On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act" or "Act") was signed into law to provide emergency assistance and health care response for individuals, families, and businesses affected by the 2020 COVID-19 pandemic. It is estimated that the Act will inject the economy with more than $2 trillion of relief through a variety of provisions for individuals and businesses impacted by the COVID-19 pandemic.
Employers should be particularly aware of Title I of the CARES Act (also known as the "Keeping American Workers Paid and Employed Act"), which includes key provisions addressing: (1) the Paycheck Protection Program; (2) the Loan Forgiveness Program; and (3) SBA Economic Injury Disaster Loans ("EIDLs") and Emergency Grants. What follows is intended to be a quick guide on how some of the key provisions of Title I, establishing the Paycheck Protection Program, will impact small businesses and whether business owners can take advantage of these changes.
1. What is the Paycheck Protection Program?
The CARES Act appropriates $349 billion to fund the Paycheck Protection Program ("PPP"), an emergency lending facility administered by the Small Business Administration (SBA), to provide businesses with loans made through June 30, 2020 to cover their upcoming operating expenses during the COVID-19 crisis. The PPP also establishes strong financial incentives for employers to retain their employees as discussed below.
A. Who provides the PPP loans?
Traditional SBA lenders will provide PPP loans either directly or through SBA-authorized financial institutions and additional financial institutions authorized by the U.S. Department of Treasury.
B. Who is eligible to receive PPP loans?
Generally, all businesses and nonprofits with fewer than 500 employees are eligible. Self-employed workers may also apply for PPP loans. Additionally, to qualify for a PPP loan, eligible businesses must: (i) have been operational on February 15, 2020; (ii) have had employees to whom they paid salaries and payroll taxes, or have paid independent contractors; and (iii) make a good faith certification that (a) the loan is necessary to support the ongoing operations of the business due to the uncertainty of current economic conditions caused by COVID-19, and (b) funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments.
Unlike traditional SBA loans, the main underwriting standard for eligibility of a PPP loan is simply proof of payroll costs. Thus, the SBA lender for PPP loans will waive the customary "credit available elsewhere," personal guaranty, collateral, and borrower and lender fee requirements. Notably, the administration has no recourse against any individual, shareholder, member, or partner of an eligible loan recipient for non-payment, unless loan proceeds are used for unauthorized purposes (i.e. expenses other than those listed in Section D. below). The interest rate of the loans will not exceed 4% per annum.
C. How much are the PPP loans?
Eligible businesses may borrow up to the lesser of (i) $10 million, or (ii) 250% of the employer's average total monthly payroll costs during the 1-year period prior to the date on which the PPP loan is made. Businesses not in existence from February 15, 2019 and June 30, 2019 may request that the measuring period be from January 1, 2020 to February 29, 2020. Other rules apply to seasonal employers.
D. How must the PPP loans be used?
PPP loans must be used for the followings expenses: (i) payroll costs, (ii) continuation of health care benefits, (iii) employee compensation, (iv) mortgage interest obligations (but not mortgage principal obligations), (v) rent, (vi) utilities, and (vii) interest on other debt incurred before February 15, 2020. Payroll costs include most compensation to employees and paid leave but exclude compensation to sole proprietors and independent contractors in excess of $100,000 per year (on prorated basis).
Additionally, businesses can use a PPP loan to refinance certain other SBA loans.
2. What is the Loan Forgiveness Program?
One of the CARES Act's most important provisions is the loan forgiveness program. It provides borrowers with loan forgiveness equal to the amount spent by the borrower, during the 8-week period following the origination date of such borrower's PPP loan (the "Forgiveness Period"), on (i) rent, (ii) payroll costs (capped at $100,000/year per employee), (iii) interest payments on mortgages (but not mortgage principal payments), and (iv) utility payments. However, the amount forgiven may not exceed the principal amount of the applicable loan (i.e. interest payments will not be forgiven). Notably, the forgiven indebtedness is excluded from borrower's gross income for federal tax purposes.
In an effort to incentivize employers to maintain their employees and their salaries and wages, the amount of loan forgiveness is subject to certain reductions.
A. What are the reductions of the Loan Forgiveness Program?
The amount of loan forgiveness may be reduced for two reasons. First, it will be reduced proportionally by any decrease in the average number of full-time equivalent employees employed by the borrower during the Forgiveness Period, as compared to one of the following (at the borrower's election): (Option A) the average number of full-time equivalent employees per month employed between February 15, 2019 and June 30, 2019, or (Option B) the average number of full-time equivalent employees per month employed between January 1, 2020 and February 29, 2020.
Second, the amount of loan forgiveness will be reduced by the amount of any reduction in an employee's total salary or wages during the Forgiveness Period that is in excess of 25% of the total salary or wages of the employee during the most recent full quarter during which the employee was employed before the Forgiveness Period. This forgiveness reduction does not apply where the reductions in pay were to certain high-income employees.
Importantly, if borrowers rehire previously laid off workers and eliminate any salaries/wages reductions by June 30, 2020, then the loan forgiveness amount will not be reduced.
B. How to receive loan forgiveness?
Borrowers must file a loan forgiveness application with the lender and provide the following documentation: (i) payroll tax filings; (ii) state income, payroll and unemployment insurance filings; and (iii) documentation verifying non-payroll payments including mortgage, rent, and utilities. Upon filing for forgiveness, businesses must also certify that the documentation is true and correct and that the proceeds of the loan were actually used for those purposes.
3. SBA Economic Injury Disaster Loans and Emergency Grants.
The CARES Act appropriates $562 million for the SBA to provide Economic Injury Disaster Loans ("EIDLs") to businesses that require financial support to endure the COVID-19 pandemic. An EIDL provides financial assistance to small businesses that suffer substantial economic injury as a result of the declared disaster. EIDLs may be approved by the SBA solely on the basis of an applicant's credit score or by use of alternative methods to determine the applicant's ability to repay.
Additionally, if emergency funds are needed to cover immediate operating costs, eligible businesses applying for EIDLs can receive an emergency advance of up to $10,000 from the SBA within 3 days upon request. Such advance does not have to be repaid, even if the EIDL request is later denied. However, unlike the PPP loans, EIDL loans must be repaid.