CARES Act: Paycheck Protection Program

• Federal
• Business

The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) appropriates $349 billion to assist small businesses through section 7(a) loans and Paycheck Protection Program (“PPP”), administered by the Small Business Administration (“SBA”). The CARES Act initially appropriated $349 billion in funding for the PPP. Congress subsequently appropriated an additional $310 billion for the PPP in the Paycheck Protection Program and Health Care Enhancement Act.

These loans are 100% guaranteed by SBA, have a 1.0% interest rate and a two-year term. The Act offers forgiveness in an amount up to the recipient’s:

• payroll costs (excluding compensation for any employee over $100,000 on an annual basis, prorated), and

• interest payments on mortgages, rent, and utility payments incurred before February 15, 2020,

during the eight-week period beginning on the date the loan is granted. The forgiven amount is considered canceled debt and excluded from gross income for federal tax purposes.

The Act also directs SBA to pay the principal, interest, and fees due on outstanding section 7(a) loans which are in regular servicing status, for the six-month period beginning on the date that the next payment is due.

Government or Lead Agency

United States Small Business Administration

Dates Available

Small businesses and sole proprietors can apply starting April 3, 2020. Independent contractors and self-employed individuals can apply starting April 7, 2020. Loans are available through June 30, 2020. Funding is limited, however, and the SBA has advised applicants to apply as soon as they are able to because loans will be made on a first-come, first-served basis.

Eligibility Requirements/Restrictions

Loan Amounts, Terms, and Uses

The program allows eligible small businesses to receive section 7(a) Paycheck Protection loans up to the lesser of:

• i) 2.5 times the recipient’s average total monthly payroll costs during the one-year period preceding the loan, plus the value of any outstanding SBA disaster loan received after January 31, 2020, for purposes of refinancing the disaster loan; or

• ii) $10 million (which replaces the existing section 7(a) cap of $5 million).

The CARES Act expands section 7(a) loan eligibility through June 30, 2020 beyond small business concerns traditionally eligible, through the new Paycheck Protection Program, to also include the following:

• i) any business concern, nonprofit organization, veterans organization, or Tribal business concern that employs not more than the greater of 500 employees or the number of employees established by the SBA for the industry in which the entity operates;

• ii) individuals who operate as sole proprietorships or independent contractors, or are self-employed; and

• iii) businesses in the accommodation and food services industry with not more than 500 employees per location.

Although the Paycheck Protection Program includes a limit on the size of eligible businesses, it waives certain affiliation rules for:

• i) certain businesses operating as a franchise,

• ii) businesses in the accommodation and food services sectors that employ up to 500 employees, and

• iii) businesses that receive financial assistance from a licensed small business investment company.

The bill does not otherwise waive existing SBA affiliation rules, which generally aggregate the employees of companies that are under common control. Affiliation can be found based on ownership; stock options, convertible securities, and agreements to merge; management; or identity of interest, and can necessitate the aggregation of employees across multiple concerns and entities. For purposes of calculating whether an entity employs not more than 500 employees, employers are required to count each individual employed on a full-time, part-time, or other basis.

Borrowers must certify that the current economic uncertainty makes the loan necessary to support ongoing operations and acknowledge that funds from the loan will be used to retain workers and maintain payroll commitments, or to make allowable mortgage, lease, and utility payments.

The Act waives the SBA’s standard requirement that section 7(a) loan applicants be “unable to obtain credit elsewhere.” Applicants that have received an SBA Economic Injury Disaster Loan (another type of loan offered by the SBA outside of the section 7(a) program) between January 31, 2020 and April 3, 2020 may still apply for section 7(a) loans, but may not use the proceeds for the same purpose.

To incentivize the retention of employees at existing salaries, the maximum amount of loan forgiveness is reduced by:

• any reduction in the average number of monthly full-time equivalent employees during the eight weeks following loan disbursement as compared to the average number of monthly full-time equivalent employees during, at the recipient’s election, either the period between February 15, 2019 and June 30, 2019 or the period between January 1, 2020 and February 29, 2020; 4 and

• the amount of any reduction in total salary or wages of any employee during the eight weeks following loan disbursement that is in excess of 25% of that employee’s total salary or wages during their most recent full quarter of employment.

With respect to any layoffs or salary cuts made between February 15, 2020 and April 26, 2020, the loan forgiveness reductions discussed above will not be applied if the business increases its full-time equivalent employees and employee salaries by June 30, 2020 to the respective levels in effect on February 15, 2020. Borrowers with tipped employees may receive forgiveness for the amount of additional wages paid to them.

How to Apply

Applicants can apply for Paycheck Protection Loans through any SBA approved lender or bank participating in the program. Links to the application form and a list of approved lenders are listed below.

Application Deadlines (If Applicable)

June 30, 2020

Contact for More Information

SBA’s Customer Service Center

Email: disastercustomerservice@sba.gov

Tel: (800) 659-2955

Tel: (800) 877-8339 (TTY: deaf and hard-of-hearing)

List of Additional Information

Borrower application form and additional guidance on the Paycheck Protection Program

Find lenders participating in the Paycheck Protection Program

Additional information from the SBA on the Paycheck Protection Program