CARES Act Expands Eligibility for SBA Loans

On March 25, 2020, Congress passed the Coronavirus Aid Relief and Economic Security (“CARES”) Act. Title I of CARES is entitled, “Keeping American Workers Paid and Employed Act” amends Section 7 of the Small Businesses Act (“SBA”) to include the Paycheck Protection Program. (NOTE: The Act includes provisions for self employed individuals and sole proprietors. This article focuses on the provisions that apply to small businesses.)

When Can Companies Apply for This Loan?

Loans under the Paycheck Protection Program are made during the “Covered Period” which is from February 12, 2020 through June 30, 2020.

Who Can Apply For This Loan?

In addition to the Small Business Concerns usually covered by the SBA, the CARES Act (“ACT”) expands eligibility to the following businesses, should certain eligibility requirements be met:

  • Nonprofits

  • Companies with less than 500 employees.

  • Businesses in the Food Services and Accommodations Sector, with more than one physical location, so long as there are no more than 500 employees per physical location. This includes individual franchise locations.

  • Sole Proprietors

When evaluating the eligibility of a borrower, Lenders MUST consider whether the borrower:

  • Was in Operation on February 15, 2020; and

  • Either

    • Had employees for whom the borrower paid salaries and payroll taxes; or

    • Paid independent contractors (Form 1099-MISC)

How Much Can Businesses Apply For?

The maximum amount of a loan depends on how long the entity has been operational:

Entities Operating for Over One Year

These entities may receive the lesser of:

  • $10 million; and

  • The sum of:

    • 2.5 times the average total monthly payroll payments incurred during the 1 year period before the date on which the loan was made and

    • The outstanding amount of an SBA Disaster loan that was made during the period beginning January 31, 2020.

Entities Not in Business From February 15, 2019 through June 30, 2019

Entities that were not in business from February 15, 2019 through June 30, 2019, may receive the lesser of:

  • $10 million; and

  • The sum of:

    • 2.5 the average total monthly payments by the applicant for payroll costs incurred during the period beginning January 1, 2020 and ending on February 29, 2020 and

    • The outstanding amount of an SBA Disaster loan that was made during the period beginning January 31, 2020.

What Are Allowable Uses for the Loan?

In addition the Allowable Uses already included in Section 7 of the SBA, recipients of the loan may use the proceeds for:

  • Payroll Costs

    • Includes: Salary, wage, commission, cash, tips, PTO, family leave, sick leave, allowance for dismissal or separation, health insurance premiums, payments for group health care benefits, payment of retirement benefits, payment of state or local tax assessed on employee compensation.

    • Does NOT include:

      • The compensation of an individual employee in excess of $100,000, as prorated for the covered period.

      • Taxes imposed under Chapters 21, 22 or 24 of the Internal Revenue Code.

      • Any compensation of an employee whose principal place of residence is outside of the United States.

      • Monies paid out as Qualified Sick Leave under the Families First Coronavirus Response Act, for which the employers receive a tax credit.

  • Costs related to paying health care benefits during paid sick, medical, family leave, and insurance premiums.

  • Employee salaries

  • Mortgage

  • Rent

  • Utilities

  • Interest on debt

What Do Borrowers Need to Certify?

An eligible recipient must make a good faith certification of the following:

  • The uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient;

  • Funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments;

  • The eligible recipient only has one application for a loan under the SBA; and

  • During the period of February 15, 2020 through December 31, 2020, the eligible recipient has not received any amounts under the SBA for the same purpose.

Interest Rate

The interest rate on the loan shall not exceed 4%.

Deferral

During the Covered Period (February 5, 2020 through June 30, 2020), the SBA will (1) consider all eligible recipients to be “impacted borrowers” and (2) require all lenders to provide complete pay deferment relief for not less than 6 months but not more than 1 year. Deferment includes principal, interest and fees.

Forgiveness

The loan is guaranteed by the SBA. A recipient is eligible for forgiveness for the payroll costs, mortgage payments, rent payments and utility payments during the Covered Period which is the first 8 weeks of the loan. (NOTE: The mortgage, rent and utilities can be forgiven if they were already incurred/in service as of February 15, 2020.). The amount forgiven cannot exceed the principal of the loan. As explained below, if there is a reduction in Full-Time Equivalent Employees and/or a reduction in Pay, the amount of forgiveness shall be reduced.

Forgiveness Amount Reduced by Workforce Reduction

  • The total amount of forgiveness (total payroll costs, covered rent, covered mortgage and covered utilities) shall be reduced by multiplying the maximum amount of forgiveness by:

    • The average number of Full-Time Equivalent Employees per month during the Covered Period divided by the average number of Full-Time Equivalent Employees per month during the period beginning February 15, 2019 and ending June 30, 2019.

    • The average number of Full-Time Equivalent Employees per month during the covered period by the average number of Full-Time Equivalent Employees per month during the period beginning January 1, 2020 and ending on February 29, 2020.

Forgiveness Amount Reduced by Reductions in Salary and Wages

  • The total amount of forgiveness (total payroll costs, covered rent, covered mortgage and covered utilities) shall be reduced by the total amount of reduction in salary or wages that is in excess of 25% of the total salary or wages of the employee during the most recent full quarter during which the employee was employed before the covered period. (This is for employees who made less than $100,000 in 2019.)

Reductions in Wages/Workforce from February 15, 2020 through 30 Day After Enactment

If an employer laid-off employees during the time period of February 15, 2020 through 30 days after the enactment of the Act, then that employer can receive the full Forgiveness Amount and not incur the penalties above, if by June 30, 2020 it does both:

  • Eliminate the Reduction of Full-Time Equivalent Employees. In other words, by June 30, 2020 they need to have the same number for Full-Time Equivalent Employees as they did prior to February 15, 2020.

  • Return the wages/salaries to what they were before February 15, 2020.

NEXT STEPS

The stimulus is expansive, and this article is just an overview of a section. Employers should seek advice of counsel when navigating this stimulus and other changes that are taking effect during this time.

Susie Cirilli