CARES Act Update: Application for Paycheck Protection Program Loans And Guidelines Available Here

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We recently blogged about the Paycheck Protection Program (“PPP”), and the tax free gifts it can provide to careful employers. On March 31, 2020, the U.S. Treasury Department published the Application Form for PPP loans, available here. The Application is short – just two pages.

The Application requires some basic information about the business applying for the PPP loan, including certifications that the loan is necessary to address economic uncertainty in the current circumstances, and that the loan proceeds will be used for payroll, rent and utility payments. The Application invites the borrower to insert its own calculation of its average monthly payroll, which should be calculated pursuant to the limitations noted in our prior blog post, including: (1) for most businesses, calculating payroll for the one-year period prior to the date on which the loan is made; and (2) excluding costs over $100,000 on an annualized basis for each employee. Borrowers should calculate payroll cost to include salaries, tips, payment for vacation or sick leave, health insurance premiums, retirement benefits and state and local payroll taxes. The Application notes that documentation of payroll costs will be required, but is not specific about what kind of documentation will be required or when it must be submitted.

The Treasury Department has also just published an Information Sheet for PPP Borrowers with important information, available here. The guidelines indicate that only 25 percent of the amount forgiven may consist of costs other than payroll costs (e.g., rent, utilities, etc.), which is a limitation not expressly stated in the CARES Act. Other notable points from the Treasury Department’s Information Sheet are:
• Loan applications for businesses and sole proprietorships will be available beginning April 3, 2020
• Loan applications for independent contractors and self-employed individuals will be available beginning April 10, 2020
• All payments will be deferred for 6 months
• The interest rate for PPP loans will be a fixed rate of 0.50%, and will accrue during the deferral period of the loan
• The loan term is two years.

[Despite the Treasury’s published Information Sheet, on April 2, 2020 U.S. Treasury Secretary Steven Mnuchin announced that the interest rate would be changed to 1% to help small banks. Further changes may arise, so check all loan terms carefully.]

We expect that more specific guidance about the PPP loan application process will be forthcoming over the next few days. Conkle, Kremer & Engel attorneys stay updated on legal events affecting businesses trying to manage the impact of the Coronavirus pandemic. We will update our blog as more developments occur.

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U.S. CARES Act: PPP Loans Provide Gifts for Careful Employers

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The U.S. Coronavirus Aid, Relief, and Economic Security (“CARES”) Act passed on March 27, 2020, and signed into law by President Trump on March 28, 2020, aims to address some of the economic impact of the COVID-19 crisis. The entire act is a $2 Trillion economic stimulus package – the largest ever. Aside from the well-publicized $1,200 per person payments, the CARES Act provides hundreds of billions of dollars for large and small businesses, state and local governments and public health.

Rather than try to summarize the entire CARES Act, we’d like to focus on what many of our clients should pay attention to first: The $349 billion loan fund for small businesses called the “Paycheck Protection Program” (“PPP”) administered by the Small Business Administration. The PPP is designed to be a huge tax-free gift to employers, provided that the employers are careful about how they use it.

The basic points for PPP loans under the CARES Act are:

  1. PPP loans are available to businesses with fewer than 500 employees, as well as 501(c)(3) non-profits, sole-proprietors, independent contractors and other self-employed individuals, so long as the business was operational and had paid employees on February 15, 2020. Some businesses with multiple locations, each having less than 500 employees, may also qualify (but generally, this is limited to hospitality businesses with a primary NAICS code starting with “72” – Accommodation and Food Service).
  2. Borrowers must make a good faith certification that the PPP loan is necessary due to the uncertainty of the current economic conditions caused by COVID-19.
  3. PPP loans will be issued through regular lenders who already handle SBA loans, in addition to new lenders electing to provide PPP loans. Your regular bank is likely to offer PPP loans.
  4. The amount of the PPP loan is at the borrower’s choice, but the maximum amount of a PPP loan is 2.5 times the business’ average monthly payroll expenses for the past year, up to $10 million.
  5. Most of the usual “red tape” for SBA loans has been waived, including determinations of borrower eligibility and creditworthiness. PPP loans are non-recourse, and require no personal guarantees. There are no fees, a maximum interest rate of 4%, and all payments are deferred for 6-12 months.
  6. PPP loans can be used for:
    a. “Payroll Costs” including salaries, vacation and sick leave, health insurance, retirement benefits, and state and local payroll taxes. But “Payroll Costs” does not include compensation for an employee’s annual salary in excess of $100,000. There is some uncertainty about this limitation, but indications are that for highly compensated individuals the first $100,000 in salary can be paid with PPP loan funds.
    b. Rent.
    c. Utilities.
    d. Interest on any debt obligations incurred before February 15, 2020.
  7. The total amount of the PPP loan funds that are used for these approved categories within the eight-week period following loan origination would be forgiven, and the forgiven amount is not taxable. In effect, the PPP loan turns into a tax free grant to the extent that it was used for the approved purposes.
  8. Businesses may elect to use PPP loan funds for other purposes not within the approved categories, but funds spent for “non-approved” uses will not be forgiven and the loan must be repaid with interest.
  9. There is an additional important condition that the PPP borrower must maintain the same number of full time employees, and cannot reduce salaries more than 25%, through June 2020. Otherwise portions of the PPP loan may not be forgiven. If the borrower terminated employees or made salary reductions greater than 25% between February 15, 2020 and April 26, 2020, as long as the employer hires back the same number of employees and restores salaries to sufficient levels by June 30, 2020, the PPP loan funds used for approved purposes will still be forgiven.
  10. One further cautionary note is that borrowers receiving a PPP loan are not be eligible for several of the other tax credits, refunds or deferrals available under the CARES Act, so consulting a tax professional about the value of those benefits to particular businesses would be advisable.

The PPP loan portion of the CARES Act is plainly designed to stem the layoffs and furloughs that have been rampant in the wake of the economic seizure that has been imposed by federal, state and local governments’ “stay at home” guidelines and orders intended to stem the COVID-19 outbreak. This can benefit both employees and employers who need to adapt their businesses to the unsettled conditions in which we find ourselves.

Business owners – from sole proprietors to employers of 499 employees (and some with more) should explore very seriously, very quickly, the virtual giveaway that the PPP loan program represents. If taken, PPP loans demand some care in documenting use of funds to assure compliance with the terms required to be granted forgiveness of the loan and receive the tax-free gift from the U.S. government.

Conkle, Kremer & Engel attorneys stay attuned to legal developments and the opportunities they create for our business clients. The CARES Act is a big opportunity that should be carefully considered and acted upon promptly.

June 18, 2020 Update: PPP funds remain undistributed, and PPP Loan Applications are currently due by June 30, 2020. See our updated blog posts concerning further developments in the PPP program:

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