The COVID-19 Pandemic has devastated businesses in America. In response, the federal government passed the CARES Act, which has many different components. We’re providing this article to help manufacturers understand what help is available and how to get it.
CARES Act Provisions
The Coronavirus Aid, Relief, and Economic Security (CARES) Act includes several provisions offering relief to small businesses. The law appropriates $349 billion for the new Paycheck Protection Program (PPP), which provides federally backed loans up to a maximum of $10 million to qualifying small businesses and nonprofits to assist with payroll and certain other operating costs. THIS IS DIFFERENT THAN THE EMERGENCY INJURY DISASTER LOANS, and can be applied for directly with a preferred SBA lender.
The CARES Act also lifts some restrictions for other SBA programs, such as 7(a) and Emergency Injury Disaster Loans, and makes it easier and more attractive for lenders to participate. The CARES Act includes provisions delaying, deferring, or outright forgiving a variety of loans to small businesses. In this article, we’re specifically looking at the Payroll Protection Program, (PPP).
Frequently asked questions that should help you:
Paycheck Protection Program
What is PPP?
The Paycheck Protection Program is designed to help employers maintain their payroll during the COVID-19 emergency. The Paycheck Protection Program is an expansion of the SBA’s 7(a) loan program that authorizes financial institutions to issue loans to qualifying small businesses on the terms set forth in the CARES Act. The federal government will fully guarantee these loans. The Act directs the SBA to issue necessary regulations within 15 days of the law’s enactment.
Do I qualify for PPP?
Under the CARES Act, an eligible entity includes any business that already qualifies as a “small business concern” under existing SBA rules, nonprofit 501(c)(3), veterans organization 501(c)(19), or Tribal business concern that employs not more than the greater of:
- 500 employees;
- if applicable, the size standards in number of employees established by the Administration for their industry; or
- if the business has more than 1 physical location and is assigned a NAICS code beginning with 72 (i.e., is in the accommodation and food services industry) at the time of loan disbursement, 500 employees per physical location of the business.
Can I qualify for PPP if I’m a sole proprietor, an independent contractor, or self-employed?
What are the eligibility requirements for non-profit organizations to apply for Paycheck Protection Program loans?
Nonprofit organizations that are tax-exempt under sections 501(c)(3) and 501(a) of the Internal Revenue Code (IRC) are eligible for SBA loans under the Payroll Protection Program to the same extent as small businesses, provided they otherwise satisfy the requirements of the Paycheck Protection Program. This means that a wide variety of “charitable” nonprofit organizations will be eligible for this funding, including, for example, certain educational institutions, research institutes, foundations, social service organizations, houses of worship, and hospitals. Veterans organizations that are tax-exempt under section 501(c)(19) will be similarly eligible. Nonprofit organizations that are not tax-exempt under sections 501(c)(3) or 501(c)(19) of the IRC are not eligible; those include trade associations, advocacy organizations, unions, and social clubs.
What businesses qualify as “small business concerns”?
In general, the SBA defines “small” based on norms applicable to the industry in which a business primarily operates, together with one of two metrics: (1) the average number of employees over the past 12 months or (2) the average annual receipts over the past three years. A business that qualifies under the size standards applicable to its primary industry is eligible to apply for the Paycheck Protection Program. The SBA offers a Size Standards Tool that can help determine whether a business qualifies as small.
As of what date does the SBA determine the size status of a business applying to participate in PPP?
Under the CARES Act, the size status is determined as of the date the SBA accepts the application for processing. However, the language in the CARES Act suggests that, for the Paycheck Protection Program, the operative date is when the loan is disbursed.
PPP Loan Terms
What are the loan terms for the Paycheck Protection Program?
The maximum interest rate that a lender may charge is 4% per annum. Payments of principal, interest, and fees by the borrower are deferred for at least 6 months and up to 1 year. Both borrower and lender fees ordinarily payable to the SBA are waived for PPP loans that originate between February 15 and June 30, 2020. If, after amounts of the loan have been forgiven pursuant to the CARES Act, there is a balance on the Paycheck Protection Program loan, the loan will have a maximum maturity of 10 years from the date on which the borrower applies for loan forgiveness under section 1106 of the CARES Act.
The maximum loan amount that may be borrowed through June 30, 2020, will be the lesser of:
- The sum of (i) 2.5 multiplied by the average total monthly payments for payroll costs incurred during the 1-year period before the date on which the loan is made and (ii) the outstanding amount of an Economic Injury Disaster Loan (EIDL) made between January 31, 2020, and the date on which Paycheck Protection Program loans are made available to be refinanced under the Paycheck Protection Program loan (if applicable);
- If requested by an eligible recipient that was not in business from February 15 through June 30, 2019, then the sum of (i) 2.5 multiplied by the average total monthly payments by the applicant for payroll costs incurred January 1 to February 29, 2020, and (ii) the outstanding amount of an EIDL that was made between January 31, 2020, and the date on which Paycheck Protection Program loans are made available to be refinanced under the Paycheck Protection Program loan (if applicable); or
- $10 million.
Payroll costs include:
- Compensation to employees that is a salary, wage, commission or similar compensation; cash tips; vacation, parental, family, medical, or sick leave; allowance for dismissal or separation; group health care benefits; retirement benefits; and state or local taxes on the compensation of employees; and
- Compensation to sole proprietors, or independent contractors that is an amount not more than $100,000 in 1 year (prorated for February 15 – June 30, 2020).
However, payroll does not include compensation of an employee in excess of $100,000/year (prorated for February 15 – June 30, 2020), federal income taxes, compensation for employees who principally reside outside the U.S., and qualified sick and family leave wages for which a borrower receives a credit under 7001 and 7003 of the Families First Coronavirus Response Act.
How can I use the loan?
In addition to the allowable uses for 7(a) loans, Paycheck Protection Program loans can be used for:
- payroll costs
- mortgage interest payments
- interest on debt obligations incurred before February 15, 2020.
What certifications must a borrower make in order to obtain a loan under the Paycheck Protection Program?
Entities that meet those conditions must also be prepared to certify that:
- The loan request is necessary to support the concern’s ongoing operations due to the uncertain economic conditions
- The funds will be used to retain workers and maintain payroll or make mortgage, lease, and utility payments
- The business does not have an application pending for another SBA loan for the same purpose
- Between February 15, 2020, and December 31, 2020, the business has not already received an SBA loan for the same purpose
How long is a loan payment deferred?
All lenders will be required to defer payments on covered loans for at least 6 months and no more than 1 year, including payments of principal, interest, and fees. The SBA will issue guidance to lenders within 30 days of enactment of the CARES Act (by April 27, 2020) on the deferment process.
Are personal guarantees or collateral required?
The CARES Act waives the borrower requirement for any personal guarantees or collateral for any loans made pursuant to PPP.
Can a loan granted under the PPP be forgiven?
Yes. The principal amount of a loan may be forgiven in an amount equal to payroll costs, interest on mortgage obligations incurred before February 15, 2020, rent payments for leases in force before February 15, 2020, and utility payments for service which began before February 15, 2020, during the 8-week period following the origination of the loan (the “covered period”). However, the loan principal may be reduced in the event the business has laid off employees or decreased their compensation during the covered period.
How do reductions in staffing affect the amount eligible for forgiveness?
The amount forgiven is reduced by multiplying the loan forgiveness amount (calculated as described above) by a fraction:
- the numerator of which is the average number of full-time employee equivalents (FTEs) per month employed during the covered period, and
- the denominator of which is the average number of FTEs per month employed from February 15, 2019, through June 30, 2019, or January 1, 2020, through February 29, 2020, with the employer electing which period to use.
If you reduce the number of FTEs between February 15, 2020, and 30 days after the enactment of the CARES Act (April 27, 2020) as compared to the number of FTEs on February 15, 2020, you may rehire the same number of FTEs not later than June 30, 2020, and thereby avoid application of the reduction to the amount of your loan forgiveness by reason of a reduction in the number of your employees during the covered period.
Do reductions in compensation affect the amount eligible for forgiveness?
The amount forgiven is reduced by the amount of any reduction during the covered period in an employee’s total salary or wages in excess of 25% of the total salary or wages paid to the employee during the most recent full quarter in which the employee was employed before the covered period.
What do I need to do to have all or part of my loan forgiven?
You must apply to your lender. The application must include:
- Documentation (including payroll filings) verifying the number of FTEs you employ and employed during the relevant periods and the compensation that you paid them, and documentation (including cancelled checks, payment receipts, transcript of accounts, etc.) verifying payments of mortgage obligations, rent, and utilities
- A certification representing that the documentation is true and correct and that the amount of forgiveness requested was used for retaining employees and paying mortgage interest, rent, and utilities during the covered period;
- any additional information that the SBA Administrator requires.
When do I find out if my loan is forgiven?
The lender will issue a decision on your loan forgiveness within 60 days of receiving the complete application.
Is the loan forgiveness treated as gross income for federal tax purposes?
No, the amount of the loan forgiveness is not included in gross income for federal tax purposes.
What if my loan has a remaining balance after application of forgiveness?
The SBA will continue to guarantee the remaining balance. The loan will have a maximum maturity of 10 years from the date on which the borrower applies for loan forgiveness under section 1106 of the CARES Act.
What is the process to apply for a loan through the Paycheck Protection Program?
A small business should apply for a loan directly from an approved 7(a) lender that has opted to participate in the Paycheck Protection Program. Within 15 days of the enactment of the CARES Act, the SBA Administrator will be issuing guidance and regulations implementing the Paycheck Protection Program.
Need Help Applying?
Accelerated Manufacturing Brokers, Inc. can assist you in applying to a preferred, national SBA lender. Reach out to us by emailing email@example.com or call 908-387-1000.