A major provision within the CARES Act and what you need to know when you talk to your bank.
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On March 27, 2020, the CARES Act was passed by Congress to pave the way for a variety of stimulus programs for businesses and individuals. One such program is a small business loan program, called the Payment Protection Program (or “PPP”). The PPP allows small businesses (defined as fewer than 500 employees, or certain types of businesses with fewer than 500 employees at each physical location) to receive a loan that may be forgiven in full or in part when used on eligible expenses.
- The PPP runs from February 15, 2020 to June 30, 2020 (“covered period”).
- Maximum loan is the lower of 2.5x the average monthly payroll costs for the 12 months preceding the loan (note a different timeframe is used for seasonal employees) or $10,000,000.
Payroll Costs Defined
- Salary, wage, commission, or similar compensation;
- Payment of cash tip or equivalent;
- Payment for vacation, parental, family, medical, or sick leave;
- Allowance for dismissal or separation;
- Payment required for the provision of group health care benefits, including insurance premiums;
- Payment of any retirement benefit; or
- Payment of state or local tax assessed on the compensation of employees; and
- Payments to sole proprietors or independent contractors.
- Note that compensation costs are capped at $100,000 for employees, sole proprietors, and independent contractors. Additionally, employees must reside in the United States in order to be included within the definition of payroll costs.
- Once the loan is received, there is an eight-week window to incur eligible costs that would enable forgiveness of the loan.
- Eligible costs include:
- Payroll costs;
- Costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;
- Employee salaries, commissions, or similar compensations;
- Payments of interest on any mortgage obligation (which shall not include any prepayment of or payment of principal on a mortgage obligation);
- Rent (including rent under a lease agreement established prior to February 15, 2020);
- Utilities (in place prior to February 15, 2020); and
- Interest on any other debt obligations that were incurred before the covered period.
Note that the amount of forgiveness may be reduced if employees are laid off or receive a pay decrease during the eligible period. Any amount of the loan that is not forgiven must be paid back with a deferral of any interest payments of six months. It appears that financial institutions may have some leeway in determining the length of the loan (not to exceed 10 years) and interest rate (not to exceed 4.0%). Lenders will require documentation to determine the loan amount (i.e. payroll registers) as well as to ensure that eligible costs were incurred (i.e. payroll registers, utility invoices, rent invoices, etc.).
Are you Eligible?
In addition to corporations and sole proprietorships under 500 employees independent contractors are also eligible under the PPP to receive essentially two months of their prior 12 months of income (capped at $100,000). Relevant documentation would need to be provided (i.e. 1099-MISC, bank statements, etc.) to obtain the loan. There is no further information in the bill about subsequent documentation to provide to the lender after obtaining the loan to receive forgiveness.
In summary, this program is designed to encourage small businesses to retain their employee base while the government provides two months of payroll, rent, and utility cost assistance. There are a number of additional caveats / details within the final bill so we encourage companies to read the bill in detail and consult with their bankers for more information. These loans will be administered through financial institutions (both physical and online) and they may be ready to issue these loans as early as the end of this week.