CARES Act – Part 2 – Paycheck Protection Loans, Grants, and Subsidies

This is the second installment of our series on the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) passed by Congress and signed by the President last week.  Today’s installment focuses on the Paycheck Protection Loans being offered by lenders through the Small Business Administration (“SBA”).  Congress has appropriated $349 billion for this program.

Paycheck Protection Loans:

The CARES Act allows the SBA to guarantee loans made by lending institutions to small businesses to make payroll and certain other payments.  The loan guarantee to the lending institution by the SBA is at 100%, which is higher than other SBA loans guarantees.  To the extent the loans are used for eligible purposes the loans may be forgiven.  Below are some frequently asked questions regarding the specifics of the program.

Who can obtain the loan?  Employers with less than 500 employees who are otherwise eligible for SBA loans.  Certain non-profits, sole proprietors, independent contractors, and self-employed individuals can also qualify.

What is the Maximum Loan Amount?  The maximum loan amount is equal to the lesser of two- and one-half times the average monthly payroll costs for the borrower over the past 12 months or $10 million.  If the borrower has not been in business for over a year, the average is computed based upon the payroll costs for January and February 2020.  Also, if the borrower is a seasonal employer, different time periods may apply.  The borrower can also refinance certain existing SBA loans as a part of the Paycheck Protection Loan (subject to the $10 million cap).

What are Payroll Costs?  “Payroll Costs” used to calculate the amount of the loan include salary, wages, commission, compensation, tips, vacation leave, medical leave, sick leave, separation payments, group health benefits (including premium payments), retirement benefits, state and local taxes on employee compensation, and any income of a sole proprietor or independent contractor or self-employment income that does not exceed $100,000.

What items are not included in Payroll Costs?  Payroll Costs do not include any compensation paid over $100,000; FICA taxes, Railroad Employment taxes, or other federal withholding taxes imposed or withheld from February 15, 2020 to June 30, 2020; compensation paid to employees outside of the United States; and any sick leave or family leave for which the employer takes as a credit under the Family First Coronavirus Response Act.

How are the loan proceeds to be used?  The proceeds from a Paycheck Protection Loan must be used to cover Payroll Costs, continuation of group healthcare benefits, paid sick leave, paid medical leave, paid family leave, mortgage interest of the employer, rent, utilities, or interest on any obligations incurred before February 15, 2020.

What are the collateral and guarantee requirements for the loan?  The CARES Act waives the requirement of collateral and personal guarantees for the Paycheck Protection Loan.

Is the loan nonrecourse?  If the loan proceeds are used as allowed under the CARES Act, there is no recourse against any shareholder, member, or partner of the borrower.

What are the fees?  Neither the SBA nor the lender may collect any fees on a Paycheck Protection Loan.

Does the borrower have to try to obtain credit elsewhere first?  No, the CARES Act waives the requirement that the borrower must seek a loan somewhere else first.  However, the borrower does have to certify that (1) it needs the loan because the current economic conditions make the loan necessary to support ongoing operations, (2) the funds will be used to retain workers, maintain payroll, and pay the eligible expenses, (3) no other loan application under the program is pending, and (4) no duplicative payments have been received from the same Payroll Costs.

What is the interest rate on the Paycheck Protection Loan?  The maximum annual interest rate on the Paycheck Protection Loan is 4%.  Under guidance issued by the SBA on Tuesday March 31, 2020, the annual interest rate on a Paycheck Protection Loan is 0.5%.

Can the Paycheck Protection Loan be forgiven?  Yes, the loan may be forgiven either in its entirety or partially.  The CARES Act requires the loan to be forgiven if during the 8-week period after the loan originates the loan proceeds are used to pay Payroll Costs, mortgage interest on obligations incurred before February 15, 2020, rent on leases in force before February 15, 2020, and payments for utilities in service before February 15, 2020 (including electricity, gas, water, transportation, telephone, or internet access).  Under guidance issued by the SBA on Tuesday March 31, 2020, no more than 25% of the forgiven amount may be used for non-Payroll Costs.

What are the limits on the amount of the loan forgiveness?  The amount forgiven may not exceed the principal amount of the loan.  The loan forgiveness is also reduced if the borrower reduces the monthly average number of full-time equivalent employees during the 8 weeks following the loan origination as compared to the monthly average number of full-time equivalent employees during either February 15, 2019 to June 30, 2019 or January 1, 2020 to February 29, 2020.  There is also another reduction if the employer reduces the pay of certain employees making less than $100,000 by more than 25% during the 8-week period following the loan origination.  The CARES Act also make provisions for employers who have terminated employees before its enactment to rehire the employees to take advantage of the loan forgiveness.

Is the forgiven portion of the Paycheck Protection Loan subject to income tax as income from the discharge of indebtedness?  No, the CARES Act specifically exempts the forgiven portion from income.

What if the entire loan is not forgiven?  Under the statutory provisions, if the entire loan is not forgiven, the loan will mature in ten years and the maximum annual interest rate on the loan is 4%.  However, under guidance issued by the SBA on Tuesday March 31, 2020, all Paycheck Protection Loans will have a maturity of two years and an annual interest rate of 0.5%.

When are payments due under the loan?  No payments are due until at least 6 months after the loan origination and could be extended to one year.

Is there a prepayment penalty?  No, the CARES Act waives any requirement for any prepayment penalty.

Emergency Grants:

For borrowers who apply for an Economic Injury Disaster Loan with the SBA, the SBA is authorized to advance $10,000 as an emergency grant within 3 days after the loan application.  The proceeds of the grant must be for the eligible purposes of the loan and if the borrower applies for a Paycheck Protection Loan any amount received as a grant reduces the amount of the Paycheck Protection Loan that may be forgiven.  If the loan is not approved, the grant does not have to be repaid.

Loan Subsidies:

For existing SBA borrowers and borrowers who take out certain guaranteed loans from the SBA within the next six months (but not Paycheck Protection Loan borrowers), the SBA will make all principal and interest payments and any fees for the borrower for six months, if the loan is in regular servicing status.  The amount appropriated for these subsidies is $17 billion.

While the SBA issued some guidance on these new provisions on Tuesday March 31, 2020, it is expected that additional guidance or regulations may be forthcoming.  This summary will be updated with any new information from any additional guidance or regulations that may be issued.

If you have questions regarding the content of this update or the CARES Act , you may contact Brent Herrin by telephone at (770) 857-1664 or by email at bherrin@smallherrin.com.

Brent W. Herrin is the managing partner of Small Herrin, LLP.  Brent focuses his practice on Family Wealth Planning and Tax, Fiduciary Litigation, and Higher Education and Accreditation.

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