Tuesday, March 31st, 2020
Posted in: Financial Planning, Income Source
The House passed the CARES Act by Unanimous Consent and the president signed it on March 27, 2020
March 31, 2020
The new law establishes a Paycheck Protection Program to assist qualifying small businesses, nonprofits, and individuals through the Small Business Administration’s 7(a) loan program. $349 billion is authorized for 7(a) lending and SBA provides a 100% guarantee of the loans. Under this new program, eligible small businesses can get a loan to cover costs incurred between February 15, 2020, and June 30, 2020. This window of time is referred to in other areas of the law, and below, as the “covered” period. Importantly, there is a forgiveness provision that largely makes this a grant program.
Who can apply for and get one of these loans?
Under the law, any small business, non-profit organizations described in Sec. 501(c )(3) of the Internal Revenue Code, veterans organization, or Tribal business concern, with no more than 500 employees, are eligible. For the purposes of this program, your total number of “employees” includes your full-time and part-time employees.
Otherwise eligible organizations are not excluded if they have already furloughed or laid-off employees. Changes in their workforce may have implications for their loans, but organizations are not precluded simply because they have already taken actions to reduce payroll levels.
How much can I borrow?
The maximum amount you can borrow is your average monthly “payroll costs” during the one-year period before the date the loan is funded multiplied by 2.5, but not to exceed $10 million.
The “Payroll Costs” for this purpose include:
- Salary, wage, commission, or similar compensation capped at $100,000.
- Compensation paid to self-employed independent contractors capped at $100,000.
- Payment for vacation, parental, family, medical, or sick Leave.
- Allowance for dismissal or separation.
- Payment required for the provision og group health care benefits, including insurance premiums.
- Payment of any retirement benefits
- Payment of state and local tax assessed on compensation of employees.
What are the loan terms?
The loans will be issued via the SBA’s network of 7(a) program lenders and will be 100% guaranteed by the SBA. Having available credit from other sources does not disqualify you. There are no application fees or closing costs allowed and there is no collateral or personal guarantee required.
The maximum interest rate lenders can charge is 4% and the maximum loan term is 10 years. The SBA website indicates that the loan would have a maturity of 2 years and an interest rate of 0.5%. The first 6 months of payments (principal and interest) are automatically deferred. This deferral period can be extended up to a year.
What can I use the loan for?
Organizations should carefully consider the permitted use of proceeds in conjunction with the provisions of forgiveness (see below) to the fullest extent possible. It should be noted that these do not fully overlap. Proceeds of covered loans can be used during the 8-week period immediately after funding for:
- Payroll costs (as defined above).
- Costs related to continuation of group health care benefits during periods of paid sick, medical, or family leave and insurance premiums.
- Employee salaries, commissions, or similar compensations.
- Mortgage interest payments
- Utilities – defined as payments for electric, gas, water, telephone, internet access and transportation for which service began before February 15, 2020.
- Interest on any other debt incurred before the covered period.
One of the primary benefits is that borrowers may be able to attain forgiveness of all or a portion of the covered loan by demonstrating that the loan was used for certain permitted purposes. Borrowers should plan for and accumulate documentation supporting the relevant expenses to achieve the greatest forgiveness that they can achieve. The following costs incurred and payments made between February 15, 2020, and June 30, 2020 (the covered period) are allowed toward the amount of forgiveness:
- Payroll Costs (as defined above)
- Payments of interest on any covered mortgage obligation.
- Payments on covered rent obligations
- Payments on covered utility expenses.
“Covered” obligations must have been in place prior to February 15, 2020. As noted above, these expenses do not completely overlap with the list of permitted uses of the loan. The Program Overview in the SBA website indicates that at least 75% of the forgiven amount must have been used for payroll costs. Remember, it is critical to have proper documentation in order to get forgiveness.
Reductions in forgiveness:
The loan amount ultimately forgiven will be reduced by the amount of the loan subject to forgiveness multiplied by
- The average number of full time equivalent employees (FTE’s) employed during the covered period divided by
- The average number of FTE’s per month employed during the period (as elected by the borrower) either a) February 15, 2019 through June 30, 2019 or b) January 1, 2020, through February 29, 2020.
The average number of FTE’s equals the average number of FTE’s for each pay period falling within a month.
The loan forgiveness will also be reduced by the amount of any reduction in total salary or wages of any employee during the covered period that is in excess of 25% of the total salary or wages of the employee during the most recent full quarter in which the employee was employed before the covered period. This does not include any employee who received, during any single pay period, wages or salary at an annualized rate of pay in an amount greater than $100,000.
Terminated or furloughed employees or those that had salaries reduced by more than 25% during the period from February 15, 2020 and April 26, 2020 which are rehired or had salaries reinstated no later than June 30, 2020 will not be considered in determining reductions in forgiveness.
Any amount forgiven is excluded from gross income of the borrower for tax purposes and will not otherwise modify the terms and conditions of the covered loan.
Lenders will be responsible for evaluating a borrower’s eligibility including that the organization was in operation on February 15, 2020 and had employees for whom the borrower paid salaries and payroll taxes or paid independent contractors as reported on forms 1099.
Fees typically applicable to 7(a) loans will be waived. The obligation that the organization be unable to obtain “credit elsewhere” is also waived during the covered period.
Repayment of Loans:
To the extent not forgiven, principal on a covered loan will have a maximum maturity of 10 years and will bear interest at a rate not to exceed four (4.0%) per annum. The SBA website indicates that the loan would have a maturity of 2 years and an interest rate of 0.5%. Covered loans may be repaid at any time without prepayment penalty.
Loans will not be available until the SBA issues its final guidance to lenders which is expected to occur as early as April 3.