PAYCHECK PROTECTION, LOAN FORGIVENESS, AND TITLE I OF THE CARES ACT

The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law on March 27, 2020. Title I of the CARES Act is separately titled the “Keeping American Workers Paid and Employed Act”. Within it are conditions for loan forgiveness and the Paycheck Protection Program (“PPP”).

This section of the CARES Act greatly impacts the availability of Small Business Association (“SBA”) loans. The purpose of Title I of the CARES Act is to assist underfunded businesses (including nonprofits) so they can keep their employees on payroll, covered by health insurance, and off unemployment.

Paycheck Protection

The PPP is created by Section 1102 of the CARES Act. It provides $349 billion in loan assistance to small businesses and nonprofits. This money is, however, available on a first-come, first-serve basis to small businesses. These loans are 100% guaranteed by the SBA.

The loan would be for a maximum of ten years from the date of the application for loan forgiveness, unless it is forgiven on an earlier date because of the provisions of the legislation. The interest rate of the loan cannot exceed 4%. There are no loan fees to the borrower, prepayment fees, or charges. There is no personal liability for PPP Loans from individual shareholders, members, or partners of the borrowers . . . unless the loans proceeds are used for unapproved purposes.

Eligible businesses must provide their lender with income and expense documentation for submission to the SBA. Importantly, the application deadline is June 30, 2020.

Eligibility

Eligible businesses include:

• small businesses with less than 500 employees,
• certain self-employed individuals,
• independent contractors,
• tax-exempt 501(c)(3) organizations,
• tax exempt 501(c)(19) veterans’ organizations,
• tribal business concerns, and
• sole proprietorships.

Small businesses in the restaurant and hospitality industry that have more than one physical location are also eligible if they do not have more than 500 employees. An eligible business must have been in operation on February 15, 2020, and have been paying independent contractors or paying employee salaries and payroll taxes.

Loan Amounts

The maximum loan a business that was operating between February 15, 2019, and June 30, 2019, can obtain is the lesser of:

• $10,000,000.00, or
• the sum of:
• 250% of the average monthly payments for payroll costs incurred during the one-year period before the date the loan is made, and
• the amount of any prior disaster relief loan made beginning January 31, 2020.

For businesses that were not open between February 15, 2019, and June 30, 2019, the maximum loan they can obtain is the lesser of:

• $10,000,000.00, or
• 250% of the average monthly payroll costs for the period between January 1, 2020 and February 29, 2020.

Payroll costs include:

• compensation (e.g., salary, commissions, wages, tips, etc.);
• payment of vacation, parental, family, medical, or sick leave;
• payment for group health care benefits (including insurance premiums);
• payment of any state and local tax assessed on employee compensation;
• payment for retirement benefits; and
• allowance for dismissal or separation.

Payroll costs do not include:

• compensation to an employee in excess of $100,000.00;
• taxes withheld under Chapters 21, 22, and 24 of the IRS code;
• qualified sick leave and family leave wages for which a credit is allowed under Sections 7001 and 7003 of the Families First Coronavirus Response Act; and
• compensation to employees who live outside the United States.

Loan Proceeds

The amount received in the loan may be used for:

• payroll costs;
• employee compensation;
• rent;
• utilities;
• interest on mortgage obligations;
• costs related to health care benefits and insurance premiums; and
• interest on debt obligations incurred before February 15, 2020.

The loan may also be used to pay for other purposes, such as working capital and equipment purchases. However, the portion of the loan spent on such things would not be subject to loan forgiveness.

Loan Forgiviness

Section 1106 of “Keeping American Workers Paid and Employed Act” creates terms and conditions for loan forgiveness. Generally, the amount forgiven will be considered cancelled debt, but excluded from gross income.

The amount of the loan forgiven cannot exceed its principal amount. To apply for forgiveness, the recipient must show the lender an application with the following materials:

• documentation verifying the number of full-time employees on payroll and their pay rates, including tax filings, and payroll and unemployment insurance filings;
• documentation verifying payment toward mortgage obligations, lease obligations, and utility payments;
• certification that the documentation is true and correct, and that the loan was used for approved payments; and
• any other documentation the administration determines is necessary.

The amount of the loan that is forgiven can be reduced, though. This reduction can be based on a number of factors including:

• a reduction in the number of employees; and
• reduction in salary and wages in excess of 25% for any employee (not including a reduction in salary for those employees who make over $100,000.00).

Employers may be exempt from the loan forgiveness reduction if employees are rehired or their wages increased before June 30, 2020. There are a number of ways to measure whether a reduction of employees has occurred.

Right now, the SBA has not created forms or rules for governing how the PPP handles loan forgiveness. It is presently anticipated that lenders will administer the forgiveness in addition to the loans, assuming the employer provides the appropriate documentation.

Conclusion

As one can imagine, there are many more facets and provisions within the CARES act. Even the “Keeping American Workers Paid and Employed Act” is more cumbersome than just this summary. So, it is extremely important to seek out an attorney to help navigate the waters of the CARES Act before applying for a loan or any forgiveness.

In these difficult times, we at Griffin Alexander, P.C., are prepared to help you manage your response to COVID‑19.

Stay strong, safe, and healthy,

Griffin Alexander, P.C.

The information in this Client Alert is provided solely for information purposes. It should not be construed as legal advice on any specific matter and is not intended to create an attorney-client relationship. The information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based upon particular circumstances.  Each legal matter is unique, and prior results do not guarantee a similar outcome.

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