23 Apr Legal Alert #5 – SBA Loans and Loan Forgiveness
On Friday, March 27, 2020, President Trump signed the massive $2 plus trillion coronavirus relief Bill (the Coronavirus Aid, Relief and Economic Security (CARES) Act) to provide much needed assistance to small businesses, employees, and taxpayers. The CARES Act provides many benefits to keep America’s economy going as we all work together to preserve through and recover from the economic challenges brought on by the virus.
In this Alert we focus on the Paycheck Protection Program, an important piece of the CARES Act.
This program will be administered by the Small Business Administration and SBA Approved Lenders (Huntington, Fifth-Third Bank, BMO, JP Morgan Chase, PNC, Regions, National Bank of Indianapolis, etc.). First and foremost, after you read this Alert, call your commercial loan officer at your commercial bank so you can get on the list and complete the to-be-created loan application as soon the Lender makes it available.
The Paycheck Protection Program provides up to $349 billion in loans to eligible entities, with such loans being subject to forgiveness under certain circumstances. The 100 percent, federally guaranteed loans may be used for a variety of purposes including payroll costs (as described below), rent, utilities, mortgage interest (not principal) and interest on debt existing prior to February 15, 2020.
Eligibility
Eligible entities are those with less than 500 employees, including for profit businesses, 501(c)(3) nonprofit organizations, veterans’ organizations; eligible self-employed individuals; independent contractors; sole proprietorships; and, businesses in the accommodation and food services industry (NAICS 72) that have less than 500 employees per physical location.
Maximum Amount
Loans are available for the lesser of the average monthly payroll costs times 2 1/2, plus any Economic Injury Disaster Loan (SBA Disaster Relief Loan that we discussed in Alert No. 2) received after January 31, 2020 that are refinanced under the Payroll Protection Program, or $10 million. Average monthly payroll costs are calculated based on the one-year period prior to the loan disbursal date except for seasonal employers and employers not in business between February 15, 2019 and July 30, 2019. There will be more guidance on how to make this calculation forthcoming from the SBA or lenders.
In the case of seasonal employers, the employer may choose to calculate the average monthly payroll costs based on the 12-week period starting February 15, 2019 or the period starting March 1, 2019 through June 30, 2019.
In the case of new employers not in business between February 15, 2019 and July 30, 2019, the average monthly payroll costs is calculated based on the period beginning January 1, 2020 through February 29, 2020.
Payroll costs include: employee salary, wages and commissions; payment of cash tips; payment of vacation, parental, family, medical or sick-leave; allowance for dismissal or separation; payment required for group health benefits (including insurance premiums); payment of retirement benefits; or payment of state or local tax assessed on employee compensation; and sole proprietor income or independent contractor compensation not in excess of $100,000.
Payroll costs exclude: compensation of an individual person in excess of $100,000 (as prorated for the period); federal employment taxes imposed or withheld taxes; compensation to an employee whose principal residence is outside of the U.S.; qualified sick leave for which a credit is allowed under Section 7001 of the Families First Coronavirus Response Act (as we discussed in Alert No. 1); and qualified family leave wages for which a credit is allowed under Section 7001 of the Families First Coronavirus Response Act (as we discussed in Alert No. 1).
Terms
Loans are available for up to a 10-year term (amortized) from the date of the application for loan forgiveness (see below). The interest rate is not to exceed 4 percent per year. Interest and principal are deferred for not less than six months and not more than 1 year. Notably, certain SBA requirements are waived. Loans are available with:
- No personal guaranties of shareholders, members or partners
- No collateral
- No proving recipient cannot obtain funds elsewhere
- No SBA fees (may still have to pay lender processing fee)
- No prepayment fee
Application Process
Eligible entities may file applications with an SBA-approved lender. Lenders have been delegated authority to make loans without SBA review. Eligible applicants will have been in operation on February 15, 2020 and will have paid employees and payroll taxes or independent contractors.
Applicants will need to certify that the loan is necessary (as we further discuss below) and will be used to retain workers and pay eligible expenses.
Hopefully, the SBA will provide further guidance on the “loan is necessary” requirement of the certification. The CARES Act states the necessary certification requirement as follows:
“ . . . the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient; . . .”
This appears to be a subjective determination. The question arises on who makes this determination? Is it the government who determines what is necessary or is it the business? At this moment, with the uncertainty on when we will return to the pre-virus business environment, it is impossible to determine that a Paycheck Protection Program loan is not necessary?
Applicants will further need to certify that no other application for a loan for the same purpose is pending and that the entity has not received any other loan for the same purposes through December 31, 2020.
Loan Forgiveness
The forgiven amount will be equal to the amount actually paid for payroll costs, salaries, benefits, rent, utilities and mortgage interest during the eight weeks following disbursement of the loan subject to a reduction (as discussed below). Additional wages paid to tipped employees under Section 3(m)(2)(A) of the Fair Labor Standard Acts may also be forgiven.
The forgiveness amount is subject to reduction if there is a workforce reduction or a reduction in the salary or wages of an employee.
- The amount attributable to a workforce reduction will be equal to the initial forgiven amount multiplied by the quotient of average full-time employees (“FTEs”) during the eight-week period divided by the average FTEs for the period from February 15, 2019 through June 30, 2019 or January 1, 2020 through February 29, 2020, as determined by the recipient.
- The amount attributable to a salary or wage reduction will be the amount of any salary or wage decrease in excess of 25 percent of the total salary or wages during the most recent full quarter such employee was employed before the eight-week period.
Only employees who did not receive wages or salary, during any single pay period in 2019, at an annualized rate of pay in excess of $100,000 are included in this calculation.
Reductions in workforce, salaries and wages that occur from February 15, 2020 to April 26, 2020 will be disregarded for purposes of reducing the forgiveness amount so long as the reductions are eliminated by June 30, 2020.
Borrowers must apply for forgiveness with the lender servicing the loan at the end of the deferment period. Lenders have 60 days to review and make a determination.
Any portion of the loan that is forgiven will be excluded from gross income.
All of us at Eagle & Fein, P.C. continue to be available to provide you guidance and support. We are well connected electronically and are available for VVFMs – Virtual Virus Free Meetings. Please reach out with any follow up questions by e-mail or phone.
The best always to stay safe and healthy.