The CARES Act, which became the law on March 27, 2020, includes the Paycheck Protection Program (PPP), which is a new loan program created under Section 7(a) of the Small Business Act. The PPP covers the period February 15, 2020 through June 30, 2020 and is a vital lifeline for small businesses suffering the negative economic impact of the COVID-19 pandemic.
Below are some general highlights of the PPP. In addition to creating a financial lifeline for small businesses, the most important element of securing a loan under the PPP is the forgiveness element – SOME OR ALL OF WHICH WILL NOT HAVE TO BE REPAID — which is detailed below.
IT IS IMPORTANT TO NOTE THAT THE SMALL BUSINESS ADMINISTRATION (SBA) AND THE U.S. DEPARTMENT OF TREASURY (TREASURY) WILL ISSUE GUIDANCE AND REGULATIONS TO IMPLEMENT THE PPP. THESE REGULATIONS MAY CHANGE THE BASIC INTERPRETATIONS PROVIDED BELOW. BMK WILL PROVIDE ADDITIONAL UPDATES ON THE PPP ONCE THE GUIDANCE AND REGULATIONS ARE RELEASED.
What Types of Businesses can Participate in the PPP?
The SBA already provides loans to “small business concerns” under various loan programs. Depending on your industry, small businesses are defined by number of employees and amount of annual revenue.
The PPP expands the universe of borrowers who may be eligible for loans beyond what was previously allowed under the other SBA loan programs. In addition to “small business concerns” as currently defined under the SBA loan programs, eligible businesses for the PPP include any business concern, 501(c)(3) nonprofit organization (including, for example, certain religious organizations and museums, subject to affiliation rules discussed below), certain veterans’ organizations, and certain Tribal business, in each case that have less than 500 employees. Sole proprietorships, independent contractors, and certain self-employed individuals may also qualify.
What are the “Affiliation” Rules and Why Does it Matter?
Typically, when determining the number of employees of a small business concern, the SBA takes into account the aggregate number of employees of the applicant, as well as its affiliates (entities that control or have the power to control the applicant). Under this metric, applicants who believe they are within the requisite threshold for qualifying as a small business may be surprised to find out that the scope of the affiliation rules puts them over the threshold.
The PPP does away with aggregation for entities that are in the “Accommodation and Food Services” industries and have multiple locations, each with fewer than 500 employees, as well as certain franchises, and businesses receiving financial assistance from a Small Business Investment Company, a type of privately-owned investment company that is licensed by the SBA. However, the affiliation rules will still apply for other businesses.
Where Can I Apply for a PPP Loan?
Loans will be made by current SBA lender banks. To accommodate what is anticipated to be an onslaught of applicants, it is likely that the SBA will expand the pool of lenders, such that additional banks and financial institutions may be designated as SBA lenders in order to facilitate processing and disbursement of the PPP loans.
What is the Maximum Loan Amount?
If approved, an applicant may receive the lesser of: (i) $10 Million and (ii) the applicant’s average monthly payroll costs for the previous one year prior to the loan being made times 2.5. (Certain other SBA loans outstanding, like Economic Injury Disaster Loans, will be added to (ii)). The amount covers payroll and certain additional costs (see below). Depending on the facts and circumstances, all or a portion of the PPP loan (the repayment of principal and interest) may be completely forgiven, without adverse tax consequences to the borrower.
What Are the Loan Terms?
The maximum term for any portion that is not forgiven is up to 10 years. The maximum interest rate is 4%. The principal amount may be prepaid without penalty. PPP loans are not subject to most typical SBA loan fees. There is no collateral required, nor are personal guarantees necessary because the loans are 100% guaranteed by the SBA. Loan payments are deferred for a period of 6 months to one year from the origination date. Loans are non-recourse to the borrower, its shareholders, members and partners.
What Are Permitted Uses for the Loan Proceeds?
Compensation, excluding individual employee compensation above $100,000 per year; certain payroll costs; group health care benefits, including paid sick, medical or family leave and insurance premiums; mortgage interest (not principal) payments; rent; utilities; and interest on debt incurred prior to February 15, 2020.
What Portion of the PPP Loan Will be Subject to Forgiveness?
Generally, an amount equal to the total costs of permitted uses (excluding non-mortgage interest) paid during the 8-week period following the origination of the loan is subject to loan forgiveness. The amount subject to forgiveness may be reduced if employee and salary levels are not maintained (see below).
What if I Lay Off Employees or Reduce Payroll?
If full time employees are terminated or payroll decreases by more than 25%, adjustments may be made to the amount forgiven. However, if, prior to June 30, 2020, a business increases its employee head count and reinstates salaries to levels in effect on February 15, 2020, adjustments may not be required. In other words, the loan forgiveness will not be decreased in that case.
Is the Amount of Loan Forgiveness Subject to Interest and is it Taxable?
A business will not be responsible for interest accrued during the 8-week period on the amount of the loan that is forgiven. The amount of loan forgiveness is NOT taxable to the borrower (as is typically the case when loans are forgiven).
Can I Apply for a PPP Loan if I Have Received an Economic Injury Disaster Loan (EIDL) Related to Covid-19?
An eligible business can apply under the SBA EIDL Loan Program and the PPP. However, ultimately, the business will be not be permitted use the proceeds of an EIDL loan and a PPP loan for the same costs/expenses covering the same time period. If a borrower has already received an EIDL loan, then upon receiving a PPP loan, the borrower will be able to refinance the EIDL as part of the PPP loan, which may be subject to forgiveness, but only to the extent the use of funds overlaps. Remaining portions of the EIDL loan for purposes other than those laid out in the loan forgiveness terms for a PPP loan would remain an outstanding loan.
Can I Apply Now and What is the Application Deadline?
The PPP is not operational until the SBA issues its guidance and regulations. So, as of March 27, 2020, applications are not available. The application deadline is June 30, 2020.
In brief, the requirements for eligibility and what is covered and forgiven under the PPP are relatively complex. BMK is continuing to monitor the PPP, the EIDL and other loan programs so that we can support our clients and friends as the process evolves and as your needs arise in this fluid and unprecedented environment.
Please note — this memorandum has been prepared for general informational purposes only and does not constitute legal advice. This memorandum is intended only as a summary of the PPP loan program and does not contain all details applicable to the PPP loan program.
If you would like more guidance, please contact your Brown Moskowitz & Kallen, P.C. attorney at (973) 376-0909 via the office extensions below or the mobile telephone numbers provided.
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