Introduction
Due to the economic uncertainty and disruption caused by the COVID-19 outbreak, Congress recently passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act or the Act) to provide relief for small businesses that are undergoing extreme challenges. The Act as passed includes relief to small businesses across the country in the form of a $349 billion Paycheck Protection Program (Program) for Small Business Administration (SBA)-eligible businesses and expands the SBA’s current loan program and eligibility requirements in order for businesses to pay employees and keep them on payroll during the current COVID-19 crisis. The Act provides for loan forgiveness, with certain limits, detailed later in this article. On April 2, 2020, and April 4, 2020, the SBA issued unusual interim final rules (the Rules) providing further detail regarding the Program, which take effect immediately upon publication in the Federal Register. However, SBA may revise the Rules based on public comments submitted within 30 days after publication. As long as they meet the requirements set forth under “Who is eligible to apply for those loans?” below, healthcare providers and other health-related organizations are eligible to receive this funding.
Where can you apply for a loan under the Program?
There are numerous lenders that already participate in the SBA’s lending programs. The Act provides that the authority to make loans under the Program can be extended to additional lenders. We suggest you contact your existing banking relationships or other local bank or credit union to see if they are already approved.
When Is the application deadline?
Applicants are eligible to apply for loans under the Program until June 30, 2020. We recommend applying for a loan as soon as possible so that proceeds can be used at the earliest opportunity. Loans under the Program are first come, first served.
Who Is eligible to apply for these loans?
Any business concern, nonprofit organization, veterans organization or tribal business concern that (i) was operating on February 15, 2020; (ii) had employees for whom it paid salaries and payroll taxes, or paid independent contractors; (iii) has 500 or fewer employees (with exceptions noted below) whose principal place of residence is the United States; (iv) has a physical place of business in the United States and transacts business in the United States; and (v) has been substantially impacted by COVID-19. Although the eligibility criteria include a business with “paid independent contractors,” payments to independent contractors are not included in payroll cost calculations. See “Are amounts paid to independent contractors included in determining payroll costs and the amount you can borrow?” below.
What does that mean?
It means if your business meets the criteria described in (i)–(v) above, you are eligible to apply regardless of the form your business takes—whether it’s a C corporation, an S corporation, an LLC, a nonprofit or a franchisee. Sole proprietorships, independent contractors and certain self-employed individuals are also eligible to apply. You must also submit such payroll documentation as is necessary to establish eligibility such as payroll processor records, payroll tax filings or Form 1099-MISC, or income and expenses from a sole proprietorship. For borrowers that do not have any such documentation, the borrower must provide other supporting documentation, such as bank records, sufficient to demonstrate the qualifying payroll amount.
Are providers that access money through the CARES Act $100 billion provider fund also eligible for SBA CARES Act funding?
Yes. As long as the funding doesn’t cover duplicative expenses, providers who seek funding from the $100 billion provider fund also can apply for SBA funding. Support from the Public Health and Social Services Emergency Fund (PHSSEF) is available for expenses or losses that have not been reimbursed from other sources or that other sources are not obligated to reimburse. Therefore, providers may apply for funding from multiple sources; if a provider receives funding from multiple sources, however, it must repay the funding it received from the PHSSEF.
Department of Health & Human Services guidance on the PHSSEF is forthcoming; the CARES Act gives the Secretary some discretion to define eligible providers for purposes of the Fund, and forthcoming guidance also is likely to provide additional clarity for providers seeking federal funding through multiple CARES Act opportunities.
Do part-time and other non-full-time employees count in the 500-employee determination?
Yes. Part-time employees and employees working on a basis other than full time or part time (which we expect includes employees who work irregular schedules or do on-call or project-based work) are counted in the 500-employee determination. However, the Act doesn’t yet make clear whether this includes only U.S.-based service providers.
What other nuances surround the 500-employee determination?
The SBA eligibility rules apply an “affiliation” test for determining whether the 500-employee threshold is exceeded. This means a borrower’s “affiliates” are considered when determining eligibility for an SBA loan. The affiliation analysis can be very complex. For example, the affiliation test may group together portfolio companies of a venture capital or private equity firm in determining whether a borrower has more than 500 employees. Perhaps most significantly, physician practices and certain other providers often have management services agreements with other organizations to provide administrative and other services to the provider entity, and these types of management arrangements can give rise to affiliation concerns. So physician practices and other providers and their management services organizations have to analyze not only whether they are affiliated as a result of common ownership but also whether the management services arrangements give rise to affiliation requirements and may affect the eligibility of both organizations.
It is currently unclear whether and how this aggregation test may be imposed—such an aggregation could have the unfortunate effect of excluding many startup and emerging growth companies from relief under the Act. It was widely expected that the SBA would issue guidance regarding the existing affiliation rules, which would make a number of these entities potentially eligible under the Program. However, the Rules did not provide such guidance and largely summarized the existing affiliation rules without material change. The Act does however specifically waive these affiliation rules for certain types of borrowers, including businesses that receive financing through the Small Business Investment Company (SBIC) program. In addition, the Rules waive these affiliation rules for qualified faith-based organizations as defined under the SBA regulations, where the application of the affiliation rules would substantially burden those organizations’ religious exercise.
Importantly, the SBA has stated that a lender is not required to make an independent determination regarding the applicability of the affiliation rules described above and that it is the responsibility of the borrower to determine which, if any, entities are its affiliates and to determine the employee headcount of the borrower and its affiliates. While we advise borrowers to consult with counsel before determining whether a business that potentially has affiliates is eligible for a loan under the Program, the SBA’s guide on size and affiliation rules can be accessed here.
Does the lender itself or the SBA determine whether you are eligible to apply for a loan under the Program?
The SBA has delegated authority to lenders themselves to make eligibility determinations without needing to go through SBA channels. These determinations are to be based only on the eligibility criteria above, and ability to repay should not be considered an eligibility criterion.
Does eligibility mean you will be approved and/or approved quickly for the loan?
Not necessarily. There is still an approval process that is undertaken by the lender, as well as specific paperwork which must be filed. For a standard Section 7(a) loan, the SBA turnaround time is five to ten days, although it is reasonable to assume the typical approval process timeline may be shortened due to the needs addressed by the Act. As noted above, the Rules specifically state that the loans will be on a “first come, first served” basis. Borrowers will be required to make good faith certification that (i) they have been affected by COVID-19; (ii) they will use funds to retain workers and maintain payroll or make mortgage payments, lease payments, utility payments and interest payments on other debt obligations; and (iii) they do not have another application pending for the same type of loan and have not received the same type of loan. However, a borrower does not need to show it is unable to obtain credit elsewhere, which is usually a factor in obtaining SBA loans.
The borrower must submit SBA Form 2483 (Paycheck Protection Program Application Form) and payroll documentation, as described above. The lender must submit SBA Form 2484 (Paycheck Protection Program Lender’s Application for 7(a) Loan Guaranty) electronically in accordance with program requirements and maintain the forms and supporting documentation in its files.
How much can an applicant borrow under the Program?
The maximum amount any eligible business may borrow is the lesser of (i) the business’s average total monthly payroll costs during the one-year period prior to the loan being made multiplied by 2.5, plus the outstanding amount of an SBA disaster loan that was made between January 31, 2020, and the date that such loan is financed with a loan under the Act; or (ii) $10 million.
- If a business was not operating during the period beginning February 15, 2019, through June 30, 2019, then the calculation of average total monthly payroll cost should be for the period beginning January 1, 2020, through February 29, 2020. So, if the loan is made April 1, 2020, the one-year period will be calculated for the period April 1, 2019, to March 31, 2020.
- For seasonal businesses (businesses that hire employees seasonally, such as for summer or winter only), the business’s average total monthly payment for payroll costs will be measured using a 12-week period beginning February 15, 2019, or the period beginning March 1, 2019, and ending June 30, 2019, whichever the seasonal employer chooses.
The following methodology, which is one of the methodologies contained in the Act, will be most useful for many applicants.
Step 1: Aggregate payroll costs (defined in detail below) from the last 12 months for employees whose principal place of residence is the United States.
Step 2: Subtract any compensation paid to an employee in excess of an annual salary of $100,000 and/or any amounts paid to an independent contractor or sole proprietor in excess of $100,000 per year.
Step 3: Calculate average monthly payroll costs (divide the amount from Step 2 by 12).
Step 4: Multiply the average monthly payroll costs from Step 3 by 2.5.
Step 5: Add the outstanding amount of an Economic Injury Disaster Loan (EIDL) made between January 31, 2020, and April 3, 2020, less the amount of any “advance” under an EIDL COVID-19 loan (because it does not have to be repaid).
What is included in determining payroll costs?
- Under the Act, payroll costs include:
- Salaries, wages, tips, commissions
- Payments for vacations, family, medical or sick leave
- Group health benefit insurance premiums
- Retirement benefits and separation payments
- State and local taxes assessed on the compensation of employees
- For an independent contractor or sole proprietor, wage, commissions, income, or net earnings from self-employment or similar compensation
- Payroll costs, however, do not include compensation paid to an individual in excess of an annual salary of $100,000, as prorated for the relevant period, or to individuals with a principal residence outside the United States.
- Therefore, only the salary of an individual employee in excess of an annual salary of $100,000 as prorated for the period is excluded.
Are amounts paid to independent contractors included in determining payroll costs and the amount you can borrow?
No. Independent contractors have the ability to apply for a Program loan on their own, so they do not count for purposes of a borrower’s Program loan calculation.
Is there anything that is expressly excluded from the definition of payroll costs?
Yes. The Act expressly excludes the following:
- Any compensation of an employee whose principal place of residence is outside of the United States
- The compensation of an individual employee in excess of an annual salary of $100,000, prorated as necessary
- Federal employment taxes imposed or withheld between February 15, 2020, and June 30, 2020, including the employee’s and employer’s share of FICA (Federal Insurance Contributions Act) and Railroad Retirement Act taxes, and income taxes required to be withheld from employees
- Qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act (Public Law 116–127)
Are there any other nuances with respect to amounts that may be borrowed?
Yes. If you received an SBA EIDL loan from January 31, 2020, through April 3, 2020, you can apply for a Program loan. If your EIDL loan was not used for payroll costs, it does not affect your eligibility for a Program loan. If your EIDL loan was used for payroll costs, your Program loan must be used to refinance your EIDL loan. Proceeds from any advance of up to $10,000 on the EIDL loan will be deducted from the loan forgiveness amount on the Program loan. However, at least 75% of the Program loan proceeds shall be used for payroll costs. For purposes of determining the percentage of use of proceeds for payroll costs, the amount of any EIDL refinanced will be included.
What are the general terms of a loan made under the Program?
The specific terms of a loan made under the Program are negotiated between a borrower and a lender. However, the Act sets forth certain limits and requirements for such loans, including the following:
- Interest rate of 1%.
- You will not have to make any payments for six months following the date of disbursement of the loan. However, interest will continue to accrue on PPP loans during this six-month deferment.
- Loan term of two years.
- Government guarantee of the loan at 100%.
- Collateral requirements and personal guarantees are waived.
- No SBA application fees.
- The loan may be eligible for partial or total forgiveness (see below).
- No prepayment penalties.
How can a borrower use a loan made under the Program?
In addition to existing allowable uses under the SBA’s Section 7(a) loan program, the proceeds of a paycheck protection loan may be used for payroll costs (see discussion above); mortgage interest payments (but not mortgage prepayments or principal payments); rent, utilities and group healthcare benefits; and interest on any other debt obligations incurred prior to February 15, 2020. At least 75% of the Program loan proceeds must be used for payroll costs.
The loan can also be used to refinance an earlier SBA loan made during the period beginning on January 31, 2020. Although there is generally no personal liability for a borrower of a paycheck protection loan, a borrower can be held liable if there is an unauthorized use of proceeds.
While a business may use the proceeds of a paycheck protection loan for any of the purposes set forth above, amounts used for purposes other than those set forth below (under “Does the Act provide for forgiveness of any part of the amount borrowed under the Program?”) will not be eligible for forgiveness.
I received an EIDL. Can I still get a paycheck protection loan?
If you received an SBA EIDL loan from January 31, 2020, through April 3, 2020, you can apply for a Program loan. If your EIDL loan was not used for payroll costs, it does not affect your eligibility for a Program loan. If your EIDL loan was used for payroll costs, your Program loan must be used to refinance your EIDL loan. Proceeds from any advance of up to $10,000 on the EIDL loan will be deducted from the loan forgiveness amount on the Program loan. However, at least 75% of the Program loan proceeds must be used for payroll costs. For purposes of determining the percentage of use of proceeds for payroll costs, the amount of any EIDL refinanced will be included.
If an EIDL was made on or after January 31, 2020, the borrower can refinance the EIDL into a paycheck protection loan and receive loan forgiveness benefits on the refinanced amount. Portions of an EIDL that are not refinanced would remain an EIDL.
Did the Act change requirements of the EIDL program?
The Act also waives (i) rules relating to personal guarantees on EIDLs up to $200,000, (ii) the requirement that a borrower has been in business for at least one year and (iii) the requirement that a borrower is unable to obtain credit elsewhere.
Note: The EIDL application link at the SBA can be accessed at https://covid19relief.sba.gov/#/.
Does the Act provide for forgiveness of any part of the amount borrowed under the Program?
Yes. The Act provides for loan forgiveness as follows:
- The amount of loan forgiveness can be up to the full principal amount of the loan and any accrued interest. That is, the borrower will not be responsible for any loan payment if the borrower uses all of the loan proceeds for forgivable purposes described below and employee and compensation levels are maintained.
- Borrowers will be eligible to apply for forgiveness on a loan under the Program in an amount equal to the amount spent by the borrower during the eight-week period after the origination date of the loan on payroll costs (see discussion above); interest (not principal) payments on any mortgage existing prior to February 15, 2020; payment of rent on any lease in force prior to February 15, 2020; and payment on any utility for which service began before February 15, 2020. However, not more than 25% of the loan forgiveness amount may be attributable to nonpayroll costs.
- As stated above, while loan proceeds can be for other permissible business-related expenses, such as inventory, the portion of the loan used for such purposes will not be forgiven.
- The amount forgiven may not exceed the principal amount of the loan. If the full principal of the loan is forgiven, the borrower is not responsible for the interest accrued in the eight-week covered period. The remainder of the loan that is not forgiven will operate according to the loan terms agreed upon between the borrower and the lender.
- Any sick leave or family or medical leave pay for which the borrower receives loss forgiveness is not eligible for tax credits under the Families First Coronavirus Response Act (FFCRA).
Are there limits to the amount of the loan that can be forgiven?
Yes. There are limits to the amount of the loan that can be forgiven.
- The amount of loan forgiveness will be reduced in proportion to any reduction in the number of employees that the borrower employed during the eight-week period as compared to the number of persons the borrower employed during either (a) the period beginning February 15, 2019, through June 30, 2019, or (b) the period beginning January 1, 2020, through February 29, 2020.
- The amount forgiven is also reduced by the reduction in pay of any employee in excess of 25% of the employee’s compensation during the most recent quarter during which the employee was employed before the eight-week period. Reductions in pay for employees with an annualized salary of more than $100,000 are not considered in this calculation.
- Note that there may be implications for loan forgiveness for borrowers who have fired or furloughed employees, or who are considering firing or furloughing employees, and who are considering rehiring these employees. These are fact-specific questions that should be discussed with an attorney to determine the proper course of action for a borrower to maximize the eight-week measurement period for loan forgiveness.
- Borrowers that rehire workers previously laid off from February 15, 2020, through April 26, 2020, or that make up for wage reductions during such period by June 30, 2020, will not be penalized for having reduced staffing or payroll at the beginning of the period. For full details regarding rehiring fired or furloughed employees and the loan forgiveness calculation, see Congressional Action in Response to the Global Pandemic—Lending Programs and Relief Provisions Under the CARES Act.
- The loan forgiveness program has positive implications for business owners, as the portion of the loan amount forgiven will not be taxed as income.
Is loan forgiveness automatic?
No. It must be specifically applied for and approved by the lender.
To apply for loan forgiveness, the borrower must submit to the lender that is servicing the loan an application that includes (i) payroll tax filings and state filings and payment receipts for mortgage, rent and utilities; (ii) a breakdown of how the loan amount was utilized among the areas of employee retention, mortgage, rent and utilities; and (iii) certification from an officer that the amount for which forgiveness is requested was used to retain employees, make payments on covered rent obligations or make covered utility payments.
Lenders will decide whether to accept a borrower’s application for forgiveness within 60 days of receipt.
Documentation of the foregoing will likely be critical to loan forgiveness, and careful attention should be paid to specifically track uses of loan proceeds.
Please note that the Act also addresses other lending programs available in response to the global pandemic. These include:
- Those smaller EIDLs referenced above. EIDLs are loans in an amount up to $2 million that the SBA will also provide to businesses with not more than 500 employees, agricultural cooperatives and private nonprofit organizations that have suffered substantial economic damage as a result of COVID-19 for the period of January 31, 2020, to December 31, 2020.
- The Act also allows businesses that self-certify as eligible to apply for an EIDL advance, in an amount up to $10,000, to be provided within three days after receipt of the application. Advances can be applied to any allowable purpose under the Program. Note: If an applicant that receives an advance is subsequently denied an EIDL, the advance is forgiven. If an applicant receives such an advance and received a loan under the Program, the advance amount is reduced from the loan forgiveness for a loan under the Program. Also note: These advances appear relatively simple to apply for, and Congress has designated $10 billion for these immediate grants.