The SBA’s Paycheck Protection Loan Program Through the CARES Act (Coronavirus and the Law: Legislative Update #3)

This article was last updated on April 3, 2020.

The Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) was signed into law on March 27, 2020, by President Trump. The CARES Act, a stimulus package providing $2 trillion in economic aid to individuals and businesses, is considered Phase Three of the federal COVID-19 relief legislation. The Small Business Administration (SBA) issued an Interim Final Rule on April 2, 2020.

The CARES Act created a number of sub-acts. This article focuses on the Keeping American Workers Paid and Employed Act (the KAWPEA Act). Part of the KAWPEA Act amends Section 7(a) of the Small Business Act to create the Paycheck Protection Program (the PPP).

• Through the PPP, the Small Business Administration (SBA) will make or guarantee loans of up to $10 million to eligible businesses that were in operation on February 15, 2020.
• The application period for a PPP loan ends on June 30, 2020.
• The SBA is expected to issue regulations on the PPP by April 11, 2020.
• Only one PPP loan application submission per eligible business.

This article does not discuss any bankruptcy aspects of the KAWPEA Act. After reviewing your options, if you think you may need guidance on a company bankruptcy please reach out to our attorneys in that field, Mike Hastings and Rich Maxwell.

Qualifications for an SBA Paycheck Protection Loan

Are you an eligible business (EB)?

The PPP is available to any business that employs not more than the greater of 500 employees or, if applicable, the size standard in the number of employees established by the SBA for the industry in which the business operates.

For businesses with more than one physical location, the 500 employee threshold can be measured per physical location if the business employs not more than 500 per location and is assigned a NAICS code beginning with 72 at the time of disbursal of the loan. Additionally, affiliation rules are waived for a business concern operating as a franchise that is assigned a franchise identifier code by the SBA. Sole proprietorships and self-employed individuals are also eligible as long as such person or sole proprietorship submits supporting documentation as required by the SBA.

What is the Maximum Loan Amount?

A PPP loan cannot exceed $10 million. For an EB, the maximum amount of a loan is calculated as follows:

• The average total monthly payroll cost payments incurred during the one-year period before the date on which the loan is made,
• Multiplied by 2.5
• Plus the outstanding amount of an SBA disaster loan that was made between January 31, 2020, and the date upon which covered loans are made available to be refinanced.
• If that amount exceeds $10 million, then the PPP loan caps at $10 million.

The SBA suggests that the following methodology is the most useful for most applicants:

1. Aggregate payroll costs (as defined below) from the last twelve months for employees whose principal place of residence is the United States.
2. Subtract any compensation paid to an employee in excess of an annual salary of $100,000 and/or any amounts paid to an independent contractor or sole proprietor in excess of $100,000 per year.
3. Calculate average monthly payroll costs (divide the amount from (1 minus 2) by 12).
4. Multiply the average monthly payroll costs from Step 3 by 2.5
5. Add the outstanding amount of an Economic Injury Disaster Loan (EIDL) made between January 31, 2020 and April 3, 2020, less the amount of any “advance” under an EIDL COVID-19 loan (because it does not have to be repaid).

The SBA provides the following examples:

Example 1:  No employees make more than $100,000.

• Annual payroll: $120,000
• Average monthly payroll: $10,000
• Multiply by 2.5 = $25,000
• Maximum loan amount is $25,000

Example 2:  Some employees make more than $100,000

• Annual payroll: $1,500,000
• Subtract compensation amounts in excess of an annual salary of
• $100,000: $1,200,000
• Average monthly qualifying payroll: $100,000
• Multiply by 2.5 = $250,000
• Maximum loan amount is $250,000

Example 3: No employees make more than $100,000, outstanding EIDL loan of $10,000.

• Annual payroll: $120,000
• Average monthly payroll: $10,000
• Multiply by 2.5 = $25,000
• Add EIDL loan of $10,000 = $35,000
• Maximum loan amount is $35,000

Example 4: Some employees make more than $100,000, outstanding EIDL loan of $10,000

• Annual payroll: $1,500,000
• Subtract compensation amounts in excess of an annual salary of $100,000: $1,200,000
• Average monthly qualifying payroll: $100,000
• Multiply by 2.5 = $250,000
• Add EIDL loan of $10,000 = $260,000
• Maximum loan amount is $260,000

Using an SBA Paycheck Protection Loan

How can a PPP loan recipient use the loan money?

From February 15, 2020 through June 30, 2020, a PPP participant may use the loan for any of the following:

1. Payroll costs (defined below);
2. Costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;
3. Employee salaries, commission or similar compensations;
4. Payments on interest on any mortgage obligation (interest only, not principal)
5. Rent;
6. Utilities; and
7. Interest-only any other debt obligations that were incurred before the covered period.

How are “payroll costs” defined in the Paycheck Protection Program?

“Payroll costs” equal the sum of payments of any compensation to employees that includes any of the following:

1. Salary, wage, commission, or similar compensation;
2. Payment of cash tip or equivalent;
3. Payment for vacation, parental, family, medical, or sick leave;
4. Allowance for dismissal or separation;
5. Payment required for the provisions of group health care benefits, including insurance premiums;
6. Payment of any retirement benefit; or
7. Payment of state of local tax assessed on the compensation of employees.

For a sole proprietor or independent contractor, “payroll costs” include payments that are wages, commissions, incomes, or net earnings from self-employment, or similar compensation that does not exceed $100,000 in one year, as prorated for the covered period of February 15, 2020 through June 30, 2020.

“Payroll costs” expressly do not include:

1. Compensation of an individual employee in excess of an annual salary of $100,000, as prorated for the covered period of February 15, 2020 through June 30, 2020;
2. Taxes imposed or withheld under FICA (Social Security and Medicare), the Railroad Retirement Act, and income;
3. Any compensation to an employee whose principal place of residence is outside of the United States;
4. Qualified sick leave or family leave wages for which a credit is already allowed under the Families First Coronavirus Response Act.

If you have questions about a designation as an independent contractor or other payroll calculations, please contact King Tower or any of our Labor and Employment attorneys.

PPP loans are nonrecourse loans, meaning the SBA has no recourse against any individual shareholder, member, or partner of an EB for nonpayment the PPP loan except if the PPP loan is used for an unauthorized purpose.

Applying for a Paycheck Protection Loan

When can an EB apply for the PPP?

Beginning April 3, 2020, EB’s and sole proprietorships can apply for and receive loans.

Beginning April 10, 2020, independent contractors and self-employed individuals can apply for and receive loans.

How does an EB apply for the PPP?

An EB must provide the following documentation to a third-party lender, i.e. federally-insured banks, credit unions, and farm credit institutions:

1. SBA Form 2483 (Paycheck Protection Program Application Form);
2. Any documentation necessary to establish eligibility such as payroll processor records, payroll tax filings, or Form 1099-MISC, or income and expenses from a sole proprietorship. For borrowers that do not have such documentation, the borrower must provide other supporting documentation, such as bank records, sufficient to demonstrate the qualifying payroll amount;
3. A Certification that:
   1. The EB was in operation on February 15, 2020, and had employees for whom it paid salaries and payroll taxes, or paid independent contractors as reported on Form 1099-Misc.
   2. The uncertainty of current economic conditions makes necessary the loan request to support the EB’s ongoing operation;
   3. The funds will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments, utility payments;
   4. Documentation verifying the number of full-time equivalent employees on payroll and the dollar amounts of payroll costs, covered mortgage interest, covered rent payments, and covered utilities for the 8-week period following the loan will be provided to the lender;
   5. The EB does not have another loan application pending for the same purpose;
   6. From February 15, 2020, through December 31, 2020, the EB has not previously received a PPP loan for the same purpose; and
   7. The information provided in the loan application and all supporting documents are true and accurate in all material respects.

From February 15, 2020 to June 30, 2020, there is no personal guarantee or collateral required for a PPP loan.

You can find a lender match on the SBA website.

Loan Forgiveness Under the Paycheck Protection Program

How much of the loan will be forgiven?

There is 100% forgiveness in an amount equal to the sum of the following costs incurred and payments made during the 8-week period beginning with the loan origination date (the Covered Period):

1. Payroll costs (as defined above);
2. Any payment on any mortgage on real or personal property that was incurred in the ordinary course of business before February 15, 2020,
3. Any payment on any rent obligation under a lease agreement of which was in force before February 15, 2020, and
4. Any utility payment for electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.

The amounts forgiven shall be considered canceled indebtedness by a lender.

Are there any loan forgiveness limitations?

The forgiveness amount cannot exceed the principal loan amount. The forgiveness amount will be reduced, but not increased, by multiplying the eligible forgiveness amount by the average number of full-time equivalent employees per month during the Covered Period and either

(a) the average number of full-time equivalent employees per month during February 15, 2019 – June 30, 2019, or

(b) the average number of full-time equivalent employees per month during January 1, 2020 – February 29, 2020.

The borrower may choose either to use (a) or (b) above in this calculation.

It is anticipated that not more than 25% of the forgiven amount may be for non-payroll costs, i.e. cover rent, mortgage, and utilities.

Employee Categories Defined by the Forgiveness Program

If you are a seasonal employer, the full-time equivalent employees per month shall use the average number of employees during February 15, 2019 – June 30, 2019.

Salary/Wage Employees

For salary and wage employees who do not receive, at an annualized rate of pay, more than $100,000, the forgiveness amount will be reduced by any the amount that employer reduces the total salary or wages of any employee that is more than 25% of the employee’s total salary or wages during the most recent full quarter during which the employee was employed before the Covered Period.

Tipped Workers

The business may receive forgiveness for additional wages paid to tipped employees.

Rehired or Repaid Employees

If during the period between February 15, 2020 and April 26, 2020, there is a reduction in the number of full-time equivalent employees, as compared to February 15, 2020 and not later than June 30, 2020, and the employer has eliminated any reduction that occurred between the February 15, 2020 and April 26, 2020 period as compared to February 15, 2020, then the amount of forgiveness shall be determined without regard to such reductions made during February 15, 2020 and April 26, 2020.

Also, if during the period between February 15, 2020 and April 26, 2020, the employer has eliminated any reduction in salary or wages of any full-time equivalent employees not later than June 30, 2020, then the amount of forgiveness shall be determined without regard to such reductions made during February 15, 2020 and April 26, 2020.

If you have questions about employee classification, please contact King Tower or any of our Labor and Employment attorneys.

What is the interest rate and is there a deferment period?

The interest rate is capped at 1.0%. Payments of principal, interest, and fees are deferred for at least six months but not more than one year from the date the loan is issued. During the Covered Period, the normal SBA requirements for fees, credit elsewhere, and personal guarantees are waived. The PPP loan period is two years and there is no prepayment penalty or fee.

Any remaining balance on a PPP loan that is not forgiven will continue to be guaranteed by the SBA and the covered loan will have a maximum maturity of ten years from the date the PPP loan recipient applies for loan forgiveness.

What is in the loan forgiveness application?

For any part of the PPP loan to be forgiven, the recipient must submit an application to the lender servicing the loan. The lender will supply the loan forgiveness application and the loan recipient applying for loan forgiveness must, at minimum, include the following documentation:

1. Documentation verifying the number of full-time equivalent employees on payroll and pay rates, including payroll tax filings reported to the IRS and state income, payroll, and unemployment insurance filings;
2. Documentation including canceled checks, payment receipts, transcripts of accounts, or other documents verifying payments on covered mortgage obligations, payments on covered rent obligations, and covered utility payments;
3. A certification that (a) the documentation presented is true and correct; and (b) the amount for which forgiveness is requested was used to retain employees, make interest payments on covered mortgage obligations, payments on covered rent obligations, and covered utility payments;
4. Any other documentation the SBA determines necessary.

The lender will issue a decision on loan forgiveness within 60 days of receiving the loan forgiveness application.

What about existing SBA loans?

If you received a Section 7(a) SBA loan on or before March 27, 2020, the SBA will pay the principal, interest, and associated fees of such loan for a certain period. If the loan is not currently deferred, then the SBA will pay the next 6-month period beginning with the next payment due. If the loan is currently deferred, then the SBA will pay the 6-month period beginning with the next payment due after the deferment period.

Emergency Economic Injury Disaster Loan (EIDL) Grants

From January 31, 2020 through December 31, 2020, the KAWPEA Act also permits an EB to apply for a disaster loan under section 7(b)(2) of the Small Business Act.  See our article SBA Economic Injury Disaster Loans Are an Additional Option for Emergency Working Capital for more information on these loans and how to apply.

Read more legal updates on COVID-19 from Woods Rogers attorneys.