CARES Act Paycheck Protection Program¹

Updated April 7, 2020

Eligibility

• Borrower Size: Borrower must be: (a) a business in operation as of February 15, 2020 with no more than 500 U.S. resident employees (or a greater number of employees as is used in the “small business concern”² test otherwise applicable to the borrower) or (b) a “small business concern” as of March 27, 2020³.
• Employees: Includes each full-time, part-time, and temp employees.
• Affiliation: The broad “affiliation” rules traditionally used for SBA loans (which require potential borrowers to aggregate the employees of affiliated companies) apply to the 500-employee test. The affiliation rules would generally require the affiliates of any 50% or greater shareholder, or any minority shareholder who has control over certain operational decisions (e.g. via veto rights), to be aggregated with the borrower for purposes of determining eligibility.
• Restaurants/Lodging: As applied to accommodation and food services businesses (NAICS code 72⁴):
  • the “affiliation” rules are waived for businesses with no more than 500 employees; and
  • the 500-employee limitation applies on a per physical location basis.
• Franchises: The “affiliation” rules are waived for franchises on the SBA Franchise Directory.

Lenders

Traditional SBA lenders plus other approved FDIC-insured lenders and credit unions.  Loans under the program do not need separate SBA approval.

Timing

Loans must be originated by June 30, 2020.

Use Of Proceeds

• Proceeds of a loan may only be used for:
  • gross “payroll costs”⁵ (excluding portion of cash compensation to an employee in excess of $100,000 per year),
  • costs related to the continuation of group benefits,
  • mortgage interest payments,
  • rent,
  • utilities, and
  • interest on any other debt obligations incurred prior to Feb. 15, 2020.
• EIDL (disaster) loans originated prior to April 3, 2020 can be refinanced under this program.
• 75% of loan proceeds must be used to cover “payroll costs.” Criminal penalties apply if borrower applies the funds to unauthorized uses.

Maximum Loan Size

The lesser of:

• $10 million, and
• 250% of average monthly “payroll costs” for last 12 months or the 2019 calendar year, at the borrower’s election⁶ (plus the amount of any EIDL loan refinanced).

Loan Deferral

Lenders required to provide complete payment deferment relief, including payment of principal, interest, and fees, for 6 months.

Loan Forgiveness

• Principal Forgiveness: The portion of the loan principal used to fund the following costs incurred and payments made during the 8-week “covered period” following the date of loan origination are eligible for complete forgiveness:
  
  • “payroll costs” (including lost tips),
  • mortgage interest payments,
  • rental payments, and
  • utility payments.
• Limitations on Non-Payroll Costs: No more than 25% of forgiven amount may be for non-payroll costs.
• Reduction in Forgiveness: The amount of principal eligible for forgiveness is reduced for borrowers that lay off employees and/or reduce wages as follows:
  
  • Headcount Reduction: Amount subject to forgiveness is subject to proportionate reduction based on reduction in full-time equivalent employees (“FTEEs”) comparing (i) average FTEEs during 8-week “covered period” to (ii) average FTEEs during one of the following periods (a) Feb. 15, 2019 to June 30, 2019 or (b) Jan. 1, 2020 to Feb. 29, 2020 (borrower elects applicable period⁷).
  • Wage Reduction: Amount subject to forgiveness is subject to a dollar-for-dollar reduction based on reduction in total wages (during 8-week “covered period” compared to most recent full quarter prior to such covered period) of any employee (excluding employees who received more than $100,000 in annualized wages in any single 2019 pay period), but only to the extent such reduction exceeds 25%.
• Re-Hires: FTEE and wage reductions that occur from Feb. 15, 2020 through Apr. 26, 2020 will be disregarded for purposes of reducing the forgiveness amount to the extent that the borrower has completely eliminated such FTEE or wage reductions prior to June 30, 2020.
• Documentation: To obtain forgiveness, the borrower must submit an application to lender with supporting documentation verifying (i) number of FTEEs and pay rates during the applicable periods and (ii) payments for covered mortgage interest payments, rent, and utilities.
• Additional Guidance: The SBA will be providing additional guidance on forgiveness.
• Taxable Income Exclusion: Amounts forgiven are excluded from borrower’s taxable income.

Maturity

Maturity of 2 years (to the extent any balance remains after forgiveness).

Interest Rate

1.0%.

Prepayment

No penalty for prepayment.

Collateral

No collateral required.

Guarantees

No personal guarantee required.

Fees

No SBA fees (agent and lender fees to be paid by SBA).

Other Credit

Borrower is not required to demonstrate that it is unable to obtain credit elsewhere.

Employee Retention Credit

Borrowers who receive a PPP loan are not eligible for the Employee Retention Credit under the CARES Act.

Payroll Tax Deferral

Borrowers who receive loan forgiveness for a PPP loan are not eligible to take advantage of payroll tax deferral provisions of the CARES Act.

Footnotes

1. The Paycheck Protection Program was added by Section 1102 of the CARES Act as Subsection (36) of Section 7(a) of the Small Business Act. Interim Final Rules were released by the SBA on April 3, 2020. We expect the SBA to provide additional guidance on a number of issues, which could modify the information provided herein. The information provided herein is intended to be a summary only and reference should be made to the language of the actual statutes, regulations, and SBA guidance.
2. The “small business concern” test is based on industry-specific maximum annual revenue and/or employees. The test applies both to the individual company and its affiliates (using a very broad affiliate test). 
3. The traditional “small business concern” test requires the borrower to satisfy either the applicable size standard based on the borrower’s NAICS industry code or the “alternative size standard” (maximum tangible net worth of no more than $15m and average net after-tax income of not more than $5m over the past 2 years).
4. A complete list of industries classified under NAICS code 72 can be found here: https://www.naics.com/six-digit-naics/?code=72
5. “Payroll costs” include: (a) employee compensation, including (i) salary, wage, (ii) tips, (iii) vacation, parental, family medical or sick leave, (iv) allowance for dismissal or separation, (v) payments for the maintenance of health care benefits (including insurance premiums), (vi) payment of retirement benefits, and (vii) payroll taxes, and (b) if the borrower is a sole proprietor or independent contractor, income in an amount not more than $100,000 per year (as prorated for the covered period); but specifically exclude (x) payments to an individual employee exceeding $100,000 (as prorated for the covered period) and any payments to independent contractors, (y) compensation to employees whose principal residence is outside of the US and (z) qualified sick and family leave for which a credit is allowed under the Families First Coronavirus Response Act. April 6, 2020 guidance from the SBA clarified that payroll tax withholding for Federal income tax and FICA paid by the employer or employee should not reduce payroll costs.
6. For “seasonal employers,” average monthly payroll costs are based on period commencing Feb. 15, 2019 and ending June 30, 2019.
7. “Seasonal employers” must use the period between Feb. 15, 2019 and June 30, 2019.