CARES Act and the Paycheck Protection Program
By Aaron Chaet
On April 3, 2020, Congress enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which is the government’s third round of financial support in response to the COVID-19 pandemic.FN1 One of the primary provisions of the CARES Act is the allocation of $350 billion dollars for the Paycheck Protection Program (“PPP”).
Eligibility
The PPP, Section 1102 of the CARES Act, is an incentive program through the Small Business AdministrationFN2 to provide federally backed loans for certain expenses to small businesses, including self-employed individuals and independent contractors, through June 30, 2020. The maximum loan size is equivalent to 250 percent (250%) of the employer’s average monthly payroll costs, which is defined as:
salary, wages, commissions, 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 provisions 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.
Employers are also able to use loans received pursuant to the PPP for:
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);
utilities; and
interest on any other debt obligations that were incurred before the covered period.
Notably, payroll costs do not include employee or owner compensation in excess of $100,000, taxes imposed or withheld under Internal Revenue Service Code Chapters 21, 22, and 24, compensation of employees whose principal place of residence is outside of the U.S., and qualified sick and family leave, for which a credit is allowed under Sections 7001 and 7003 of the Families First Coronavirus Response Act.FN3
In evaluating the eligibility of a borrower seeking a PPP loan, the lender must consider whether the borrower 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 a Form 1099–MISC.FN4 Importantly, with respect to a PPP covered loan, neither a personal guarantee nor collateral will be required.FN5
Loan Forgiveness and Deferral
Borrowers are eligible for loan forgivenessFN6 equivalent to the amount of the loan that the borrower used for the following purposes in the first eight weeks after origination of the loan:
Payroll costs; and
Non-payroll costs, capped at 25% of the loan amount for the first eight weeks, including:
payments on interest on mortgage obligations so long as it was in place prior to February 15, 2020;
rent payments, so long as the lease was in place prior to February 15, 2020; and
utility payments.
The Act requires borrowers to maintain both the number of employees and salary expenses in order to qualify for full forgiveness. Amounts to be forgiven will be reduced if the business either (i) reduces full time equivalent employees; or (ii) reduces an employee’s salary by more than twenty five percent (25%).FN7 Loan payments will also be deferred for six months.
Takeaway
Employers are encouraged to closely monitor their economic needs and consider whether the loans under the Payment Protection Program are realistic avenue to assist in weathering the COVID-19 pandemic. Please contact the attorneys at Campbell Litigation for guidance regarding eligibility and suitability for this program.
Footnotes:
FN1 - See HB 748, https://www.congress.gov/bill/116th-congress/house-bill/748
FN3 – See §1102(a)(2)(36)(A)(viii)(II).
FN4 – See §1102(a)(2)(36)(F)(ii).
FN5 – See §1102(a)(2)(36)(J).
FN6 - See §1105.
FN7 - Reductions in employment or wages that occur during the period beginning on February 15, 2020, and ending 30 days after the enactment of the CARES Act (April 26, 2020) shall not reduce the amount of loan forgiveness if by June 30, 2020, the borrower eliminates the reduction in employees or reduction in wages.