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THE CARES ACT PAYCHECK PROTECTION PROGRAM

The Coronavirus Aid, Relief, and Economic Security (CARES) Act Paycheck Protection Program will likely be one of the more popular programs included in the federal stimulus bill that was just signed into law. Congress wants to help small business employers maintain high employment by offering loans from Small Business Administration (SBA) lenders that can be used to meet payroll costs and other expenses of staying open for business.  One key provision of the Program allows loans to be forgiven if various conditions are met.

Eligible employers have two critical decisions to make in the days ahead. 

►First, they need to look quickly but carefully at the Program and make a business decision about whether the Program works for their business without the loan forgiveness.  If it does, they need to find a qualified SBA lender and begin the application process immediately

►Second, all employers – but especially those counting on loan forgiveness – need to understand the standards and requirements to qualify for loan forgiveness and consider those standards when making employment decisions, now and in the coming months. 

Following is a summary of the features of the program.

  1. Who is eligible for these loans? Eligible borrowers include
    • Businesses with fewer than 500 employees
    • Sole proprietors and independent contractors
    • 501(c)(3)(charity) and 501(c)(19)(veterans) nonprofit organizations
      • Other 501(c) organizations are excluded
  1. How much can you borrow?
    If you were IN business 2/15/19-6/30/19:  Up to 250% of your average monthly payroll costs during that time period.
    If you were NOT in business 2/15/19-6/30/19:  Up to 250% of your average monthly costs between 1/1/2020 and 2/29/2020.

In all cases, the maximum is $10 million. Loans of up to $1 million are available on an expedited basis. If you also took an Economic Injury Disaster Loan between February 15, 2020 and June 30, 2020, special rules apply.

  1. Who will be making these loans?

Loans will be available from all current approved SBA lenders through June 30, 2020. Applications must be obtained from and submitted to these banks, not the SBA. Personal guarantees and collateral security are not required, but borrowers will be required to provide documentation proving the eligible expenses. An entity is limited to one Paycheck Protection Program loan but can still apply for other SBA and other programs.

  1. What can the borrowed money be used for?
    • Payroll costs (defined below)
    • Payments for vacation, parental, family, medical, or sick leave, and related insurance premiums
    • Wages, salaries, commissions, or similar compensation
    • Rent
    • Mortgage interest payments (includes mortgages in personal property, but excludes prepayment of interest and payment of principal)
    • Utilities
    • Interest on any other debt incurred before the covered period
  1. What is included in “Payroll costs?”
    • Salaries, wages, commissions, cash tips, and similar compensation BUT CAPPED AT $100,000 per person
    • Payments for vacation, parental, family, medical, or sick leave
    • Payments “for dismissal or separation,” i.e., severance payment
    • Payments for group health care benefits including insurance premiums
    • Payments of any retirement benefits
    • State and local employment taxes
  2. What are the terms of the loan?
    • Two (2) year term
    • Interest rates are set by the lender, but cannot exceed 1%
    • Repayment is to be deferred for not more than one year
    • No prepayment penalty
    • There are no SBA loan fees, but there may be application fees imposed by individual lenders, which will be capped by SBA
  3. How is the loan forgiven?  First, SBA was given 30 days from the date of enactment in which to issue guidance and regulations concerning forgiveness, so further details will emerge in the weeks ahead.

    For now, the major features are these:

The default assumption is that the loan is to be fully forgiven to the extent the loan proceeds were spent on the items listed in Q. 4 above. Loan proceeds spent on other items must be repaid.

Forgiveness may be reduced for these two (2) reasons:

  1. Reduction in Number of Employees. Loan forgiveness will be reduced by a fraction that compares the average number of full-time equivalent employees per month during the “covered period” (the 8-week period beginning on the origination date of the loan) to the average number of full-time equivalent employees per month between either of (at borrower’s choice)

2/15/2019 and 6/30/2019, or 1/1/2020 and 2/29/2020.

  1. Reduction Salary and Wages. Loan forgiveness will be reduced (dollar for dollar) by the amount of any reduction in total salary or wages of any employee in excess of 25% of the total salary or wages of the employee during the most recent full quarter prior to the Covered Period. Employees paid more than $100,000 per year are not counted in this formula.

Forgiveness may be increased in these two (2) circumstances:

  1. Tipped Employees. An employer who increases wages paid to tipped employees may receive forgiveness for such additional wages.
  2. Rehires and Raises. Without getting into the details, the Program rewards employers for rehiring employees terminated after 2/15/2020, and for restoring wage or salary reductions imposed after 2/15/2020. The deadline for the rehiring or restoration is June 30, 2020.

Borrowers must apply to their lenders for forgiveness and demonstrate that they meet the requirements.  The lender is to make its decision within 60 days. The amount of loan forgiven will not be deemed taxable income to the borrower.

8. When must a borrower repay the unforgiven portion of the loan?  The law requires lenders to defer repayment of loans for not less than 6 months, and not more than 1 year from the end of the covered period, meaning June 30, 2020.

The application form can be found here.

The U.S. Treasury has prepared a Fact Sheet.  Click here.

You should consult with your legal and accounting professionals when considering applying for the Paycheck Protection Program.

This is not intended to be legal advice.  You should contact an attorney for advice regarding your specific situation.

Be sure to visit our Coronavirus Resource Page for more information.


Gary M. Schuster is partner at the firm and practices business, non-profit, and arts and entertainment law.  He can be reached at  866-303-9595 toll free or 845-764-9656 and by email.

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