Title 1 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act is the Keeping American Workers Paid and Employed Act, which provides relief for small businesses and their employees who are adversely affected by the outbreak of COVID-19. The cornerstone provision is the “Paycheck Protection Program,” an emergency lending facility, administered by the Small Business Administration (SBA) under its 7(a)-lending program, to provide small business loans on favorable terms to borrowers impacted by the current state of economic uncertainty. At $349 billion in new lending capacity, it accounts for the vast majority of the small business assistance provided in the Phase III legislation.
The Paycheck Protection Program is a modification of the SBA’s 7(a) loan program, in which the SBA partially guarantees loans made by banks to qualifying small businesses. The Paycheck Protection Program modifies the 7(a) loan program in four important ways: it expands the businesses that are eligible for loans, it modifies the loan terms, including eliminating guarantee and collateral requirements of the borrower, it allows all or a portion of the loan to be forgiven if the borrower maintains its payroll, and it modifies a number of provisions to incentivize banks to make such loans and make the loan process faster and more efficient.
Who does it cover?
It Covers entities with less than 500 employees, including the following:
- 501(c)(3) nonprofit organizations
- Veterans organizations
- Certain tribal business concerns
- Eligible self-employed individuals
- Independent contractors
- Sole proprietorships
- Businesses in the accommodation and food services industry (NAICS 72) that have less than 500 employees per physical location
For the purposes of determining the 500-employee threshold, applicants should include full time, part-time and other basis employees. The requirement to include employees of affiliates is waived with respect to:
- Businesses in the accommodation and food services industry (NAICS 72),
- Franchises assigned a franchise identifier code
- A business licensed under Section 301 of the Small Business Investment Act
How much can I borrow?
Loans are available for the lesser of the average monthly payroll costs times 2.50 plus any EIDL received after January 31, 2020, that are refinanced under subsection 36 or $10 million.
Average monthly payroll costs are calculated based on the one-year period prior to the loan disbursal date except for seasonal employers and employers not in the business between February 15, 2019, and July 30, 2019.
In the case of seasonal employers, the employer may choose to calculate the average monthly payroll costs based on the 12-week period starting February 15, 2019, or the period starting March 1, 2019, through June 30, 2019.
In the case of new employers not in the business between February 15, 2019, and July 30, 2019, the average monthly payroll costs are calculated based on the period beginning January 1, 2020, through February 29, 2020.
Payroll costs include employee salary, wages, and commissions; payment of cash tips; payment of vacation; parental, family, medical or sick-leave; an allowance for dismissal or separation; payment required for group health benefits (including insurance premiums); payment of retirement benefits; or payment of state or local tax assessed on employee compensation; and sole proprietor income or independent contractor compensation not in excess of $100,000.
Payroll costs exclude: compensation of an individual person in excess of $100,000 (as prorated for the period); federal employment taxes imposed or withheld taxes; compensation to an employee whose principal residence is outside of the U.S.; qualified sick leave for which a credit is allowed under Section 7001 of the Families First Coronavirus Response Act; and qualified family leave wages for which a credit is allowed under Section 7001 of the Families First Coronavirus Response Act. FICA and income tax withholdings, and certain COVID-19 paid leave. Seasonal employers or businesses in operation for less than a year are subject to a different calculation.
How does it work?
The program generally targets businesses, nonprofits, Tribal businesses, and veteran’s organizations with 500 employees or less as eligible for federally insured, partially forgivable loans that can be used to cover short-term operating expenses during the economic crisis. The maximum loan size is equivalent to 250 percent of the employer’s average monthly payroll costs (e.g., roughly 10 weeks of payroll expenses) or $10 million, whichever is less. Payroll costs are defined broadly to include wages, salaries, retirement contributions, healthcare benefits, covered leave, and other expenses. (See above paragraph for details)
What are the Loan Terms?
Loans are available for up to a 10-year term (amortized) at a maximum of 4 percent interest, with six months (and up to one year) deferral of principal and interest payments. Notably, certain SBA requirements are waived.
Loans are available with:
- No personal guarantees of shareholders, members or partners
- No collateral
- No proving recipient cannot obtain funds elsewhere
- No SBA fees (may still have to pay lender processing fee)
- No prepayment fees
Importantly, the CARES Act waives the “credit available elsewhere” test normally applicable to SBA loans. This means that business is not required to seek other sources of capital, including equity or debt investments from owners with liquid assets prior to obtaining a Paycheck Protection Loan.
The CARES Act did not modify the types of businesses that are generally ineligible for SBA business loans. Therefore, the following businesses that are ordinarily not eligible for SBA Loans, such as financial businesses, passive business, foreign businesses, gambling businesses, and private clubs, among others, are generally ineligible.
Please note that the above is only a summary of the key eligibility requirements
Are there limitations on Use of Proceeds?
Paycheck Protection Loans may be used to pay payroll costs (as defined above), group healthcare benefits, insurance premiums, and interest on a mortgage or other debt incurred prior to February 15, 2020, and to make rent and utility payments. Loan proceeds may not be used to prepay debt.
To qualify for forgiveness, employers must maintain their pre-crisis level of full-time equivalent (FTE) employees or else face a reduction in forgiveness proportional to the reduction in headcount. Since many businesses have already been forced to make staffing reductions in response to vanishing customers and lost revenues, the legislation includes a clause that allows them to qualify for loan forgiveness if they have re-hired back to pre-crisis levels by June 30, 2020.
Congress made the terms generous and the barriers to entry low to ensure resources would be made available as quickly as possible to needy businesses. Borrowers do not need to demonstrate actual economic harm in order to qualify.
Section 1106 of the CARES ACT outlines the forgiveness of loans.
The forgiven amount will be equal to the amount actually paid for payroll costs, salaries, benefits, rent, utilities, and mortgage interest during the eight weeks following disbursement of the loan. Additional wages paid to tipped employees under Section 3(m)(2)(A) of the Fair Labor Standard Acts may also be forgiven.
The forgiveness amount is subject to reduction if there is a workforce reduction or a reduction in the salary or wages of an employee.
- The amount attributable to a workforce reduction will be equal to the initial forgiven amount multiplied by the quotient of average FTEs during the eight-week period divided by the average FTEs for the period from February 15, 2019, through June 30, 2019, or January 1, 2020, through February 29, 2020, as determined by the recipient
- The amount attributable to a salary or wage reduction will be the amount of any salary or wage decrease in excess of 25 percent of the total salary or wages during the most recent full quarter such employee was employed before the eight-week period. Only employees who did not receive, during any single pay period during 2019, wages or salary at an annualized rate of pay in excess of $100,000 are included in this calculation.
Reductions in the workforce, salaries, and wages that occur from February 15, 2020, to April 26, 2020, will be disregarded for purposes of reducing the forgiveness amount so long as the reductions are eliminated by June 30, 2020.
Borrowers must apply for forgiveness with the lender servicing the loan. Lenders have 60 days to review and decide. Any portion of the loan that is forgiven will be excluded from gross income.
Given the importance of this novel aspect of the Paycheck Protection Program, we expect meaningful guidance from the Treasury and SBA on how businesses and lenders can better ensure their Paycheck Protection Loans are eligible for forgiveness.
Our entire Team at MillerMusmar CPAs is here to help you navigate through this program. Please contact us if you require our assistance.
Please be advised that, based on current IRS rules and standards, the advice contained herein is not intended or written by the practitioner to be used and cannot be used by the taxpayer for the purpose of avoiding penalties.
MillerMusmar CPAs is an established accounting firm with offices in Reston, and Virginia. We have a twenty-five-year history of providing top quality auditing, tax, and accounting services to clients throughout the Washington Metropolitan area and internationally. By combining the expertise of a mid-sized firm with the personal attention, we are both large and small enough to deliver a responsive service to our clients. For more information, please call us at +703-437-8877 or visit our website at www.MillerMusmar.com