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The CARES Act and The SBA 7(a) Loan Program: What Business Borrowers Need to Know

April 08, 2020

By: Grayson T. Orsini

On March 27, President Trump signed the Coronavirus Aid, Relief, and Economic Security, or “CARES” Act. One of the key protections under the CARES Act is the Paycheck Protection Program (or PPP)- a $349 billion dollar expansion of Small Business Administration’s 7(a) loan program. Under the PPP Program, the SBA will give 7(a) loans to an expanded group of qualified businesses on a first come, first served basis during a “covered period” lasting from February 15, 2020 to June 30, 2020. Below is what business borrowers need to know to see if they qualify for PPP loans, and if these loans may be forgiven.

Can My Business Receive PPP Loans Under the CARES Act?

Under the CARES Act, a business may receive a PPP loan if they were in operation on February 15, 2020 and meet one of the following requirements:

  • The business already qualifies as a “small business concern” under the Small Business Administration Act.
  • The business employs no more 500 employees, whether employed full-time, part time, or on any other basis.
  • A business employs more than 500 employees, but meets the applicable SBA size standard for the industry that the business operates in.
  • A 501(c)(3) nonprofit organization, a tax-exempt veterans organization, or a tribal business concern.
  • A business in the hotel and food service industries that employs more than 500 employees, but employs no more than 500 employees per each physical location that the business operates.
  • Self-employed individuals, such as individuals operating as sole proprietors or independent contractors, also qualify for PPP loans.

How is the Number of Employees a Business Employs Counted?

The SBA counts employees working directly for the business entity applicant, as well as those working for “affiliated business entities.”

  • Businesses are generally “affiliated” if one business concern, business entity, or individual owns, controls, or has the power to control, another business entity.
  • The CARES Act waives affiliation rules for the following businesses:
    • Any business in the hotel and food service industries employing less than 500 people.
    • Any business the SBA identifies as a franchise.
    • Any business receiving financial help from a “small business investment company” as defined by Section 301 of the Small Business Investment Act of 1958.

If you need help in determining whether your employee count is under 500, or if you need help determining whether your business may qualify for PPP loans, feel free reach contact us for a consultation.

What Does A Lender Look for When Considering To Approve Loan Applications?

When reviewing PPP loan applications, lenders must consider the following:

  • Whether the business was in operation on February 15, 2020.
    AND
  • Whether the business had employees for whom the business paid salaries and payroll taxes OR whether the business paid independent contractors.

How Much Money Can A Business Receive From the PPP Program?

If a business qualifies, it is eligible to receive the lesser of:

  • 10 million dollars, or the sum of:
    • 250% of the average monthly payments for “payroll costs” incurred during the one-year period before the date on what the loan was made, and
      • for seasonal employers, the average total monthly payments for payroll shall be calculated over the 12 week period beginning on February 15, 2019, or March 1, 2019 (depending on what the employer chooses), and ending on June 30, 2019.
    • the outstanding amount of Economic Injury Disaster Loans made by the SBA under 15 USC §636 (b)(2), made during the period beginning from January 31, 2020 to the date the PPP loan is made.

Keep in mind that a business can only receive one PPP loan.

What Do “Payroll Costs” Include?

Payroll costs include the following:

  • Salary, wage, commission, 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 group healthcare benefits, including insurance premiums.
  • Payment of any retirement benefit.
  • Payment of state or local taxes assessed on the compensation of employees.
  • For the self-employed, any compensation or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment, or similar compensation, and that is in an amount not more than $100,000 in 1 year, prorated as the covered period.

Payroll costs do not include the following:

  • Payments to employees of more than $100,000.00, as prorated over the covered period.
  • Taxes imposed or withheld under chapters 21, 22, or 24 of the I.R.S. Code.
  • The compensation of an employee whose principle place of residence is outside the United States.
  • Wages paid as the result of qualified sick and family leave under the Families First Coronavirus Response Act.

What Can I Use Loan Proceeds For?

Businesses can use loan proceeds for the following:

  • Uses allowed under the traditional 7(a) loan program.
  • Payroll costs.
  • Costs related to healthcare benefits during periods of paid sick, medical, or family leave, and insurance premiums.
  • Salaries and compensations.
  • Interest payments on mortgages or other debt obligations incurred before February 15, 2020.
  • Refinancing an Economic Injury Disaster Loan (EIDL).

What Are Other Key Terms and Conditions of PPP Loans Under the CARES Act?

 

  • Currently, the interest rates of PPP loans are 1 percent, with a maturity date of 2 years.
  • Interest rates of PPP loans must not exceed 4 percent.
  • No personal guarantees or collateral are required to receive the loan.
  • The SBA has decided to defer payments on PPP loans for 6 months. Further, interest rates will accrue during this six-month deferment. Under the CARES Act, The SBA can require lenders to defer payments on PPP loans for at least 6 months, but not for more than one year.

Will My Loan Be Forgiven?

If a Business receives a PPP loan during the covered period, it may be able to receive loan forgiveness for costs and payments incurred during the 8-week period after the receiving the loan. PPP lenders may forgive loans for:

  • Payroll costs.
  • Interest payments on mortgage obligations.
  • Payments on rent obligations.
  • Utility payments.

Note that this amount does not include principal payments for mortgages. However, no more than 25 percent of the loan forgiveness amount can be attributable to non-payroll costs.

The amount that could otherwise be forgiven will be reduced in proportion to any reduction in employees during the 8-week period after receiving the loan. Specifically, the amount otherwise forgiven will be reduced by multiplying that amount by the number obtained by dividing the average number of employees employed during the 8-week period after the loan was issued, by one of the following options chosen by the borrower:

  • The average number of full-time employees employed per month from February 15, 2019 to June 30, 2019; or
  • The average number of full-time employees employed per month from January 1, 2020 to February 29 2020; or
  • In cases of seasonal employers, the average number of full-time employees employed from February 15, 2019 to June 30, 2019.

For example: If a business had an average number of 10 employees per month from January 1, 2020 to February 29, 2020, but only retained 5 employees during the 8-week period after receiving a PPP loan during the covered period, then 50% of the loan would be forgiven.

  • Employees earning more than $100,000.00 are not considered for this calculation.
  • If wages to employees are cut by 25 percent, then there is an additional reduction in the amount forgiven by the amount wages were cut to employees.

What Do I Need to Submit in Order to Receive A PPP Loan and Loan Forgiveness?

To receive loan forgiveness, businesses must submit SBA Form 2483, including all certifications on the application, and include the following documents to the lender servicing the PPP loan:

  • Payroll tax filings reported to the IRS.
  • State income, payroll, and unemployment insurance filings.
  • Documents, such as cancelled checks, payment receipts, transcripts of accounts, or other documents verifying payments on mortgage obligations, lease obligations, or utility payments.
  • A certification, stating that: 1) the documents presented are true and correct, and 2)

the amount requested for forgiveness was used to keep employees, make interest payments on mortgage obligations, make payments on rent obligations, or make utility payments.

  • Any additional documents as required by the SBA

The lender must also submit SBA Form 2485 electronically, and maintain forms and maintain the submitted forms and documentation in its files. After receiving the application, a lender has 60 days to decide whether to forgive the loan amount. Once forgiven, these loans will be considered cancelled debt, and will be excluded from a borrower’s taxable gross income.

If you need help determining if your loan can be forgiven, or if you need help in preparing loan forgiveness packages, feel free to reach out to an attorney at Wolcott Rivers Gates for guidance. The SBA will issue further guidance on loan forgiveness to lenders within thirty days from Friday, March 27 2020, and we will continue to monitor the situation to scope out potential legal issues and opportunities for our clients. As our crisis unfolds, feel free to contact Wolcott Rivers Gates for up to date guidance on the CARES Act and the law’s response to COVID-19.