UNDERSTANDING THE STIMULUS SBA LOAN AND FORGIVENESS PROGRAM (“PAYCHECK PROTECTION PROGRAM”)
As part of the recently passed stimulus legislation, the CARES Act (the Coronavirus Aid, Relief, and Economic Security Act), $349 billion is earmarked to assist small businesses with loans. The loans will be administered through the SBA 7(a) loan program via qualified commercial lenders and pertain to companies that have seen business decline as a result of COVID-19. The objective is to help businesses ease payroll/overhead burden and bring back workers who may have already been laid off. The program can be retroactive to February 15, 2020, to help bring workers who may have already been laid off back onto payroll. The loan covers the period from February 15 to June 30, 2020.
Under the drafted regulations small businesses are considered to be businesses that meet the following key criteria:
- Less than 500 employees
- Must have been in business as of 2/15/2020 and had employees or independent contractors who received salary
*Note: special consideration is given to franchisers and the hospitality sector (restaurants and hotels) where employees are counted by physical location. Therefore, a restaurant with 600 employees over five restaurant properties would qualify for these loans. With this change, a number of larger independent restaurants and franchise owners would be eligible to participate in the SBA loan program.
How is the Maximum Loan Calculated?
The maximum loan is calculated based on the following calculation.
If you were in business during 2/15/2019 – 6/30/2019:
- Average total monthly payments for payroll costs incurred during the 1 year period before the date the loan was made (except that if applicant is seasonal employer, then average total monthly payments for payroll for the 12 week period of 2/15/2019 or 3/1/2019 and ending 6/30/2019)
- Multiplied by 2.5 plus
- The outstanding amount of a loan already made by 1/31/2020 from a previous program under the “Business Loans Program Account” SBA title V Act of 2020 or $10,000,000
If not in business 2/15/2019 ending 6/30/2019:
- Average total monthly payments for payroll costs incurred 1/1/2020 – 2/29/2020
- Multiplied by 2.5 plus
- The outstanding amount of the loan under previous “Business Loans Program Account” SBA title V program made by 1/31/2020 or $10,000,000
*Note the payroll costs are not allowed to include salaries for any person that gets paid $100K or more or any payments for salaries already covered by the tax credit under the Families First Coronavirus response act.
What Expenses Qualify?
These loans are permitted to be used to cover the following costs:
- Payroll costs
- Costs related to continuation of group health benefits and sick leave
- Payment of cash tip or equivalent
- Payment for vacation, parental, family, medical, or sick leave
- Allowance for dismissal or separation
- Retirement benefit
- State local taxes assessed on employee compensation
- Employee salaries, commissions and similar compensation paid to independent contractors
- Interest on mortgage obligations – not to include any prepayment of mortgage principal
- Interest on any debt occurred before covered period
How is the Conversion To Grants/Debt forgiveness Considered?
If the loans are used only to fund the above detailed costs during an eight week period after the origination date of the loan, they would be available for conversion to grant/forgiveness. These loans are also considered non-recourse and guarantees have been waived. Any amounts not used for permitted costs are considered guaranteed by the owners of the businesses and paid back within 10 years using an interest rate of not more than 4% (repayment deferred 6-12 months). These costs will need to be verified by sending documentation to the lender during the period of the loan.
Companies would need to prove they needed the loans and used them as intended when they apply for debt forgiveness. Applications require certification of good faith of the business that the funds will be used for permitted costs to keep workers employed. The certification of good faith should also include the loan is being requested due to the uncertainty of the current economic conditions and the loan is needed to support ongoing operations of the business and support the ability to maintain mortgage, lease and utility payments in addition to payroll. Acknowledgement should be provided that no other loan application is in process or has been granted. Any forgiveness of the loan would potentially be reduced due to a reduction in workforces compared to the prior year along with the reduction in pay of any employee beyond 25% of their prior year compensation. Borrowers can re-hire workers previously laid off and not be penalized by this exception. Forgiveness of debt is typically income for tax purposes, but in this case waived and not taxable to recipients.
Will the Paperwork be as Extensive Other SBA Programs?
It has been indicated that a significant portion of the SBA’s standard paperwork requirements/prerequisites would be waived in order to expedite the funds toward small businesses. Borrowers making a good-faith statement are presumed eligible for the loans. Prior requirements such as “collateral” and “credit elsewhere” are also anticipated to be waived. Fees would also be waived under the covered period (the period beginning on February 15, 2020 and ending on June 30, 2020).
What About Previous Loans?
Loans made under previous “Business Loans Program Account” SBA title V program can be refinanced into a loan under this new program. The formula under the Maximum Loan Calculation integrates this.
Anthros recommends eligible employers gather the following information:
- 2019 Payroll including the last 12 months of payroll
- 2019 Employees. 1099’s for 2019 employees and independent contractors that would otherwise be an employee of your business. (Note: Do NOT include 1099’s for services)
- Healthcare costs. All health insurance premiums paid by the business owner under a group health plan.
- Retirement. Your company retirement plan funding paid for by the company.
Anthros will continue to provide up-to-date information to clients as the government finalizes the details and processes for implementing these programs. For additional COVID-19 resources for employers and details about the Families First Coronavirus Response Act (FFCRA), please visit the Anthros blog.