Paycheck Protection Loans Under the CARES Act
On March 27, 2020, President Trump signed H.R. 748: Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) into law. The purpose of this article is not to recite the CARES Act (full text available here), rather it is intended to provide a review of its significant points as it relates to the borrowing of certain funds to maintain payroll continuity (i.e., “paycheck protection loans”). Therefore, the remainder of this article is intended to provide an overview of the CARES Act in that regard.
I. What businesses can apply for a loan?
A. During the covered period (February 15, 2020 through June 30, 2020) any business concern (this article does not discuss non-profits, self-employed individuals, sole-proprietors, veterans organizations, Tribal businesses, or seasonal businesses) shall be eligible to receive a covered loan (a loan made pursuant to the CARES Act) if the business employs not more than: (1) the greater of 500 employees; or (2) if applicable, the size standard in number of employees established by Small Business Administration (“SBA”) for the industry in which the business concern operates.
a. Employee is defined to include individuals employed on a full-time, part-time, or other basis.
b. For purposes of this article, we assume that if there are less than 500 employees the business should be eligible for a loan under the CARES Act.
c. Note, this article does not address the rules applicable to the accommodation and food services industries that have more than one (1) physical location.
II. Loan Amount
A. Maximum loan amount shall be the lesser of:
a. The average total monthly payroll costs incurred during the 1-year period before the date on which the loan is made (this is a fiscal year, e.g. April 1, 2019 through March 31, 2020, and depends on when the loan is made) MULTIPLIED BY two and one half (2.5) PLUS any disaster loan taken out between January 31, 2020 and the date a loan is taken out under the CARES Act
b. $10 Million Dollars.
B. What are “payroll costs”?
a. Salary, wage, commission, or similar compensation;
b. Payment for vacation;
c. Payment for parental, family, medical, or sick leave;
d. Payment required for group health care benefits, including insurance premiums;
e. Payment of any retirement benefit; and
f. Payment of state and local taxes assessed on an employee’s compensation.
C. What are not “payroll costs”?
a. Employee compensation, as prorated for the covered period, in excess of an annual salary of $100,000.00;
i. Compensation is capped at $100,000.00 annually
b. Payroll taxes (i.e., FICA/FUTA/federal income tax withholdings);
c. Qualified sick leave wages for which a credit is allowed under the Families First Coronavirus Response Act; and
d. Qualified family leave wages for which a credit is allowed under the Families First Coronavirus Response Act
III. What expenses can the loan be spent on?
A. Notwithstanding that the loan amount is based on payroll costs, the loan can be used for:
a. Payroll costs (see II.C. and II.D. above);
b. Costs related to the continuation of group health care benefits during periods of sick, medical, or family leave, and insurance premiums;
c. Employee salaries, commissions, or similar compensations;
d. Interest payments on mortgage (not principal payments);
e. Rent under a lease agreement;
f. Utilities; and
g. Interest on any other debt obligations incurred before the covered period.
IV. Loan Forgiveness
A. Covered period (i.e., the period of time over which the use of the loan proceeds will be analyzed so as to possibly be forgiven):
a. An 8-week period beginning on the origination date of the loan.
B. Depending on how the loan is used/spent during that 8-week covered period will determine if the loan, in part or in full, will be forgiven.
C. What the loan can be spent on during that 8-week period so as to be forgiven:
a. Payroll costs (see II.C. and II.D. above);
b. Payment of interest on a mortgage obligation;
i. Mortgage obligation must have been incurred in the ordinary course of business prior to February 15, 2020, be a liability of the borrower, and be a mortgage on real or personal property.
c. Payment on any rent obligation; and
i. It has to be a rent obligation under a lease agreement, which was in force prior to February 15, 2020.
d. Utility payments.
i. Electricity, gas, water, transportation, telephone or internet access for which service began before February 15, 2020.
V. Limit on Amount of Loan Forgiveness
A. Assuming the loan is spent in the correct manner, how might the forgiveness of the loan, otherwise be limited?
a. Loan forgiveness will be reduced as a result of the decrease in the number of employees and/or reduction in an employee’s salary.
i. BUT, there is an exception to this cut back if the employees are re-hired and/or the salary decreases are restored (see below).
a. The amount of loan forgiveness shall be reduced, but not increased, by multiplying the loan by the following percentage:
i. Percentage =
1. The average number of full-time employees per month employed during the covered period (this is the 8-week period beginning on the date of the loan)
One of the following (borrower gets to choose)
a. The average number of full-time employees per month during the period of February 15, 2019 through June 30, 2019
b. The average number of full-time employees per month during the period beginning January 1, 2020 through February 29, 2020.
a. The amount of loan forgiveness shall be reduced by the amount of any reduction in total salary or wages of any employee during the covered period (this is the 8-week period beginning on the date of the loan) that is in excess of 25% of the total salary or wages of the employee during the most recent full quarter during which the employee was employed before the covered period (this is the 8-week period). For purposes of the prohibited salary reduction it only applies to any employee who did not receive, during any single pay period during 2019, wages or salary at an annualized rate of pay in an amount more than $100,000.00.
i. Likely benchmark: Quarter 1, 2020.
D. POSSIBLE EXEMPTION TO THE SALARY REDUCTION RULE
a. An exception to the foregoing employee and salary reduction rule may apply.
b. The amount of loan forgiveness shall be determined without regard to a reduction in the number of full-time employees or a reduction in the salary of 1 or more employees during the period (this is a new period) beginning on February 15, 2020 and ending on the date that is 30 days after the CARES Act is enacted IF the following apply:
i. During the period described above (February 15, 2020 and ending on the date that is 30 days after the CARES Act is enacted) if there is a reduction, as compared to February 15, 2020, in the number of full-time employees and not later than June 30, 2020 the reduction has been eliminated (i.e., re-hire) in the number of full-time employees.
ii. During the period described above (February 15, 2020 and ending on the date that is 30 days after the CARES Act is enacted) there is a reduction, as compared to February 15, 2020, in salary or wages of 1 or more employees (note, this is not just full-time employees) and not later than June 30, 2020 that reduction has been eliminated (i.e., there is a restoration of salary or wages for such employee(s)).
VI. Other Important Information
A. The application period begins on April 3, 2020 for small businesses and sole proprietorships and April 10, 2020 for independent contractors and self-employed individuals.
B. You should apply as soon as possible. The loan program is open until June 30, 2020, but there is a cap on funding and it is expected that the cap will be met well before June 30, 2020.
C. Applications may be made through any existing SBA lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating.
D. There should be no loan origination fee.
E. The loan would be without recourse against borrowers unless the loan is used for unauthorized purposes.
F. There should be no personal guarantees of the loan.
G. Assuming that all, or a part, of the loan is not forgiven, then:
a. The interest rate that shall apply shall not exceed 4%;
b. The loan maturity term could be as much as 10 years; and
c. From February 15, 2020 thru June 30, 2020 there is a complete payment deferment for a period of not less than 6 months, including payment of principal and interest, and not more than 1 year.
H. Loan application documentation to be submitted may include:
a. Documentation as to the number of full-time employees on payroll and pay rates for the periods in V.B.a.i.1.a. or V.B.a.i.1.b. above including:
i. Payroll tax filings reported to the IRS;
ii. State income, payroll and unemployment insurance filings; and
b. Documentation, including canceled checks, payment receipts, transcripts of accounts, or other documents verifying payments on covered mortgage obligations, payments on covered lease obligations, and covered utility payments.
I. Lender shall make a decision on the application not later than 60 days after receipt.
J. A copy of the Paycheck Protection Program loan application may be found here.
K. A copy of the Paycheck Protection Program Information Sheet may be found here.
The foregoing article is prepared by attorneys James C. “Jim” Purnell V and Sherwood C. “Chris” Henderson (Mr. Henderson is a Board Certified Specialist in Estate Planning and Probate Law, as designated by the NC State Bar Board of Legal Specialization) of White & Allen, P.A. in order to provide general information to interested parties who wish to learn more about these topics discussed. This article is not intended to give, and should not be relied upon for, legal advice in any particular circumstance or fact situation, and does not establish an attorney-client relationship. If you would like additional information or to discuss your specific situation, please contact White & Allen, P.A. by calling 252-527-8000.
White & Allen, P.A. is a full service law firm in eastern North Carolina. Since we opened our doors in 1927, our reputation has been built on trust.