CARES Act: SBA Loans and the Paycheck Protection Program
The House and Senate have passed the Paycheck Protection Program Flexibility Act of 2020, and it is awaiting the President’s signature to pass it into law.
Once in effect, this update to the PPP program will make it easier for businesses to qualify for loan forgiveness. Most significantly, businesses will have an extension of time in which they can use the loan funds and qualify for loan forgiveness.
Originally, borrowers needed to use their loan within 8 weeks of receiving it, and no later than June 30th. This proved to be a huge challenge for most borrowers who were limited in their ability to return to regular business operations while the coronavirus pandemic continued and closure orders remained in place.
The updated law has much more flexibility regarding when businesses need to use their loan funds. Borrowers can now qualify for loan forgiveness based on using the funds over a 24-week period. The 24-week loan period starts on the date of loan origination, but has to end no later than December 31st. Note that if you were able to (or are on track to) use the funds within the initial 8-week, you are still able to get forgiveness based on those parameters.
Another challenge borrowers faced was the requirement that they spend at least 75% of the loan on payroll expenses. That threshold has been reduced to 60%. Along with the extended loan forgiveness period, this allows many borrowers to direct funds toward other business expenses: “for any payment of interest on any covered mortgage obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation), any payment on any covered rent obligation, or any covered utility payment.”
Of course everything in the law isn’t good news. While they did reduce the amount of payroll expenses to 60%, that is now an absolute minimum that has to be met to receive any loan forgiveness. Previously, if employers didn’t meet the 75% payroll threshold the amount of loan forgiveness would simply be adjusted. Now, spending at least 60% on payroll is a minimum threshold item to get any forgiveness. However, the repayment period of any portion of the loan that is not forgiven has been increased from 2 years to 5 years.
Businesses continue to be able to get full loan forgiveness even if they are unable to bring all staff back to work. If an employee declines a good faith return to work offer, and the employer isn’t able to replace them, that won’t negatively impact loan forgiveness as the staffing change was outside the employer’s control.
In addition, loan forgiveness won’t be denied if it is not possible for the business to return to its prior level of activity due to complying with HHS, CDC, or OSHA requirements/guidance. For example, if you are a healthcare provider but are only permitted to open for emergency, non-routine visits, you may not be able to bring back your full staff at full-time hours. If you are a restaurant, your state may only permit you to operate at 50% capacity due to safety and social distancing rules. These restrictions won’t negatively impact your loan forgiveness eligibility.
We expect further SBA updates on their guidance under these new rules, particularly as to how to document a change in staffing levels. You can also read a summary provided by CEDR’s CPA partners, Cain Watters & Associates and watch for ongoing COVID-19 updates from those experts.
Guidance from the Department of the Treasury Available
The federal government’s ‘third phase’ of emergency legislation, called the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), in response to the present outbreak of coronavirus/COVID-19 addressed the economic impact of the pandemic and provided financial relief for affected businesses.
You can read the law in its entirety here. We also provide general guidance and answer common questions about the sections of the law that are especially important to your business and employees below.
The new guidance makes very clear that this loan is designed for businesses that are open and have all or most employees actively working, but are generating a decrease in revenue.
The loan helps you pay your employees’ salaries when you need them to be working. You really want to be ready to reopen with your full staff when you use this loan, as at least 60% of it must be spent on payroll to be forgiven.
If you are currently closed, you may not want to apply for a PPP loan just yet. As a reminder though – work with your own CPA, banker, or other financial planner to determine the best course of action for your business. We are hearing that many banks aren’t prepared to process these applications yet, in part because we are still waiting on the SBA to issue their own guidance. However, the SBA has released a list of the 100 most active SBA 7(a) lenders.
Here are some important dates for those who do wish to apply for a PPP loan:
- Applications open on April 3, 2020 for small businesses and sole proprietorships.
- Applications open on April 10, 2020 for independent contractors and self-employed individuals.
- The application period runs through June 30, 2020.
The Department of Treasury guidance also confirmed some details of the loan. Interest will accrue at a rate of 1.0%. The loan maturity will be 5 years. Money has to be used for qualified expenses, and only 40% of the forgiven amount of the loan may be for non-payroll costs.
Another important update from the government is that you cannot apply for this program again through the end of 2020. So if another round of PPP funding is released in later months, you cannot participate in that if you take a loan now.
For much more specific information and guidance regarding what is now known about the PPP loans, we recommend watching this video, presented by CEDR’s CPA partner, Cain Watters and Associates. In that video, CWA Partners Dan Wicker and Hunter Satterfield discuss:
- Available guidance by the Department of the Treasury
- A lesson in Banking
- The loan forgiveness process
- Interest and maturity figures
- Important dates for the application process
- How to use these funds strategically for your business
Note that CEDR cannot provide financial planning advice to you or individual guidance on the loans. Please work directly with your CPA, banker, or other financial advisor on how to make the right business decisions for you.
Paycheck Protection Program (PPP Loan)
These are forgivable loans that can be used to cover payroll costs once your business reopens.
Before we give you the details of this program, it is important to clarify one thing: Don’t depend on the PPP loan to cover your current payroll costs or any payroll costs incurred before you get the loan.
Many of you are making important decisions about whether to reduce your employee’s hours or furlough them, as well as whether you can continue to provide paid leave benefits and insurance coverage during a full or partial office closure. These decisions should be made based on your current funds — not the funds you will have after receiving a PPP loan. These loans are being provided to help employers cover payroll costs once they reopen — they won’t be much help if you have to use it to cover payroll costs you’ve already incurred.
Of course, we are not financial advisors, and you should definitely speak to your CPA about your specific financial situation, but this is an important point to consider as you plan your future through this crisis.
Related Reading: Unemployment Eligibility Expanded Under the CARES Act
When is the deadline to file for a loan under the Act?
June 30, 2020
Which employers are eligible for a loan?
Employers with 500 employees or less who:
- were in operation on February 15, 2020; and
- had employees for whom they paid salaries and payroll taxes or independent contractors for whom they reported on a Form 1099–MISC.
For this purpose, ‘employee’ includes individuals employed on a full-time, part-time, or other basis.
Sole-proprietors, independent contractors, and other self-employed individuals are eligible for loans.
Businesses with more than one physical location that employs no more than 500 employees per physical location in certain industries are eligible.
No personal guarantee, collateral, or credit elsewhere test will be required.
What is the maximum loan amount I can receive?
Loans will be calculated by multiplying the average total monthly payroll costs incurred during the 1 year period before the date on which the loan is made by 2.5 — up to a maximum of $10,000,000. What this means is that employers will be able to get a loan equal to 250 percent of a single average month of payroll.
There are special exceptions in the law for seasonal employers.
To start prepping your paperwork to file for this loan, please read this letter from CPA Firm Cain Watters and Associates.
What can I use the loan to pay for?
The loan can be used to pay for payroll costs, which includes:
- payroll support, including paid sick, medical, or family leave, and costs related to the continuation of group healthcare benefits during those periods of leave;
- employee salaries;
- mortgage payments;
- rent (including rent under a lease agreement);
- utilities; and
- any other debt obligations that were incurred before February 15, 2020.
Will there be any loan fees?
The law waives both borrower and lender fees for participation in the Paycheck Protection Program and it ensures borrowers are not charged any prepayment fees.
How quickly can I get a loan?
This is still unclear. However, loans will be available through more than 800 existing SBA-certified lenders, including banks, credit unions, and other financial institutions. The Small Business Administration (“SBA”) will also be creating a process to bring additional lenders into the program as quickly as possible. We will update this post when more information becomes available.
What will I need to do to get the loan?
The law requires eligible borrowers to make a good-faith certification that the loan is necessary due to the uncertainty of current economic conditions caused by COVID-19; that they will use the funds to retain workers and maintain payroll, lease, and utility payments; and that they are not receiving duplicative funds for the same uses from another SBA program.
No personal guarantee, collateral, or credit elsewhere test will be required.
Repayment ability (which is impossible to determine during a crisis) will not be considered in determining eligibility for the loan.
When do I have to start paying off the loan?
You may never have to pay off the loan, as many employers will be eligible for complete loan forgiveness under the law (read more about loan forgiveness in the next section).
Loan payments can be deferred (including principal, interest, and fees) for 6 months..
The loan will have a maximum maturity of 5 years from the date on which the borrower applies for loan forgiveness. The interest rate on the loan will be 1.0%percent.
Related Reading: Families First Coronavirus Response Act Guidance and FAQ
Can the loan be forgiven?
Yes, employers who receive loans under this law are eligible for loan forgiveness, as long as they (1) use the loan to cover payroll costs and prior debts, (2) maintain their employees, and (3) maintain the rate of pay of their employees.
- Employers can receive loan forgiveness for an amount equal to the cost of maintaining payroll during the 24-week period after the loan was originated. Payroll costs can include payments made on debt obligations (mortgages, rent, utilities) that were incurred before February 15, 2020.
- Payroll costs do not include:
- the compensation of an individual employee in excess of an annual salary of $100,000, as prorated for the 24 weeks after the loan is originated
- taxes imposed or withheld by the Internal Revenue Code during the 8 weeks after the loan is originated
- an employee whose principal place of residence is outside of the United States
- qualified sick leave wages for which a credit is allowed under the Families First Coronavirus Response Act
- qualified family leave wages for which a credit is allowed the Families First Coronavirus Response Act.
- Payroll costs do not include:
- The law is intended to encourage employers to bring employees back on payroll once they receive the loan. The amount of loan forgiveness you are eligible for depends on the average number of full-time employees you have on payroll during the 8 weeks after you receive the loan compared to the average number of full time employees you have on payroll between February 15, 2019 to June 30, 2019 OR January 1, 2020 to February 29, 2020. You get to pick the time period to which you would like to have your current employee count compared.We know that’s confusing, so please be sure to work with your financial planner to determine the specifics for your business. You should talk to your CPA about what the best timing is for your business to apply for, accept, and start using the loan, as well as when you will want to bring back on any employees you have laid off.At this time, the best information we have says that borrowers can apply and be approved for the loan, but that you can defer accepting it and starting the 8 week period.
- Do I have to bring everyone back at once?No. You can bring the number of people on that makes sense once you start back up and keep others on unemployment. The law gives you until the end of your 24-week forgiveness window. So, if by the end of the 24 weeks you bring back 8 of 8 of your employees, that will satisfy that part of the forgiveness equation.
- Do I Have to bring back the same employees?No. HOWEVER, we would like to caution that there are job protections in the Act. If an employee can not return or refuses to return, you can hire someone else and that would count towards your forgiveness amounts. If your office is under a mandatory closure order, full or in part, and most, if not all of your employees, are on unemployment and cannot work from home, then it might make sense for you to hold off on getting the loan until it looks like you will be able to reopen to the public.
What information will I be required to provide to qualify for loan forgiveness?
The employer must submit documentation verifying the number of full-time equivalent employees on payroll and their pay rates during relevant periods of time. This includes:
- payroll tax filings reported to the Internal Revenue Service;
- State income, payroll, and unemployment insurance filings;
- cancelled checks, payment receipts, transcripts of accounts or other documents verifying payment on debt obligations (mortgages, leases, utilities) incurred before February 15, 2020;
- A certification that the documentation presented is true and correct and the amount for which forgiveness is requested was used for appropriate purposes under the law; and
- any other documentation the Administrator determines necessary.
What is the best way to track all this time?
CEDR Members have access to a robust timekeeping system that can help track a number of important metrics associated with your office’s temporary shutdown and loan forgiveness. That system is built into your HR Vault Software. 5 employee seats are included with the cost of membership; additional employees are $1.50 per employee per month. Request a demo of the system or schedule a time to customize your timekeeping system for your practice.
Not a CEDR Member? Try the HR Vault free for 90 days.
What about other SBA loans?
There are EIDL loans available right now which are not the PPP loan. Those loans are not forgivable and much has been made about a $10,000 forgiveness component within the EIDL loan program.
Sound too good to be true? For more on that, please read this blog post from our friends at the financial planning firm Cain Watters and Associates.
When will we know more about this law?
The Administrator must provide additional guidance and regulations on the loan forgiveness portion of the law within 30 days of enactment. Please note that the law is over 800 pages long, and that our legislative team is working in consultation with other experts to stay informed as information develops. As we learn more, we will continue to update our guidance on this subject.
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This blog was updated on June 4, 2020; originally published April 1, 2020.