April 2, 2020
Updated April 10, 2020 to reflect updated guidance.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) became law and, among other things, expanded the Small Business Administration (“SBA”) 7(a) loan program to offer small business loans under the Paycheck Protection Program. A full explanation of these loans can be found here. This update intends to address a number of inquiries regarding the total loan availability and the loan forgiveness provisions of the Paycheck Protection Program Loans (“PPP Loans”).
Loan Availability
The CARES Act and PPP Loan Application will require the borrower to calculate its “Payroll Costs” in order to determine the amount of loan availability.
Payroll Costs are comprised of the following:
1. wages, commissions, salary, or similar compensation to an employee or independent contractor;
2. cash tip or equivalent;
3. vacation, parental, family, medical or sick leave;
4. allowance for dismissal or separation;
5. group health care benefits, including insurance premiums;
6. any retirement benefits; and
7. state or local tax assessed on the compensation of employees (such as unemployment insurance).
They do not include the following:
1. compensation of any individual employee or owner in excess of an annual salary of $100,000 as prorated for the period February 15 to June 30, 2020;
2. the employer’s share of federal payroll taxes (not the amounts imposed on an employee and required to be withheld by the employer), railroad retirement taxes, and income taxes;
3. any compensation of an employee whose principal place of residence is outside the U.S.;
4. any compensation to 1099 independent contractors;
5. any compensation to employees outside the US
6. qualified sick leave wages for which a credit is allowed under section 7001 of the Families First Coronavirus Response Act (“FFCRA”); or
7. qualified family leave wages for which a credit is allowed under section 7003 of the FFCRA. The FFCRA was passed on March 18, 2020.
On April 8, 2020, the SBA, in consultation with the U.S. Department of Treasury, issued additional guidance with respect to calculating payroll costs. Specifically, the guidance stated that “payroll costs are not reduced by taxes imposed on an employee and required to be withheld by the employer.” The only federal payroll taxes to be excluded from the calculation of payroll costs are the employer’s share of federal payroll taxes. The SBA and U.S. Department of Treasury guidance is available here.
After calculating the Payroll Costs, the borrower must determine its Average Monthly Payroll Costs. To do that, the borrower needs to evaluate whether (i) is a non-seasonal business; (ii) is a seasonal business; or (iii) it is a new business that was not operational in 2019.
For non-seasonable businesses, the borrower can calculate the Average Monthly Payroll Costs by taking the total monthly Payroll Costs for calendar year 2019, and divide that number by twelve (12).
For seasonal businesses, the borrower can calculate the Average Monthly Payroll Costs by taking the total monthly Payroll Costs per month beginning February 15, 2019 or March 1, 2019 (decided by the borrower) and ending June 30, 2019, and divide that number by 4.5 or 4 (depending on the more advantageous start date).
For businesses that were not operational in 2019, the borrower can calculate the Average Monthly Payroll Costs by taking the total monthly Payroll Costs from January and February 2020, and dividing that number by two (2).
Once the borrower has determined the appropriate Average Monthly Payroll Costs, the borrower shall multiply that number by the Multiplier, which is 2.5.
The loan availability, then, will be determined by the following formula:
Average Monthly Payroll Costs x 2.5 = Loan Availability.
Loan Forgiveness
Section 1106 of the CARES Act also allows for certain expenses to be converted from a loan to a grant from the federal government, under certain Loan Forgiveness provisions of the Act.
The amount of the loan that the borrower used for the following purposes in the first eight (8) weeks after origination of the loan will qualify for loan forgiveness:
(1) Payroll Costs (as defined above);
(2) interest on mortgage obligations so long as it was in place prior to February 15, 2020;
(3) rent payments, so long as the lease was in place prior to February 15, 2020;
(4) utility payments.
Non-payroll costs (rent, utilities, mortgage payments) will be capped at 25% of the loan amount for purposes of determining forgiveness (i.e. no more than 25% of the loan can be spent on non-payroll costs in in the first (8) weeks after receiving the loan).
The Act requires borrowers to maintain both the number of employees and salary expenses in order to fully qualify for forgiveness. Specifically, amounts to be forgiven can be reduced if the business either (i) reduces full time equivalent employees; or (ii) reduces salary.
Reduction of Employees
If the business reduces full time equivalent employees, the forgiveness will be reduced by the the numeric average of monthly full time equivalent employees for the eight (8) weeks following the making of the loan (“Post PPP Loan FTE”) divided by one of the following (“Pre PPP Loan FTE”):
(i) the average number of monthly full time equivalent employees from February 15, 2019 through June 30, 2019;
(ii) the average number of monthly full time equivalent employees from January 1, 2020 through February 29, 2020 (for new businesses);
(ii) the average number of monthly full time equivalent employees from February 15, 2019 through June 30, 2019 (for seasonal busineses).
Here is a simple example. If the loan forgiveness amount totals $100,000.00, and the Post PPP Loan FTE is 5, and the Pre PPP Loan FTE is 10, then the forgivable amount of the loan is only $50,000.00.
Reduction of Salary/Wages
If the business reduces salary/wages for any employee that did not make in excess of $100,000.00 by more than twenty five percent (25%) from the most recent quarter they were employed before the loan was originated, then the forgivable amount of the loan shall be reduced by the annualized wages.
Here is an example. If a business has $100,000.00 as the amount of the loan that qualifies for forgiveness, but cuts annual salary of its one (1) employee from $80,0000.00 per year to $40,000.00 per year, then the forgivable portion of the loan will be reduced from $100,000.00 to $80,000.00.
Reductions in employment or wages that occur during the period beginning on February 15, 2020, and ending 30 days after the enactment of the CARES Act (April 26, 2020) shall not reduce the amount of loan forgiveness if by June 30, 2020, the borrower eliminates the reduction in employees or reduction in wages.
Documentation Required for Loan Forgiveness
In order to qualify for loan forgiveness, a borrower must submit the following documentation to the lender:
(1) documentation verifying the number of full time equivalent employees on payroll and pay rates for the periods seeking forgiveness
(2) payroll tax filings reported to the Internal Revenue Service;
(3) State income, payroll, and unemployment insurance filings;
(4) documentation, including cancelled checks, payment receipts, transcripts of accounts, or other documents verifying payments on covered mortgage obligations, payments on covered lease obligations, and covered utility payments;
(5) a certification from a representative of the eligible recipient authorized to make such certifications that the documentation presented is true and correct; and the amount for which forgiveness is requested was used to retain employees, make interest payments on a covered mortgage obligation, make payments on a covered rent obligation, or make covered utility payments; and
(6) any other documentation the SBA determines necessary.
Upon collection of such satisfactory documentation, the lender will be required to submit the information to the SBA for a final determination of forgiveness. If approved, the SBA will then remit the total amount of forgiveness plus interest accrued through the date of payment to the lender.
The forgiven amount will be treated as cancelled indebtedness, but will not be included as gross income for federal income tax purposes. Any remaining loan amounts that were not forgiven will remain outstanding for up to ten (10) years at an interest rate no higher than four percent (4%).
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