A New Business Loan Program with Loan Forgiveness
On March 27, 2020, The Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) was signed into law by President Trump. The key provision in the CARES Act is a new forgivable loan plan "the Paycheck Protection Program (the program)." The program is to provide small and medium size businesses with help in meeting their operating and employee expenses during the Coronavirus crises. The program will be administered by the Small Business Administration (SBA) under its 7(a)-lending program during the covered period February 15, 2020 through June 30, 2020. Congress has provided $349 billion in a new lending facility to support the program.
Who is eligible for this program?
Small and medium size business with fewer than 500 employees. Counted employees include full-time, part-time or other basis. Employees of affiliated organizations are also counted towards the 500 limits. Affiliation rules are waived for industries under NAICS business sector 72 (business in the hospitality and dining sector) with less than 500 employees per location and SBA approved franchises.
Individuals who operate as sole proprietors or as independent contractors and self-employed. These individuals seeking a loan must submit documentation to establish eligibility such as payroll tax filings, Forms 1099-Misc., and income and expense schedules.
Tribal businesses, veterans' organizations and 501(c)(3) non-profit organizations are also eligible for the program.
Lenders must only consider whether a borrower is in business on February 15, 2020, has employees for salary and payroll tax purposes; or the case of payments to independent contractors, reported as 1099-MISC.
Lenders cannot consider whether the borrower can obtain funds from other sources.
Loan applicants must make a good faith certification to the lender that economic conditions make necessary the loan request and the funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments.
How much loan can I qualify for?
Applicants can qualify for a loan amount up to 2.5 times their average monthly payroll costs, measured over the prior 12-month period before the loan is made or $10 million, whichever is smaller.
Payroll costs are defined as salaries (including officer salaries), employee benefits, state and local payroll taxes and compensation to independent contractors.
Excluded Payroll Costs: payroll costs do not include salaries or payments that exceed $100,000 on an annual basis to employees or independent contractors.
Also excluded under the definition of payroll costs are compensation of foreign employees, FICA, income tax withholdings, and qualified sick leave wages for which a credit is allowed under Section 7001 or 7003 of the Families First Coronavirus Response Act.
What are the terms of the loan?
Program loans do not require personal guarantee or collateral from either the borrower or the owner(s). Program loans are non-recourse unless the loan funds are used for purposes other than the defined purposes below.
Any amount of a program loan which is not forgiven, (defined later) will have an amortizable term of up to 10 years, will be guaranteed by the SBA and the interest rate cannot exceed 4%. Businesses operating on February 15, 2020 qualify for automatic deferments of principal and interest on program loans for at least six months and not more than one year.
What can the loan proceeds be used for?
The program loans are to be used for the following (defined purposes):
- Compensation to employees, including salaries, commissions and similar compensation
- Vacation pay, parental, family, medical, or other sick leave
- Group term health insurance premiums
- Retirement benefit payments
- State and local taxes assessed on the compensation of the employee
- Mortgage interest payments, rent, and utility payments
- Loan proceeds cannot be used to prepay debt, or to cover individual employee compensation whose salaries are over $100,000 per year, prorated for the cover period (same as excluded payroll costs defined earlier)
Program loan proceeds expended during the 8-week period starting from the origination of the loan will be forgiven if those expenditures are used for the defined purposes stated above, but not more than the loan principal.
In order to qualify for loan forgiveness with respect to mortgage interest, lease/rent and utilities, they must be in effect as of February 15, 2020.
Program loan amounts eligible for forgiveness will be reduced correspondingly if there is a reduction in employees or pay during the covered period February 15, 2020 through June 30, 2020 compared to 2019. However, the reduction will not apply if the employer re-hires employees who were recently laid off due to the crises.
In order to obtain loan forgiveness, borrowers will need to submit to their lenders the following information:
- Documentation verifying the number of full-time equivalent employees, including payroll tax filings, state and local payroll tax filings, unemployment insurance filings.
- Documentation supporting payments for mortgage, leases, or utility payments
- A certification from a representative of the eligible recipient authorized to make sure certifications 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 determines necessary
Any amounts forgiven under the program will not be taxable income for federal income tax purposes.
Business who receive a program loan or forgiveness under the program will not be eligible for delay of payment of payroll taxes or employee credit of payroll taxes under the CARES Act.
RINA is here to help you navigate the different benefits of the CARES Act. If you are interested in applying for the Paycheck Protection Program and need further guidance in finding a lender, determining your payroll costs, what information you need to track to obtain loan forgiveness and any other information to comply with the program, your RINA partner is available to help you.