/15/20. These include:
- Small businesses,
- Tribal business concerns, and
- veteran’s organizations.
Sole proprietors, certain self-employed individuals, or independent contractors may also be eligible.
Lenders will determine eligibility by evaluating whether the business was in operation on February 15, 2020, had employees for whom the borrower paid salaries and payroll taxes, or paid independent contractors.
What is the maximum amount of a PPP loan?
The maximum principal amount of a loan is limited to the lesser of $10 million or 2.5 times the average total monthly payments for payroll costs
during the one-year period prior to the date of the loan. For businesses not in operation in 2019, the measurement period would be January 1, 2020 through February 29, 2020.
What are payroll costs?
Payroll costs include salaries, wages, commissions, payment of cash tips or equivalent, separation payments, payments for group health care benefits, including insurance premiums, retirement benefits, and payments of state or local employment taxes assessed on the compensation of employees, but excludes
compensation to an employee in excess of $100,000.
What can businesses use the loan proceeds for?
Loan proceeds may be used for:
When can businesses apply for a PPP loan?
- payroll costs; (capped at $100,000 on an annual basis for each employee)
- costs related to group health care benefits during periods of paid sick, medical or family leave and insurance premiums;
- employee salaries, commissions or similar compensation;
- interest on any mortgage obligations (but not principal or loan prepayments);
- interest on any other debt obligations incurred before February 15, 2020; and
- certain other permitted purposes, such as working capital and equipment purchases; however, that portion is not subject to the loan forgiveness provisions of the program.
Starting April 3, 2020, small businesses and sole proprietorships can apply for and receive loans to cover their payroll and other certain expenses through existing SBA lenders.
Starting April 10, 2020, independent contractors and self-employed individuals can apply for and receive loans to cover their payroll and other certain expenses through existing SBA lenders.
How long will this program last?
The program application window closes on June 30, 2020, although, employers should apply as quickly as possible because there is a funding cap and lenders need time to process loans.
What are the terms of the loan?
Where should businesses apply?
- The loan is for a maximum period of 10 years from the date of the application for loan forgiveness, unless it is forgiven pursuant to the loan forgiveness provisions of the legislation.
- Interest may not exceed 4%; there are no loan fees to the borrower, or prepayment fees or charges; there is no requirement to show an inability to obtain credit elsewhere; there are no guaranties or other collateral requirements; and the loan is non-recourse.
- Applications are self-certified. To the extent that the loan is not forgiven, then there will be a deferment of the obligation to repay the loan that may range from a minimum of 6 months to a year.
PPP loans will be made by SBA-approved lenders. Eligible businesses should contact their bank to determine if they will be offering PPP loans and the expected timing for processing and approving applications. Otherwise, businesses may apply through any existing SBA lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. Businesses can visit www.sba.gov for a list of SBA lenders.
The Treasury Department released a PPP Loan Application found on its website at: https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Application-3-30-2020-v3.pdf
How much of the PPP loan is forgivable?
A business that receives a PPP loan will be eligible for forgiveness of indebtedness, which will be nontaxable, in an amount equal to the sum of the following costs incurred and paid during the eight-week period beginning on the date of the origination of the loan:
- Payroll costs;
- Interest payments on mortgage loans (provided that the mortgage loan was incurred prior to Feb. 15, 2020);
- Rent obligations (provided that the leasing arrangement was in force prior to Feb. 15, 2020); and
- Utility payments (electricity, gas, water, transportation, telephone, internet access) for service that began before February 15, 2020.
Businesses will need to apply for forgiveness with the lender that services the loan.
What is the maximum amount of the PPP loan that may be forgiven?
Businesses will owe money when the loan is due if it is used for anything other what is noted in the above question. Businesses will also owe money if the business does not maintain its staff and payroll.
- Number of Staff: The loan forgiveness will be reduced if the business decreases its full-time employee headcount during the eight-weeks beginning on loan origination.
- Level of Payroll: Loan forgiveness will also be reduced if the business decreases salaries and wages by more than 25% for any employee that made less than $100,000 annualized in 2019.
To avoid penalization, businesses have until June 30, 2020 to restore its full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020.
Due to likely high subscription, it is anticipated that 75% of the forgiven amount will be used for payroll costs.
To encourage businesses to rehire employees or restore wages, the amount of loan forgiveness will be determined without regard to reductions in the number of employees or reductions in wages that occurred during the period beginning February 15, 2020, and ending on the date that is 30 days after the date of the enactment of the CARES Act, if the business eliminates the reduction no later than June 30, 2020. For example, if a business lays off 50 employees on March 31, 2020, and rehires all of them before June 30, 2020, those 50 employees will be deemed to have been employed for purposes of calculating the average number of FTEs during the eight-week period beginning on the date of loan origination.
How can a business request loan forgiveness?
Submit a request to the lender that is servicing the loan. The request will include documents that verify the number of full-time equivalent employees and pay rates, including payroll tax filings and state income, payroll and unemployment insurance filings. Also, documentation including cancelled checks, payment receipts, transcripts of accounts or other documents verifying payments on mortgage obligations, lease obligations and utility payments; businesses must certify that the documents are true and that it used the forgiveness amount to keep employees and make eligible mortgage interest, rent, and utility payments. The lender must decide on the forgiveness within 60 days. Any canceled loan amount will not count towards gross income for tax purposes.
When do I need to start paying interest on my loan?
All payments are deferred for 6 months; however, interest will continue to accrue over this period.
When is the PPP loan due?
After any loan forgiveness, businesses may defer payment of the remaining principal, interest and fee balances for at least 6 months interest free. The balance will have a maximum maturity of 10 years from the date on which the borrower applies for loan forgiveness with an interest rate not to exceed 4 percent.
Do employers need to pledge any collateral for these loans?
No collateral or personal guarantee are required.
Economic Injury Disaster Loans (EIDL)
The US Small Business Administration (SBA) is tasked with providing disaster assistance loans to eligible small businesses. The amendment expands the ways in which businesses can obtain emergency loans. The SBA is offering a $10,000 emergency grant to any business owner that applies for the EIDL—and they’ll issue the funds within three days of application. To apply for the grant, businesses must apply for the EIDL first and then request the grant.
What is the maximum amount a business can apply for?
The Disaster Loan Program can be up to $2 million. Terms are determined on a case-by-case basis, based upon each borrower’s ability to repay the loans. Regardless of the loan’s status, the $10,000 advance is not required to be reimbursed.
When can businesses expect to receive the loan?
If approved, Disaster Loan may be delivered anywhere from 60 to 90 days.
When can businesses apply?
Now until December 31, 2020. (The application period for the PPP runs only until June 30, 2020).
Who is eligible?
Businesses with no more than 500 employees; sole proprietors; private non-profits; independent contractors; cooperatives, ESOPs, and tribal units with 500 or fewer employees. The entity had to have been in business for at least a year, but this requirement if the business was operational on or before January 31, 2020.
What can EIDL loans be used for?
- To provide paid sick leave to employees unable to work due to COVID-19;
- Pay for increased costs to obtain materials unavailable from the applicant’s original source due to interrupted supply chains;
- rent or mortgage payments; and
- allowable purposes as made under section 7(b)(2) of the Small Business Act.
Loan cannot be used to replace lost sales or profits, including to refinance debt, make payments on loans owed by another federal agency, to pay tax penalty obligations, repair physical damages, or to pay dividends to stockholders.
What is the EIDL criteria to determine whether a business can be approved?
Loan approval is based on the credit score of the applicant or an alternative method to
as determined by the lending institution/SBA loan process. No collateral or personal guarantees are required.
How do I apply for the EIDL?
The EIDLs are being facilitated and funded solely by the SBA and can be applied for at SBA.gov or through a local SBA office.
Final Note: A borrower cannot receive a PPP loan in addition to an EIDL through the SBA for the same purposes. However, a borrower who has an EIDL loan unrelated to COVID-19
may apply for a PPP loan (with an option to refinance the EIDL loan into the PPP loan). The emergency EIDL grant award of up to $10,000 would be subtracted from the amount forgiven under the PPP.
The Treasury Department released the Paycheck Protection Program Loan Application: https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Application-3-30-2020-v3.pdf
US Small Business Administration SBA provided clarity on 3/31/2020 regarding the Payment Protection Program:
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act):
The US SBA is in the process of releasing clarifying information; therefore, provisions are subject to change. Savoy will continue to monitor the information and will make updates accordingly.