The Paycheck Protection Program Included in the “CARES Act” Offers Substantial Potential Benefits to Small Businesses
The CARES Act enacted on Friday, March 27, 2020 includes $349 billion in relief for small businesses through the Paycheck Protection Program (“PPP”).
The PPP is specifically designed to provide short-term cash flow assistance to small businesses to help them deal with the economic impact of COVID-19 and to encourage these businesses to keep their employees on the payroll. The loans will be made available through Treasury-approved banks, credit unions, and certain non-bank lenders, and administered by the Small Business Administration (“SBA”).
- If you are an employer with fewer than 500 employees (or, if applicable, the size standard established by the SBA for the industry in which your business operates), you may be eligible to receive a loan as large as 250% of your average monthly payroll, subject to a cap of $10 million. The loan may be used to pay salaries, paid leave, health insurance premiums, mortgages, rent, and utility bills. Personal guarantees and collateral are NOT required to receive these loans.
- Importantly, the amount of the loan required to be repaid may be forgiven or reduced if certain conditions are met regarding the number of employees that the business keeps on its payroll. The amount of the loan that is forgiven is not subject to federal taxation.
Keep in mind that this is a new and complicated statute and small businesses will need to undertake a detailed analysis of their individual payroll to determine whether it makes sense to obtain a loan through the PPP. For example, only the first $100,000 of an employee’s salary is eligible for consideration when calculating the amount of the loan available to a business, and it may not make business sense to rehire already laid off workers in order to comply with the program’s eligibility requirements.
Each business should obtain individualized legal and accounting advice based on the facts and circumstances relevant to their specific situation.
Paycheck Protection Program – Frequently Asked Questions
- In general, the program is open to employers with 500 employees or fewer.
- Eligible small businesses also include sole-proprietors, independent contractors, and other self-employed individuals.
WHAT ARE THE LOAN TERMS?
- The loan may be as large as 2.5 times (250%) an employer’s average monthly payroll (during certain designated time periods), subject to a cap of $10 million. Eligible payroll expenses include salaries, wages, cash tips, and employee benefits, such as health insurance premiums, retirement contributions, and paid leave.
- Personal guarantees and/or a pledge of collateral are not required.
- Interest on the loans is capped at 4% per annum.
- Borrowers may defer payments (principal, interest and fees) for a period of not less than six months and not more than one year.
- There are no prepayment penalties.
- All or a portion of the loan may be forgiven (as detailed below).
DO YOU HAVE TO REPAY THE LOAN?
- The first eight weeks of the loan may be forgiven if the proceeds are used to cover payroll costs, interest payments on mortgages, rent, and/or utilities. Appropriate documentation must be provided regarding the use of the loan proceeds.
- The amount of the loan that may be forgiven cannot exceed the principal amount of the loan, and eligible payroll costs do not include compensation to any individual over $100,000.
- To get the full benefit of the available loan forgiveness, small businesses must keep their employees on the payroll and pay them at least 75% percent of their prior-year compensation.
- To encourage employers to re-hire workers already laid off during the COVID-19 crisis, employers that re-hire previously laid-off workers will not be penalized for having a reduced payroll at the beginning of the loan period.
- The forgiven debt will not be taxable as income for federal income tax purposes.
HOW DO YOU APPLY?
- Once the PPP is operational later this week, eligible businesses should apply for a loan through their lending institution.
- Businesses will be required to make a good faith certification that:
- the uncertainty of current economic conditions make the loan necessary for ongoing operations;
- the funds will be used to retain workers and maintain payroll, or to make mortgage interest, lease and utility payments;
- there is not a second loan application pending for the same purpose and duplicative of amounts applied for or received; and
- for the period of February 15, 2020 through December 31, 2020, the business has not already received funds under the program.