COVID-19 Funding Opportunity
In order to severely limit the COVID-19 health risks on the more than 330 million Americans, the United States Government requested millions of Americans to fight this virus by staying home because the existing healthcare infrastructure would not have been able to handle the demand on such services. As a response to this request, President Trump signed into law the CARES Act on March 27, 2020 to bring the much-needed cash flow to businesses with 500 or less employees which have been severely affected by the COVID-19 pandemic and related negative economic effects.
A significant amount of the financial resources contained in the CARES Act will be administered by the Small Business Administration. The flagship 7(a) SBA Loan Program is helping to carry out the bulk of these provisions. Below is a discussion to help you understand the new provisions.
The CARES Act: Paycheck Protection Program and Loan Forgiveness
The CARES Act allows for a bank or similar institution to make emergency loans under the SBA 7(a) Program. A bank or similar institution may lend the lesser of $10,000,000 or average total monthly payments by the applicant for payroll costs incurred during the 1-year period before the date on which the loan is made by 2.5 to help finance the eligible business expenses during the covered period starting February 15, 2020 through June 30, 2020.
How are payroll costs defined under this program?
The payroll costs include salaries, wages, commissions, cash tips, vacation, parental, family, medical or sick leave, allowance for dismissal or separation, health care-related benefits, retirement funding, or payment of state and local payroll taxes.
The definition of payroll costs excludes compensation greater than $100,000 in annual salary, payroll taxes (FICA, RRTA, & Income Tax Withholding), compensation of employees whose principal residence is outside of the U.S., qualified sick leave and qualified family leave wages eligible for a credit under Section 7001 and 7003, respectively, of the Family First Coronavirus Response Act. These payments will not be payments that can be made if a company or businesses wishes to qualify under this program.
Employees include individuals employed on a full-time, part-time, or other basis.
Who is eligible?
Any business concern, non-profit organization, veterans organization, or Tribal business concern is eligible to participate in this program as long as the business or organization employs not more than the greater of 500 employees or the size standard in number of employees established by the SBA. This generally means that an applicant must aggregate all employees on an affiliate basis, including subsidiaries. Eligible recipients include sole proprietors, independent contractors, and self-employed individuals.
However, if the applicant has more than one location and the applicant employs not more than 500 employees per location, then the applicant may be eligible as long as it is assigned a North American Industry Classification System Code beginning with 72 at the time of disbursal. The NAICS code 72 includes accommodation and food services businesses, like restaurants and hotels.
Furthermore, any business concern that operates as a franchise and which is assigned a franchise identifier code by the SBA, and any business concern that receives financial assistance from a company licensed under the Small Business Investment Act of 1958 may be eligible.
What will a lender require of an applicant to determine eligibility under this program?
The applicant must apply on or before June 30, 2020. The applicant must make a good faith certification that the uncertainty of the current economic conditions makes it necessary to request the loan in order to support the ongoing operations of the applicant.
The applicant must acknowledge that the funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments. The applicant must also acknowledge that it does not have another application pending or duplicative of amounts applied for or received under a covered loan.
Finally, the applicant must not have already received any other funds under this program or for the same purposes from February 15, 2020 through December 31, 2020. An applicant must be ready to provide all the necessary information such as taxpayer identification numbers, prior year tax returns and financial statements, and any other pertinent information that may be relevant when seeking financing to avoid any delays in processing.
The lender must be able to consider that the borrower or applicant was in operation on February 15, 2020, had employees for whom the borrower paid salaries and payroll taxes, or paid independent contractors, as reported on a Form 1099-MISC.
How may the applicant use the loan proceeds?
A recipient of these funds may use such funds to pay for payroll costs, costs related to the continuation of health care benefits during periods of paid sick, medical, or family leave, and insurance premiums, employee salaries, commissions, or similar compensation, payments of interest on any mortgage obligation (which do not include any prepayment or a payment of principal on a mortgage obligation), rent (including rent under a lease agreement), utilities (including electricity, gas, water, transportation, and phone and internet access for service incurred in the ordinary course of business), and interest on any other debt obligations that were incurred before the covered period.
What is the applicable interest rate on the loan once this is disbursed?
The interest rate must not exceed 4% per annum, and there will be no prepayment penalties.
What recourse does the lender or the SBA have against the borrower?
None. The law states that the SBA or lenders have no recourse against any individual shareholder, member, or partner of an eligible recipient of loan proceeds under this program as long as the loan proceeds are used as directed. This law does not require a personal guarantee or collateral of any kind.
If needed, is the applicant able to defer payments on these loans?
Yes. The law states that an impacted borrower or an eligible recipient may be able to defer the payment of principal, interest and fees for a period of 6 months to 1 year.
What is the term or maturity date of the loans?
The loans have a maximum 10-year maturity from the date on which the borrower applies for the loan forgiveness.
So, the loans can be forgiven? What is loan forgiveness and what portion of the loans is eligible for forgiveness?
Yes. The loans may be forgiven. Loan forgiveness means that a borrower is not required to pay back the amounts borrowed. The language in the law states that the amount of the loan forgiveness shall not exceed the principal amount of the financing made available through this program as long as the loan proceeds are spent on payroll costs (excluding the prorated portion of any compensation above $100,000 per year for any person), payments of interest of any covered mortgage obligation (which shall not include any prepayment or payment of principal of a covered mortgage obligation), payments on any covered rent obligation, and covered utility payments.
The borrower will treat the loan forgiveness as cancelled indebtedness by a lender authorized under Section 7(a) of the SBA.
However, the loan forgiveness amount will be reduced by multiplying the total of all payments made by the quotient obtained by dividing the average number of full-time equivalent employees (“FTE”) per month employed by the applicant during the covered period by either the average number of FTEs per month employed by the applicant during the period beginning 2/15/19 and ending 6/30/19 or the average number of FTEs per month employed by the applicant during the period beginning 1/1/20 and ending 2/29/20. For seasonable employers, the average is the number of FTEs per month employed by the applicant during the period beginning 2/15/19 and ending 6/30/19.
Furthermore, the amount of loan forgiveness may 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 during which the employee was employed before the covered period.
For tax purposes, the CARES Act states that for purposes of the Internal Revenue Code of 1986, any amount which (but for these forgiveness provisions) would be includible in gross income of the applicant by reason of the forgiveness provisions of the CARES Act shall be excluded from gross income. This indicates that applicants may not have to include the amounts forgiven in the taxable income calculations. As such, we would expect the IRS to confirm this treatment.
What requirements must be met in order to achieve forgiveness?
An applicant that intends to seek loan forgiveness must submit to the lender that is servicing the covered loan application documentation verifying the number of FTEs on payroll and pay rates for the periods described, payroll tax filings reported to the IRS, and state income, payroll, and unemployment insurance filings, cancelled checks, payment receipts, transcripts of accounts, or other documents verifying payments on covered mortgage obligations, payments to covered lease obligations, and covered utility payments.
Furthermore, an applicant must present a certification by a representative of the applicant to certify that the documentation presented is true and correct and the amount for which forgiveness is requested was used to retain employees, make interest payments on a covered mortgage obligation, make payments on a covered rent obligation, or make covered utility payments and any other documentation the SBA requires.
Without exception, the applicant must submit this required documentation in order to achieve the loan forgiveness pursuant to this law.
It can be difficult to make sense of all the new legislation passed in the wake of COVID-19. Contact us to help you navigate through this pandemic and check out our COVID-19 Resources page for more information.