DISCLAIMER: FOR INFORMATIONAL PURPOSES ONLY
Title 1 of the $2 trillion Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) is the “Keeping American Workers Paid and Employed Act” that authorizes $349 billion in forgivable small business interruption loans through the “Paycheck Protection Program” (the “PPP”). The CARES Act is largest ever economic stimulus package, which, by comparison, is far more than the $700 billion that Congress had originally authorized in 2008 under the Emergency Economic Stabilization Act to address the subprime mortgage crises. As the CARES Act itself is of considerable size at nearly 900 dense pages, the purpose of this note is to parse the legalese and explain in plain English the CARES Act’s mini bail-out for small businesses afforded under the PPP through effectively a grant.
While the CARES Act went into effect on March 27, 2020, small businesses cannot yet avail themselves to the portion of the PPP’s small business interruption loan program that actually forgives the loans because the Small Business Administration (the “SBA”), which is charged with administration of the lending program, has not yet promulgated guidelines for loan forgiveness. As the SBA is mandated to issue guidelines on the loan forgiveness application soon, small businesses would be well served to be in a position to immediately apply for the PPP’s small business interruption loans that are now available.
The goal of the PPP is to maintain the status quo of small businesses’ payrolls as approximately half of all U.S. employees work for small businesses. The PPP provides small businesses with eight (8) weeks of cash-flow assistance through low interest (i.e., capped at 4%), non-recourse loans (i.e., no personal guaranty and non-collateralized) that can be forgiven without negative tax implications that generally require canceled loans (i.e., discharged indebtedness) to be considered as taxable income. For small businesses, this is incredibly meaningful legislation because the PPP’s loan forgiveness program essentially operates a grant for small businesses that maintain payroll status quo between February 15, 2020 through June 30, 2020.
Set forth below are certain critical pieces of information for small businesses desirous of using the PPP’s program specifically to obtain loan forgiveness; this is the functional equivalent of a grant. In plain English, this is free money. Over the course of this week, by separate note, we will address other provisions of the PPP.
Ten Frequently Asked Questions About PPP Loan Forgiveness:
1. What is the time period the PPP covers?
The “covered period” is defined as the first eight weeks following date of the loan.
2. Who is eligible for PPP loan forgiveness?
- The basic requirement for eligibility is not more than 500 “employees,” which definition includes full-time, part-time or other basis;
- the business had to be in operation as of February 15, 2020; and
- the business had employees for whom the business paid salaries and payroll taxes; or paid independent contractors, as reported on Form 1099-MISC.
3. What “Payroll Costs” are subject to loan forgiveness?
- Salary, wage, commission, or similar compensation;
- payment of cash tip or equivalent;
- payroll costs, employee salaries, or similar compensation;
- rent (including rent under a lease agreement);
- payment for vacation, parental, family, medical or sick leave;
- allowance for dismissal or separation; payment requires for the provision of group health care benefits, including insurance premiums;
- payment of any retirement benefit;
- payment of interest on any mortgage obligation (which shall not include any prepayment of or payment of principal on a mortgage obligation);
- payment of State or local tax assessed on the compensation of employees; and
- interest on any other debt obligation that were incurred before February 15, 2020.
4. Do the PPP’s loans require personal guarantees or collateral?
- No personal guarantee is required; and
- no collateral is required.
5. What are the borrower requirements?
- A “good faith certification” that states that uncertainty of the current economic conditions makes necessary the loan request to support the ongoing operation of the business; and
- an acknowledgment that the funds will used to retain workers and maintain payroll or more mortgage payments, lease payments, and utility payments.
6. Is there an application fee?
There is no application fee for the loan.
7. What is the interest rate?
Capped at 4%.
8. What is the term?
Maximum maturity of 10 years.
9. What are the tax consequences?
The amount of the loan forgiven that is generally considered as gross income imputed to the borrower is excluded from gross income. No negative tax implications.
10. What documents must be submitted for the loan forgiveness program of the PPP?
The details are still being worked on.