Loan Forgiveness Program under the CARES Act and The Paycheck Protection Program

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted on March 27, 2020. The CARES Act contains many sections and provisions applicable to numerous individual and business situations. For small business owners, the most helpful provision may be the new loan program called the Paycheck Protection Program (PPP).  This program is developed to assist small business owners to retain their employees and recall employees who have been furloughed or laid-off related to the financial hardships associated with COVID-19.

The PPP will be administered through the Small Business Administration (SBA). There are several different sources of funds available to employers through the SBA loan programs, which should be reviewed at sba.gov/funding-programs.

The PPP loan program is different from the Economic Injury Disaster Loan (EIDL) program created under the Families First Coronavirus Response Act (FFCRA) on March 18, 2020. The EIDL program provides for a 100% refundable tax credit to small businesses to take immediate advantage of the paid family leave and the paid sick leave benefits.

The PPP is available to eligible small businesses. Eligible employers are those with fewer than 500 employees and therefore are designated as small businesses as defined by the SBA.  The SBA website has tools to assist in identifying whether your business qualifies as a small business.  The website also helps identify certain businesses with more than 500 employees in identified industries which may be eligible for the loan program if they meet the SBA’s size standards for those industries. Included in the definition of eligible businesses are those with 500 or fewer employees; 501(c)(3) organizations with less than 500 employees; sole proprietors; self-employed individuals; independent contractors; and 501(c)(19) Veterans organizations. Eligible businesses can obtain immediate assistance to meet identified operating expenses, with the prospect of not having to re-pay the loan.

Further, the PPP allows employers to obtain an SBA loan up to a maximum amount of 2.5 times the average total monthly payroll cost, plus the outstanding amount of any loan under an SBA’s Disaster Loan Program between January 31, 2020 and the date such loan is to be refinanced under this PPP program, or up to $10 Million.

The loan proceeds may be only be used for limited purposes, including payroll costs (excluding individual compensation over $100,000, certain federal taxes, sick pay and family leave wages paid for where a credit is allowed under FFCRA), healthcare benefits and healthcare insurance premiums, employee wages, salaries, commission and other compensation, mortgage interest payments, rents, utilities and interest on certain debts.

Under the PPP, no collateral or personal guaranties are required, interest on the loan shall not exceed 4%, any loan proceeds which are not forgiven are payable over 10 years, no fees are associated with obtaining the loan, no pre-payment penalties are on the loan, there is no recourse against the individuals, shareholders, members or partners of the loan recipient for non-payment (unless the proceeds are used for unauthorized purposes) and the borrower cannot be denied the loan based on having credit available elsewhere from non-federal sources.

The most advantageous feature of these loans is that they may be forgivable, and any debt service payments may be deferred to January 31, 2021.  The loan is forgiven in an amount equal to the cost incurred and paid during the covered period for payroll costs, interest payments on mortgages, rent payments and utility payments (not to exceed the amount of the loan).  The amount available for forgiveness will be reduced based on any reduction in the number of employees retained (starting on the date the loan was originated) compared to the prior year (February 15, 2019 thru June 30, 2019), and any reduction in pay of employees of 25% or more of their prior year compensation.  Employees who have been temporarily laid-off and are re-hired and paid with the loan proceeds and are not counted as a reduction of employees retained.  Loan amounts forgiven under this program would not be included as debt forgiveness for federal income tax purposes.

The SBA is still compiling the forms, information and application process.  This is expected to be completed within fifteen (15) days of March 27, 2020.  During this time, you should be collecting information on payroll, including wages paid and number of employees during 2019, mortgage documents, rent and lease agreements, health care costs and health insurance costs. The SBA is going to require reporting to verify full time employees on your payroll and pay rates, documentation on covered costs, such as  verifying rent, mortgage and utility payments, certification that the documentation is true and correct and that the forgiveness amounts requested were used to retain employees and make payments of the covered expenses.

The first step in obtaining the loan is to contact SBA loan 7(a) authorized lender.  CMDA is available to guide small business owners through the Paycheck Protection Program.

Christopher G. Schultz is an equity partner, the managing partner of the Firm, and a member of the Executive Committee. He works out of our Livonia office and concentrates his practice on business law, real estate law, and estate planning. He maintains an AV Preeminent Rating from Martindale-Hubbell, which is the highest possible rating an attorney can achieve for both ethical standards and legal ability.

He represents and counsels manufacturers, financial service institutions, and small and large businesses in the retail and service sectors in many areas, including entity election, start-up issues, shareholder and owner relationships, employment matters, mergers, acquisitions, real estate matters, and business succession planning. Mr. Schultz is also a Certified Public Accountant (CPA).

He may be reached at (734) 261-2400 or cschultz@cmda-law.com.