Congress has passed and President Trump signed into law on March 27 the Phase 3 COVID-19 Relief package commonly known as the “CARES ACT” in an attempt to provide financial relief to American businesses and the American people in response to the COVID-19 pandemic and specifically include relief to small businesses through up to $349 billion in aggregate federally backed loans under a modified Small Business Administration 7(a) loan program, known as the Paycheck Protection Program. We prepared a set of main points to help you determine whether your business is eligible to receive funds from the CARES ACT: Paycheck Protection Program and answer several anticipated questions you may have.
If you have any questions about the article below or the CARES Act and its Paycheck Protection Program and how it can support your business, please contact us at wallin@carneylaw.com, graves@carneylaw.com, or tao@carneylaw.com.
This is a living document and we will update it as new information becomes available.
Who is Eligible?
- Generally (see bullet point immediately below), businesses adversely impacted by the COVID-19 outbreak, with up to 500 employees (including employees of affiliates), which were in operation as of February 15, 2020 and had employees or paid contractors.
- For businesses in the accommodation and food services industries with more than one physical locations, businesses with no more than 500 employees per location.
- Nonprofits (except those receiving Medicaid expenditures).
- Eligible sole proprietors, self-employed individuals and independent contractors.
Where are these these loans from available?
- Through Small Business Administration and U.S. Treasury approved banks and credit unions, and other non-bank lenders.
How do I apply?
- Expect additional guidance from the Small Business Administration soon. Here is a link for a typical SBA loan application: https://www.sba.gov/funding-programs/loans
- UPDATE: The application is now live here. More information for borrowers can be found here.
How much can I borrow if I am eligible?
- Up to 2.5x the average monthly payroll expenses of your business during the one-year period before the loan is made, up to $10M.
- For seasonal employers, the average monthly payroll expenses would be calculated based on the 12-week period beginning February 15, 2019 or March 1, 2019, as you choose. If you were not in business during that period, then it would be the period from January 1, 2020 to February 29, 2020.
What kind of loan is it?
- Non-Recourse against any individual shareholder, member or partner of any eligible recipient unless the proceeds are used for a purpose other than those set forth immediately below.
What can I use the money for?
- Payroll support costs (including retirement benefits, medical insurance premiums and certain taxes).
- Employee salaries for those employees in the US making less than $100,000 per year.
- Mortgage interest payments.
- Rent (including rent under a lease agreement).
- Utilities.
- Interest on any debt obligation incurred before February 15, 2020.
What is the interest rate of the loan?
- No more than 4%
How much is the application fee payable to the Small Business Administration?
- There is no fee.
What if I can obtain credit elsewhere? Will it impact my application?
- No. Inability to obtain credit elsewhere used to be a precondition but it is not now, and will not be until June 30, 2020.
Can I defer payments?
- Yes. All amounts are deferred for at least six months and can be deferred for up to one year.
Do I need to personally guarantee the loan?
- Not during the “covered period,” which is defined as the period from February 15, 2020 to June 30, 2020.
Is there a collateral requirement?
- No, not during the “covered period” (see above).
Is any of the money I take eligible for forgiveness?
- Yes. If you borrow, you are eligible for forgiveness of all payroll costs, mortgage interest payments, rent obligations in place before February 15, 2020, and utility payments effective beginning before February 15, 2020. The amount forgiven cannot exceed the original principal amount of the loan.
- But, this amount could be reduced:
- If you reduce your amount of full time employees, the maximum forgiveness amount will be reduced proportionally.
- If you reduce any employee’s salary by more than 25%. Note that this does not apply to employees with wages or salaries exceeding $100,000, and such employee’s wages/salaries may be reduced without reduction of the amount your loan can be forgiven.
- If you have previously laid off any of your employees or reduced salary/wages paid, you may be able to minimize the loan forgiveness reduction amount if you increase your workforce or salary/wages paid (as compared to February 15, 2020) by June 30, 2020.
What is the tax impact of the forgiveness?
- The amount forgiven will be treated as cancelled indebtedness and not treated as income. The bill states on its face that “Canceled indebtedness under this section shall be excluded from gross income for purposes of the Internal Revenue Code of 1986.”
What documents do I need to submit to apply for forgiveness?
- Documentation showing the number of full time employees on payroll and documentation of their payroll, which has to include payroll tax filings and State income, payroll, and unemployment insurance filings.
- Documentation verifying payments on mortgage, lease, and utility payments. This has to include cancelled checks, payment receipts, and transcripts.
- A certificate from an officer of your company regarding the use of the funds and the documentation.
- Any other documentation the Small Business Administration requests.
How long do I have to wait until I know whether the loan has been forgiven?
- 60 days from the date of your application for forgiveness.
What if I want to repay the loan before the maturity date? Any prepayment penalty?
- There is no prepayment penalty.
Here is some additional guidance that we have found helpful. We will continue to update this list as we learn more.
https://www.uschamber.com/sites/default/files/023595_comm_corona_virus_smallbiz_loan_final_revised.pdf
https://microconf.com/latest/covid-19-business-relief-overview
https://earlygrowthfinancialservices.com/what-small-businesses-need-to-know-about-the-coronavirus-relief-bill/
By: Joe Wallin, James Graves, and Haiyan Tao
For more related articles about CARES ACT, please visit our website, here.
Disclaimer: this post is for informational/educational purposes only. It is not intended to provide any legal advice.