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The Paycheck Protection Loan Program
The program streamlines the Small Business Administration (SBA) loan process for businesses affected by the COVID-19 outbreak.
The loan is non-recourse except to the extent that the borrower uses the proceeds for a purpose not authorized under the act and no personal guaranty is required. The typical SBA requirement that the borrower show that it is unable to obtain credit elsewhere is waived, and there are no collateral requirements. (If you were not in business prior to February 15, 2020, please contact us as you may not be eligible.)
While, generally speaking, the borrower cannot have more than 500 employees during the covered period, there are exceptions, so please check with your counsel to see if you are eligible. The extent to which the employees of related entities will be aggregated for purposes of determining eligibility under the program, and whether the determination will be consistent with the Families First Coronavirus Response Act (the Families First Act) which also contains a 500 employee limit is unclear. The covered period is the 8-week period beginning on the date of origination of the Paycheck Protection Loan.
The maximum amount that can be borrowed under the Paycheck Protection Loan is the lesser of (i) $10 million, or (ii) the average total monthly payroll costs during the 1-year period before loan origination, multiplied by 2.5. The “payroll costs” means payment of compensation to employees including (i) salary, wage, commission or similar compensation; (ii) vacation, parental, family, medical or sick leave; (iii) dismissal or other severance payments; (iv) group health benefits, including insurance premiums; (v) payment of retirement benefits; and (vi) state or local taxes on compensation. Payroll costs do not include compensation of an employee in excess of an annual salary of $100,000 or taxes imposed under IRS Chapters 21, 22 or 24.
The interest on the loan will not exceed 4% per annum, and no payments of principal or interest will be due for a period of at least 6 months, but no more than 1 year. To the extent that there is a remaining loan balance after the loan forgiveness (discussed below), the maximum loan term is 10 years.
The loan can be used for (i) payroll costs; (ii) health care benefits and insurance premiums: (iii) sick, family and medical leave payments; (iv) employee salaries and commissions; (v) interest on any mortgage obligation; (vi) rent under a lease agreement; (vii) utilities; and (viii) interest on any other debt incurred before the covered period.
To qualify for the Paycheck Protection Loan, a borrower must make a good faith certification to the SBA and the SBA lender showing that (i) the uncertainty of current economic conditions makes the loan necessary to support ongoing operations; (ii) the funds will be used to retain workers, maintain payroll or pay existing debt (including mortgage interest), leases or utilities; (iii) the applicant does not have any pending loan applications under the Program for the same or duplicative amounts or purposes; and (iv) during the period between February 15, 2020 and December 31, 2020, the recipient has not received duplicative amounts. The borrower is not prohibited from also obtaining an SBA administered Economic Injury Disaster Loan, although the loan must be for a different purpose and you should contact counsel before doing so.
All sums obtained pursuant to the Paycheck Protection Loan Program and utilized as set forth in the program are subject to forgiveness. The SBA will create an application process for forgiveness by which the borrower can request forgiveness and confirm permissible use of loan proceeds (“loan forgiveness”).
The amount eligible for loan forgiveness can be reduced (but not increased) by multiplying the loan amount by the quotient obtained by dividing (A) the average number of full time equivalent employees per month during the covered period by (B) (at the borrower’s election) either (i) the average number of full-time equivalent employees during the period of February 15, 2019 through June 30, 2019, or (ii) the average number of full-time equivalent employees per month employed from January 1, 2020 through February 29, 2020, determined for each pay period in any month. However, if a reduction in employees has occurred between February 15 and 30 days after enactment of the CARES Act, and the employer eliminates the reduction by June 30, 2020, the amount of the loan eligible for loan forgiveness is not reduced.
The loan forgiveness can also be reduced by the amount of reduction in total salaries or wages of any employee in excess of 25% compared to the most recent quarter before the covered period (not including any employee earning, during any pay period during 2019, an annualized salary of over $100,000). Again, if a reduction in salary or wages has occurred between February 15 and 30 days after enactment of the CARES Act, and the employer eliminates the reduction by June 30, 2020, the amount of the loan forgiveness is not reduced.
Loan forgiveness is not includable in the calculation of gross income. Therefore, it is not taxable to the borrower as would be the case in most instances of loan forgiveness.
The SBA does not presently have applications for the Paycheck Protection Loan, nor has it issued any implementation regulations, to our knowledge, as the CARES Act (including the PPL program) has only just become law on March 27, 2020. We anticipate that it will take at least a week for the SBA to provide its guidance.
Payroll Taxes Holiday
The payroll tax provisions mentioned in our earlier alert are also part of the final CARES Act bill. Employers can defer payment of the employer share of the social security tax that they otherwise are responsible for paying with respect to their employees (the 6.2% tax on employee wages). The deferred employment tax must be paid over the following two years, with half of the amount required to be paid by December 31, 2021 and the other half by December 31, 2022. The underwriting provisions of the Paycheck Protection Loan Program allow your prior payment of these taxes to be considered in calculating the amount of the loan, but you are not obligated to pay them even if you get the loan except as set forth above.
Employee Retention Credit for Employers Subject to Closure Due to COVID-19
The bill provides a refundable payroll tax credit for 50% of wages paid by employers to employees during the COVID-19 crisis. The credit is available to employers (i) whose operations were fully or partially suspended, due to a COVID-19-related shut-down order, or (ii) whose gross receipts declined by more than 50% when compared to the same quarter in the prior year.
The credit is based on qualified wages paid to the employees. For employers with greater than 100 full-time employees, qualified wages are wages paid to employees when they are not providing services due to the COVID-19-related circumstances described above. For eligible employers with 100 or fewer full-time employees, all employee wages qualify for the credit, whether the employer is open for business or subject to a shut-down order. The credit is provided for the first $10,000 of compensation, including health benefits, paid to an eligible employee. The credit is provided for wages paid or incurred from March 13, 2020 through December 31, 2020.
The payroll tax credit under the bill is separate and distinct from the payroll tax credit available to employers who pay for leaves under the Family First Act, which is designed to immediately and fully reimburse them, dollar-for-dollar, for the cost of providing coronavirus-related leave to their employees. It is not clear at this point how these payroll tax credits will be applied relative to each other.
Treasury Loans Under the Coronavirus Economic Stabilization Act
The bill also allocates $500 billion for loans to be made by or through the U.S. Treasury in an attempt to stabilize certain industries particularly impacted by the COVID-19 crisis (namely passenger airlines, cargo carriers and related businesses), as well as national security companies and other companies that may need to tap into additional financing. $454 billion of the allocation is set for business loans, which will be made through a program established by the Treasury to make direct loans, guaranteed loans and/or investments.
Unlike the payroll loans, the Treasury loans are not forgivable, and will have certain terms intended to restrict stock buybacks, restrict dividends and cap compensation for a certain period of time during, and sometimes following, the term of the loan. In addition, because the Treasury loan program is largely a new development (unlike the payroll loan program, which pivots off of the established SBA program), the Secretary of the Treasury will have to implement rules and regulations shortly following the passing of the bill (which rules and regulations should come no later than ten days from implementation). In addition, the bill provides for an oversight committee in Congress as well as an Inspector General to oversee the implementation of the program and the loans, guaranties and other investments to be made by the Treasury. The loans are also deemed indebtedness, thereby creating a tax impact should the loan ever be forgiven, modified or similar.
Because additional guidance is required from the Secretary, greater specifications on the terms and conditions of the Treasury loans should soon be forthcoming.
Jeffer Mangels Butler & Mitchell LLP is a full-service law firm committed to providing clients with outstanding results. Our corporate lawyers serve numerous middle-market companies, large publicly traded corporations and emerging entrepreneurial businesses with a full range of financing, transactional and operational counsel, as well as in all aspects of mergers and acquisitions.
This update is provided to our clients, business associates and friends for informational purposes only. Legal advice should be based on your specific situation and provided by a qualified attorney.
