The Paycheck Protection Program Under The CARES Act

The President has signed, a $2.2 trillion coronavirus spending bill that establishes a $349 billion lending program for small businesses. Under the Coronavirus Aid Relief and Economic Security (CARES) Act’s Paycheck Protection Program (PPP), the loans are available to companies with not more than 500 employees and apply to 501(c)(3) nonprofits, sole-proprietors, independent contractors, and other self-employed individuals.

Small businesses that take out these loans can get some or all of their loans forgiven. Generally speaking, as long as employers continue paying employees at normal levels during the eight weeks following the origination of the loan, then the amount they spent on payroll costs (excluding costs for any compensation above $100,000 annually), mortgage interest, rent payments and utility payments can be combined and that portion of the loan will be forgiven. Also, a borrower will not be penalized by a reduction in the amount forgiven for termination of an employee made between February 15, 2020 and April 26, 2020, as long as the employee is rehired by June 30, 2020. The maximum loan amount under the Payroll Protection Program is equal to 2.5 times the borrower’s average monthly payroll costs, up to a $10m cap.

Below are excerpts from an article by the NJCPA, providing some insight at to how this program will work.

The $377 billion small business relief aid in the $2 trillion economic recovery package signed into law today by President Trump is “an impressive amount of money” said Neil Bradley, the U.S. Chamber of Commerce’s executive vice president and chief policy officer, on a webinar sponsored jointly by Inc. magazine and the U.S. Chamber of Commerce that aired today ahead of the signing.

The Coronavirus Aid Relief and Economic Security (CARES) Act’s Paycheck Protection Program provides loans to maintain employees on staff and pay other expenses. Loans can also be forgiven if companies meet certain criteria. The Senate passed the stimulus package on March 25, and the House passed it today.

As Bradley noted, the process to obtain these loans is very streamlined. “A lot of the programmatic things that folks who are familiar with going through to get a government loan are waived. So, for example, the requirement that you first try to get a loan elsewhere before turning to the government program, that’s completely waived in this legislation.” He also said the requirements to provide a personal guarantee or collateral to secure the loan are waived. Similarly, borrowers only need to have “good faith” attestations that the business needs the money as a result of an economic impact because of the coronavirus. 

“It’s really more of a loan that converts to a grant,” he explained. “They are really going to expand the availability of lenders to offer this product. It starts with the seven to eight preferred lenders that are already in this system. They are automatically qualified to begin providing this support. The Treasury Department in conjunction with the Small Business Administration (SBA) are authorized to designate additional lenders to provide these loans. They will take a very broad approach. They will try to make as many lenders as humanly possible in the financial system available to make these loans.” He adds, “this money is going to be getting out the door to qualified small businesses very quickly.”

Sole proprietors, independent contractors and other self-employed individuals are eligible for the loans. Businesses with more than one physical location that employ no more than 500 employees per physical location in certain industries are also eligible. It also includes “501(c)(3) nonprofits, 501(c)(19) veteran’s organizations or Tribal business concern described in section 31(b)(2)(C) of the Small Business Act with not more than 500 employees, or the applicable size standard for the industry as provided by SBA, if higher.”

Also, below I have provided highlights from an article from Forbes.

$2.2 Trillion CARES Act Provides A Lifeline To Small Businesses, Rohit Arora, Senior Contributor.

The small business-focused Paycheck Protection Program (PPP) of the CARES Act increases the government guarantee of loans to 100 percent through Dec. 31, 2020, for SBA 7(a) loans. The loans are available to companies with not more than 500 employees and those which have below a gross annual receipts threshold in certain industries. Under the legislation, 501(c)(3) nonprofits, sole-proprietors, independent contractors, and other self-employed individuals are eligible for loans.

Another notable element of the economic stimulus is that it establishes the maximum 7(a) loan amount to $10 million through Dec. 31, 2020 and provides a formula by which the loan amount is tied to payroll costs incurred by the business (in order to determine the size of the loan). Allowable uses include payroll (employee salaries, paid sick or medical leave), insurance premiums, and mortgage/rent, and utility payments.

Under the CARES Act, lenders are able to make determinations on borrower eligibility and creditworthiness of small businesses without going through all of SBA’s normal channels. It also provides that same authority to lenders who join the program and make these loans.

Since determining repayment ability simply is not possible during this crisis, lenders are to determine whether a business was operational on Feb. 15, 2020, and had employees to whom it paid salaries and payroll taxes at that time.

Borrowers also are required to use the funds to retain workers and maintain payroll, lease, and utility payments; and are not receiving duplicative funds for the same uses from another SBA program.

A borrower cannot receive a PPP loan in addition to an Economic Injury Disaster Loan (EIDL) through the SBA for the same purposes. However, a borrower who has an EIDL loan unrelated to COVID-19 may apply for a PPP loan (with an option to refinance the EIDL loan into the PPP loan). The emergency EIDL grant award of up to $10,000 would be subtracted from the amount forgiven under the Paycheck Protection Program.

We are closely monitoring the developments related to the COVID-19 pandemic and economic stimulus acts and will try to keep you informed as new information becomes available.