Overview of the Paycheck Protection Program of the CARES Act.
On Friday, March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “Act”) became law. This stimulus package provides nearly immediate relief to businesses, with particular support for those with fewer than 500 employees.
Under the Act’s Paycheck Protection Program, the federal government has made available approximately $350 billion for unsecured, non-recourse loans to small businesses. Large portions of the loans are forgivable, meaning they convert to grants when used by small businesses for specific purposes, including payroll.
- Who is eligible? Generally, businesses with fewer than 500 employees, sole proprietors, independent contractors, and self-employed individuals.
- What is the maximum loan amount? The lesser of $10 million or 2.5 times the business’s average total monthly qualified “payroll” costs.
- When are loans available? Applications can be made through June 30, 2020.
- What are the key loan terms?
- Qualified use is subject to being forgiven.
- Maximum interest rate of 4% on amounts not forgiven.
- Payments will be deferred for at least 6 months for repayment of amounts not forgiven.
- No collateral or personal guarantees required.
- No recourse against owners (shareholders, members or partners) of borrower for nonpayment, except to the extent proceeds are used for an unauthorized purpose.
- No pre-payment penalties or annual fees.
- What can loan funds be used for?
- Employee payroll costs, including: salaries, wages, commissions, or similar compensation (excluding the compensation of an individual employee in excess of an annual salary of $100,000); cash tips or equivalents; payments for vacation, parental, family, medical, or sick leave; severance payments; group health care benefits, including insurance premiums; retirement benefits; state or local taxes assessed on the compensation of employees
- Payments of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment, or similar compensation and that is in an amount that is not more than $100,000 in 1 year, as prorated for the covered period
- Interest on mortgage obligations
- Interest on other debt obligations, if incurred before February 15, 2020.
- Entitlement to loan forgiveness and how to apply:
- The program is facilitated through the Small Business Administration and qualified SBA lenders.
- Borrowers will be eligible for forgiveness of loan funds spent in the first 8 weeks following loan origination on qualified costs with the following limitations:
- The amount forgiven cannot exceed the original loan principal.
- Payroll payments towards employee salaries in excess of $100,000 per year cannot be forgiven.
- The amount of loan forgiveness may be reduced if the borrower reduces the number of its employees as compared to the prior year, or if the borrower reduces the pay of any employee by more than 25%. Borrowers who re-hire workers previously laid off as a result of the COVID-19 crisis will not be penalized for having a reduced payroll for the beginning of the relevant period.
- To apply for loan forgiveness, a borrower must submit an application to the lender servicing its loan. The application must include (i) documentation verifying the number of full-time employees on payroll and pay rates for the applicable periods, including payroll tax filings reported to the IRS, and state income, payroll, and unemployment insurance filings; and (ii) documentation verifying payments on mortgage obligations, lease obligations, and utility payments.
- The lender must issue a decision within 60 days of receiving the application for loan forgiveness.
The above is intended only to be an overview summary of the CARES Act. DDWK is available to help business owners with specific CARES Act questions:
- Understanding the purpose of the CARES Act and answering questions about your eligibility for stimulus funds under the Act
- Identifying your applicable payroll and operational costs
- Counseling you about how to apply stimulus funds provided under the Act
- Explaining the interrelationship of new state and federal employment and stimulus laws – including the CARES Act – enacted because of COVID-19
- Work side by side with you to keep your business operational during these trying times
Please do not hesitate to contact us for assistance.