What do I Need to Know About the Small Business Association Paycheck Protection Program?

Under the new life circumstances of the Coronavirus, there are many people and small businesses struggling. It is because of this that the Senate passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, a stimulus bill that includes a loan program for small businesses to help them during this time. This is known ass the Paycheck Protection Program. The following are important highlights regarding the program:

  • 350 billion allocated for the Paycheck Protection Program meant to help small businesses (fewer than 500 employees) impacted by the pandemic and economic downturn to make payroll and cover other expenses from February 15 to June 30. Notably, small businesses may take out loans up to $10 million-limited to a formula tied to payroll costs-and can cover employees making up to $100,000 per year (Note: There is ambiguity on how to treat compensation of employees who make over $100,000 for purposes of “payroll costs” and loan funding amounts, as to whether employers are required to exclude 100% of the salary or exclude the amount of salary above $100,000. We are awaiting clarification and will update this announcement). Loans may be forgiven if a firm uses the loan for payroll, interest payments on mortgages, rent, and utilities and would be reduced proportionally by any reduction in employees retained compared to the prior year and a 25 percent or greater reduction in employee compensation;
  • The loan amount is based on average total monthly payments for payroll costs (1) incurred during the 1-year period before the date on which the loan is made multiplied by 2.5;
    • Government will participate 100% in the guarantee of the loan amount through 12/31/2020;
    • Covered period for loans is February 15, 2020 until June 30, 2020;
    • No guarantee by borrower;
    • No collateral needed;
    • No fee to the borrower;
    • Any amount of loan proceeds not forgiven are payable over 10 years starting with the date of the application for loan forgiveness;
    • Interest payments are completely deferred for one year;
    • Interest rates will be less than 4%
  • The forgivable nature of these loans in effect turns them into grants, meaning that qualifying businesses will not see a significant increase in their debt burdens. But to qualify for forgiveness, employers must maintain their pre-crisis level of full time equivalent employees, or else face a reduction in forgiveness proportional to the reduction in headcount. Since many businesses have already been forced to make staffing reductions in response to vanishing customers and lost revenues, the legislation includes a clause that allows them to qualify for loan forgiveness if they have re-hired back to pre-crisis levels by June 30, 2020;
  • Congress made the terms generous and the barriers to entry low in an effort to ensure resources would be made available as quickly as possible to needy businesses. Borrowers do not need to demonstrate actual economic harm in order to qualify. Instead, they simply need to make a series of good faith certifications, principally that current economic conditions necessitate the loan to support ongoing business operations, and that the funds will be used to maintain payroll and address other covered expenses. While this streamlined approach will certainly make it easier for vulnerable businesses to receive support on an expedited basis, it may also lead some otherwise healthy businesses to take advantage of the program at the expense of those whose survival depends upon it;
  • Amounts forgiven may not exceed the principal amount of the loan. Amounts forgiven are considered forgiveness of debt but are not taxable under special exception provided in the Bill;
  • Borrowers will need to maintain detailed accounting and record keeping on all elements that affect the ability to be granted loan forgiveness. Employers do not need to track covered expenses against the loan but will need to have detailed documentation available. Documentation required as part of application for loan forgiveness:
    • Payroll tax filings reported to the IRS
    • State income, payroll, and unemployment insurance filings
    • Documentation verifying the payment of the mortgage interest, rent and utilities
    • Decision on forgiveness must be made by the lender within 60 days of receipt of the application for forgiveness 

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