CARES Act: Small Business Assistance under the Paycheck Protection Program

By Thomas J. Malicki

The Paycheck Protection Program was enacted as part of the CARES Act recently passed into law in connection with the COVID-19 stimulus package. This program will provide $349 billion to be allocated to the Small Business Administration (SBA) to guarantee loans to qualifying small businesses. The information set out below is intended as a brief overview of the program. There have been frequent changes to the rules due to the fluidity of the economic crisis caused by COVID-19, so some of the information set out below may be altered by future regulation. Businesses are advised to seek accounting and legal assistance prior to making any application under the program to determine how the program applies to their specific business situation.

Who is Eligible?
With some exceptions, any business with 500 or fewer employees, including non-profits, sole proprietors, independent contractors, and self-employed persons.
Business must have been in operation on February 15, 2020.

When Can I Apply?
Small businesses and sole proprietorships can apply during the period from April 3, 2020 through June 30, 2020.
Independent contractors and self-employed individuals can apply during the period from April 10, 2020, through June 30, 2020.
The loans under the program will be provided on a first-come, first-serve basis, so potential borrowers are being encouraged by the Treasury to apply as soon as possible.

How Do I Apply?
An applicant must submit a completed loan application along with required payroll documentation supporting the requested loan amount to an SBA approved lender. A small business can only apply for one loan.

What is the Maximum Loan Amount?
The maximum loan amount is 2.5 times your business’ average total monthly “payroll costs” (capped at $10 million).

What are Payroll Costs?
• Salaries, wages, commissions, etc. (capped at $100,000 per year for each employee).
• Group healthcare insurance premiums, retirement plan  contributions, and parental, family, medical, or sick leave.
• Certain other employment-related expenses and taxes.
• Independent contractors do not count as employees.

How do I Calculate the Loan Amount?
Example 1: No employees make more than $100,000
Annual Payroll: $120,000
Average Monthly Payroll: $10,000
Multiply Average Monthly Payroll by 2.5: $25,000
Maximum Loan Amount: $25,000

Example 2: Some employees make more than $100,000
Annual Payroll: $1,500,000
Compensation Amounts in Excess of $100,000: $300,000
Subtract Compensation Amounts in Excess of $100,000 from Annual Payroll: $1,200,000
Average Monthly Qualifying Payroll: $100,000
Multiply Average Monthly Qualifying Payroll by 2.5: $250,000
Maximum Loan Amount: $250,000

Is any Collateral Required?
No collateral or personal guarantees are required.

What can the Loan Proceeds be Used For?
Payroll costs, mortgage interest, rent, and utility payments during the 8-week period commencing on the loan origination date (payment for items other than payroll costs are subject to certain restrictions and may impact loan forgiveness – See Can the Loan Amount be Forgiven? below).

Can the Loan Amount be Forgiven?
In general, if the loan proceeds are spent on eligible expenses, and there are no reductions in employee headcount or wages paid, then the loan amount (and any accrued interest) will be forgiven in its entirety. However, if more than 25% of the loan proceeds are used for expenses other than payroll costs, then such excess amount will not be forgiven. In addition, the amount of loan forgiveness will be reduced if any reductions in employee headcount or wages paid are not restored by June 30, 2020.
Loan Forgiveness is not automatic; the borrower must request it.
Any amount of loan forgiveness will not be taxable to the borrower.

What are the Loan Repayment Terms if the Full Loan Amount is not Forgiven?
Any loan amounts not forgiven will need to be repaid under the following terms and conditions:
Term of Loan: 2 years
Fixed Interest Rate: 1%
Deferred Payments: No principal or interest payments due for 6 months
Prepayment Penalty: No prepayment penalty

For more information, please call 402.392.2150 to speak with Tom Malicki or one of our other business attorneys.