The Keeping American Workers Paid and Employed Act, under the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) provides for $350 billion in SBA loans to small businesses. Much of these loans will be forgiven such that taxpayers will not be required to repay the loan provided the loan is used for qualified purposes. This is a summary of of the CARES Act as it relates to these loans.
Title I of the CARES Act deals with certain Small Business Administration (“SBA”) programs. Much of this summary is excerpted from the Senate Staff summary of the CARES Act.  This summary is focused on issues related to potential borrowers and does not provide a summary on provisions related to lenders.
Title I of the CARES Act addresses the following SBA Programs:
Economic Injury Disaster Loan Program. The Economic Injury Disaster Loans (“EIDL”) are part of an SBA loan program to provide working capital to small businesses after a disaster. EIDLs will provide small businesses with working capital loans of up to $2 million to help overcome the temporary loss of revenue they are experiencing from a disaster.
SBA Express Bridge Loan Program. The SBA Express Loans (“Express Loans”) allows small businesses who currently have a business relationship with an SBA Express Lender to access up to $25,000 with less paperwork. These loans can provide vital economic support to small businesses to help overcome the temporary loss of revenue they are experiencing and can be a term loan or used to bridge the gap while applying for a direct EIDL. If used as a bridge, the Express Loan will be repaid in full or in part with proceeds from the EIDL.
Paycheck Protection Loan Program (PPP). Section 1102 of the CARES Act creates a new loan program under Section 7(a) of Small Business Act (the “Paycheck Protection Loans”). An eligible borrower can receive a Paycheck Protection Loan for up to $10 million to fund certain payroll costs, mortgage payments, rent payments and utility payments as long at the borrowers maintain their payroll.
TITLE I—KEEPING AMERICAN WORKERS PAID AND EMPLOYED ACT
Section 1102. Paycheck Protection Program and SBA Express Loans
Provides the authority for the Small Business Administration (“SBA”) to make loans under the Paycheck Protection Program through authorized lenders.
Paycheck Protection Program (PPP)
SBA Guarantee – Increases the government guarantee for Paycheck Protection Loans to 100% through December 31, 2020.
Eligible Borrowers – The following entities/individuals are eligible to receive a Paycheck Protection Loan:
- Small business concerns as defined by the SBA:
- Business concerns, non-profit (501(c)(3)) organizations, veteran’s (501(c)(19)) organizations or tribal business concerns that do not have more than 500 employees, or the applicable size standard for the industry (NAICS) as provided by SBA, if higher;
- Sole-proprietors, independent contractors, and other self-employed individuals;
- Businesses with more than one physical location that employs no more than 500 employees per physical location in industries under an NAICS Code starting with 72 (Accommodation and Food Services).
SBA Affiliation Rules
- Waives affiliation rules for businesses in industries under an NAICS Code starting with 72,  franchises that are approved on the SBA’s Franchise Directory, and small businesses that receive financing through the Small Business Investment Company (SBIC) program.
- Applies current SBA affiliation rules to eligible nonprofits and veteran’s organizations.
Covered Period – Defines the “covered period” for the Paycheck Protection Program as beginning on February 15, 2020 and ending on June 30, 2020.
Loan Amount – During the “covered period” the maximum loan amount for a Paycheck Protection Loan is the lesser of: (a) $10 million; or (b) the amount determined by a formula that is based on the loan applicant’s Payroll Costs.  Payroll costs are the sum of: (a) the product obtained by multiplying (i) the average total monthly payments by the applicant for payroll costs incurred during the 1-year period before the date on which the loan is made, except that, in the case of an applicant that is seasonal employer, the average total monthly payments for payroll shall be for the 12-month period beginning February 15, 2019, or at the election of the eligible recipient, March 1, 2019, and ending June 30, 2019; by (ii) 2.5; and (b) the outstanding amount of a loan under subsection (b)(2) that was made during the period beginning on January 31, 2020 and ending on the date on which covered loans are made available to be refinanced under the covered loan; or the Act provides for other allowable loan calculations for businesses not operating during the 12 month period beginning February 15, 2019.
Allowable Uses of Loan Proceeds – In addition to the allowable uses for loan proceeds for loans under the SBA’s Section 7(a) program, a borrower may use the loan proceeds during the “covered period” from a Paycheck Protection Loan for Payroll Costs (such as employee salaries, healthcare benefits, paid sick or medical leave), interest payments on mortgages, interest payments on debt obligations entered into prior to the “covered period”, rent, and utility payments.
Lender Considerations on Eligibility – To determine the eligibility of an applicant for a Paycheck Protection Loan, requires lenders to, instead of determining repayment ability, which is not possible during this crisis, to determine whether a business was operational on February 15, 2020, and had employees for whom it paid salaries and payroll taxes, or it paid independent contractors.
Limitations Related to EIDL – Provides a limitation on a borrower from receiving a Paycheck Protection Loan and an EIDL for the same purpose. However, it allows a borrower who has an EIDL unrelated to COVID-19 to apply for a Paycheck Protection Loan, with an option to refinance that loan into the Paycheck Protection Loan. In addition, any emergency grant from an EIDL (grants are available up to $10,000) would be subtracted from any amount forgiven under the Paycheck Protection Program under the loan forgiveness provisions.
Borrower Certification – Requires eligible borrowers to make a good faith certification that: (a) the loan is necessary due to the uncertainty of current economic conditions caused by COVID-19; (b) loan proceeds will be used to retain workers and maintain payroll, and make lease, mortgage and utility payments; and (c) are not receiving duplicative funds for the same uses from another SBA program.
Waiver of Fees – During the “covered period”, SBA is waiving both borrower and lender fees for participation in the Paycheck Protection Program.
Waiver of Unavailability of Credit Requirement – During the “covered period”, SBA is waiving the no credit availability elsewhere test for small business concerns applying for a Payment Protection Loan.
Collateral and Personal Guarantees – During the “covered period”, SBA is waiving both the collateral and personal guarantee requirements for Paycheck Protection Loans.
Loan Term, Interest Rate, Deferment and Prepayment –
- Any portion of a Paycheck Protection Loan that is not forgiven (See Section 1106 below) will have a maturity of not more than 10 years, and the guarantee for that portion of the loan will remain intact.
- Maximum interest rate is 4%.
- During the “covered period”, lenders are required to defer all payments (principal, interest and fees) on Paycheck Protection Loans for at least six months and not more than a year. The SBA will disseminate guidance to lenders on this deferment process within 30 days.
- Lenders cannot charge prepayment penalties for Paycheck Protection Loans.
SBA Express Loans
Increases the maximum loan for an Express Loan from $350,000 to $1 million through December 31, 2020.
Section 1106. Loan Forgiveness under the Paycheck Protection Program
How to calculate Loan Forgiveness Amount – Establishes that the borrower who received a Paycheck Protection Loan are eligible for loan forgiveness equal to the amount spent by the borrower during an 8-week period after the origination date of the loan on: (a) Payroll Costs,; (b) interest payments on any mortgage incurred prior to February 15, 2020 (excluding any prepayments); (c) rent payments on any lease in force prior to February 15, 2020; and (d) payment on any utilities (including internet) for which service began before February 15, 2020 (collectively, the “Eligible Loan Forgiveness Amount”). Eligible payroll costs do not include compensation above $100,000 (annualized) in wages.
Maximum Forgiveness Amount – Amounts forgiven may not exceed the principal amount of the Paycheck Protection Loan.
Reductions in Loan Forgiveness Amount –
The Eligible Forgiveness Amount can be reduced for several reasons.
First, the Eligible Loan Forgiveness Amount is reduced if the borrower lowers the number of Full Time Equivalents (FTE’s) below a base period or reduces by more than 25% the total salary or wage of any employee.
Borrower Verification – Borrowers are required to verify through documentation to lenders their payments during the 8-week period that qualify for loan forgiveness. The borrower is required to submit documentation and a certification from a representative of the eligible recipient authorized to make such certifications must accompany the documentation. NOTE – Randazzo, Eschenburg & Associaties, PLLC is eligible to make the certification for your company.
Loan Forgiveness Not Taxable Income – Canceled indebtedness through the loan forgiveness program will not be treated as taxable income for federal income taxes.
Section 1110. Emergency EIDL Grants
Expansion of Eligible Participants – Expands eligibility during the covered period for access to Economic Injury Disaster Loans (EIDL) to include: (a) any business (including small tribal business concerns, cooperatives, and ESOPs) with fewer than 500 employees; and (b) any individual operating as a sole proprietor or an independent contractor. Under the EIDL program small business concerns, private non-profit organizations and small agricultural cooperatives were eligible participants. The “covered period” under the EIDL program is January 31, 2020 to December 31, 2020, which is slightly different from the covered period under the PPP.  During the “covered period”, the SBA will waive any personal guarantee on advances and loans below $200,000, the requirement that an applicant needs to have been in business for the 1-year period before the disaster, and the unavailability of credit elsewhere requirement.
If you have questions, your REA contact is awaiting your call or contact Gregory J. Randazzo, CPA at g.randazzo@reacpas.com. In the meantime, we’ll keep our COVID-19 business insights here.
Gregory J. Randazzo, CPA, Managing Member