UPDATE on 4/16 – In a brief announcement on their website, the Small Business Administration has announced they are no longer accepting new loan applications for the Paycheck Protection Program because funding has run out. DGC will monitor this situation and keep you updated with any new developments.
UPDATE ON 4/7: The U.S. Treasury has published new guidance concerning their Paycheck Protection Program Loans. You can read the list of FAQs here. We have also updated our original article below which was originally published on March 30th.
On March 27, Congress passed the Coronavirus Aid, Relief, and Economic Security Act or CARES Act into law. A large part of this Act is to appropriate $349 billion for the Paycheck Protection Program, as part of the 7(a) loan program administered by the Small Business Administration (SBA) for small businesses that are being adversely impacted financially by the coronavirus pandemic. Also, the SBA is delegating full authority to approximately 1,800 lenders that are already authorized to participate in other loan programs from the SBA. The following is a summary of the key provisions:
Eligibility
Any small business, including non-profits, with 500 employees or less is eligible. The business needs to be in existence and operating as of February 15, 2020 and have employees receiving salaries or wages. There are certain exceptions to the affiliation rules for the food service and hospitality industries., franchises and those businesses with an SBIC loan already in place. In addition, the borrower needs to certify that uncertain economic conditions makes the loan request necessary.
Loan Amount
The maximum loan amount that a business is eligible to receive is equal to their average monthly payroll costs multiplied by 2.5. The loan cannot exceed $10 million. The average monthly payroll costs are calculated by using a 12-month look back period. The look back period is the 12-month period of time that precedes the loan origination date, such as April 1, 2019 to March 31, 2020 or the borrower can use calendar year 2019.
Payroll costs are defined in the CARES Act as the sum of salaries, wages, sick pay, vacation pay, commissions, health care premiums, retirement costs, and state and local tax assessed on employee compensation. However, the portion of salaries and wages during the look back period that exceed $100,000 for each employee are excluded from this calculation. In addition, the borrower should exclude from this calculation any sick or family leave pay in which the borrower has received a related credit under the Families First Coronavirus Response Act. An additional exclusion is for payroll costs for employees that have a foreign principal residence. The total of payroll costs for the 12-month look back period are divided by 12 to arrive at the monthly average of payroll costs.
In addition, any other SBA-related loan made between January 31, 2020 and June 30, 2020 can be refinanced under this program. However, the combined loan amount (the loan amount from payroll costs plus the refinanced SBA loans) cannot exceed $10 million.
Other Key Provisions
Loan Forgiveness
As part of the CARES Act, Congress is providing a substantial incentive for employers to prevent layoffs and salary reductions by allowing for loan forgiveness. The loan forgiveness amount is calculated by totaling the amounts spent by the business over the 8-week period following the loan origination date for the following costs:
Prepayments of any of these costs would not be included in the calculation. In addition, interest payments from other loans would not be included in the calculation.
To the extent that an employer reduces headcount, which is measured in full-time equivalent employees (FTEs) or reduces an employee’s pay (to the extent the reduction exceeds 25%), the loan forgiveness would be reduced by that same percentage. Headcount and salary reductions made between February 15th, 2020 and 30 days post-CARES act, if cured by June 30, 2020, will not impact the forgiveness computation.
The borrower must submit an application for forgiveness with the lender. While the CARES Act does not explicitly state when an application for forgiveness can be submitted, we infer that it would be after the 8-week period mentioned above at the earliest. The application for forgiveness should include documentation that verifies certain information such as full-time equivalents, payroll costs, and pay rates used to determine the amount of forgiveness. The documentation needs to be certified by a representative of the recipient. The lender is required to make a forgiveness decision within 15 days. The amount of loan forgiveness is excluded from Federal taxable income.
For a list of important CARES Act business provisions you should consider, click here.
If you have questions, please contact a member of your DGC client service team or Rick Strout, CPA at 781-937-5716 / rstrout@dgccpa.com for more information. You can also visit our coronavirus web page at dgccpa.com/coronavirus which is frequently updated with new articles and checklists to help you deal with the impact of the coronavirus on you and your business.
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