Relief Under the CARES ACT: Paycheck Protection Program

Since Congress passed the landmark Coronavirus Aid, Relief, and Economic Security Act (CARES Act) last week, which is designed to provide financial relief to U.S. individuals and businesses in response to the economic fallout from the coronavirus (COVID-19) pandemic, business owners have rightfully been focused on the “Paycheck Protection Program” included under the CARES Act and how they might benefit from the provision of aid thereunder in the form of $349 billion in loan financing.  This article, which is one of a series our firm is authoring in our effort to help individuals and businesses navigate our now rapidly shifting economic and legal landscape, distills the most important aspects of the program. 

Who is eligible for a “Paycheck Protection Program” loan under the CARES Act?

Loans under the Paycheck Protection Program (also referred to as “covered loans”) are available to businesses and non-profit organizations with fewer than 500 employees, but only if operational on or prior to January 31, 2020.  As it pertains to eligibility for a covered loan, “employees” include those employed on a full-time, part-time or other basis.

Sole proprietorships, independent contractors and self-employed individuals are also considered eligible under the program.

If you are eligible, how much can you borrow?

Generally speaking, the maximum loan that you can take out under the Paycheck Protection Program is 2.5 times your average monthly “payroll costs” during the 1-year period preceding the date on which the loan is made, not to exceed $10 million.  (There are adjustments to this calculation for both seasonal employers, and employers that were not in business between February 15, 2019 and June 30, 2019.)

For purposes of this calculation, payroll costs do not include compensation of any employee in excess of an annual salary of $100,000 (as prorated for the covered period).  In other words, you will only be able to borrow a little more than $20,000 (i.e., $8,333 – which is the result of dividing the $100,000 annual cap by 12 – times 2.5) for each employee that earned more than $100,000 in the last year.

What are the allowable uses of a covered loan?

A covered loan can be used for the following eligible expenses:

• Payroll costs
• Continuing healthcare benefits
• Interest payments on mortgages or other debts (but cannot be used to pay the principal amount of any such mortgage or debt)
• Rent payments
• Utility payments

When and how is a covered loan, or a portion thereof, forgiven?

You can expect forgiveness of your covered loan in an amount equal to the sum of payroll costs (again, not to exceed $100,000 per employee on an annualized basis), interest paid on mortgages, rent payments, and covered utility payments incurred or made during the 8-week period beginning on the date of the origination of your loan.  Critically, such forgiven amount would be excluded from a borrower’s calculation of gross income for tax purposes.

If I reduce my workforce or salaries for my employees while the loan is outstanding, could that reduce the amount eligible for forgiveness?

In short, yes, but not necessarily.  Generally, a reduction in workforce will reduce the amount eligible for forgiveness, but only if as a result of such reduction you would have fewer employees during the covered period than the average number of employees you had during the period from February 15, 2019 and ending on June 30, 2019 (alternatively, borrowers may choose to make this determination based on headcount during the period from January 1, 2020 and ending on February 29, 2020).  So, if you have increased your workforce from what it was during the same time last year, a reduction in workforce now may not affect the calculation of how much of your covered loan would be forgiven.

Likewise, a reduction in payroll costs only reduces the forgivable amount to the extent you are reducing salaries or wages of employees earning less than $100,000 per year by more than 25% of the total salary or wages of such employees during the most recent full quarter.

Even under such circumstances, you may be eligible for the maximum forgivable amount, should you rehire the number of employees terminated or if you restore any of the aforementioned salaries or wages that were reduced, in each case prior to June 30, 2020.

If I “accelerate” payment of allowable expenses, will that be included in the calculation of the amount of the loan that will be forgiven?

Nothing in the CARES Act expressly disqualifies “accelerated” expense payments (such as prepayment of several months of rent) in determining how much of the covered loan will be forgiven.  However, we expect that this, among other matters, may be addressed in the SBA guidance on this program, which should be forthcoming in the coming weeks.

What are the other important features of a Paycheck Protection Program Loan?

Covered loans are designed to be low-cost, and have terms and conditions less stringent than the standard ones applied to the SBA’s Economic Injury Disaster Loans. Some key features (in addition to “forgiveness” aspects discussed above) include:

• No early prepayment or other fees associated with covered loans
• Interest rate not to exceed 4%
• Deferral of payment of principal and interest for between 6 months and 1 year
• The remaining balance of a covered loan following application of any loan forgiveness (as described above) shall have a maximum maturity of 10 years
• No requirement for a personal guarantee or for collateral – the covered loan may be unsecured
• No recourse against any individual shareholder, member or partner for nonpayment of a covered loan, unless such individual has used the covered loan for an unauthorized, non-allowable purpose
• An applicant need not prove that there is no credit available elsewhere

How and when do borrowers apply?

The borrowing period will extend through June 30, 2020.  Eligible applicants will apply with SBA-approved lenders, with a maximum turnaround decision time of 60 days from submission. 

At this time, financial institutions are not taking applications, as banks are awaiting guidance from the SBA. We will be closely monitoring any developments concerning the application process and the implementation of this program.  

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This is not intended to provide legal advice for specific situations, and no legal or business decision should be based on its content. If you would like us to advise you on your specific situation, please feel free to contact us.