As part of the recently enacted CARES Act, the $2 trillion stimulus package, designed to help bolster workers and small businesses during the COVID-19 crisis, the law provides businesses (including sole proprietorships and self-employed individuals) with financial assistance though direct SBA loans. The loans will be primarily use to help businesses pay operating expenses, especially helping business maintain their workforce on their payroll.
Coverage Period. The loans will cover eligible costs incurred from February 15, 2020 though June 30, 2020.
Eligibility Requirements. All “small business concerns” are eligible to receive a covered loan during the covered period. The small business must have been:
- in operation on February 15, 2020
- had employees for whom the borrower paid salaries and payroll taxes or paid independent contractors, as reported on a Form 1099-MISC.
A business is a “small business concern” if: (1) the size of the concern alone (without affiliates) does not exceed the size standard designated for the industry in which the applicant is primarily engaged, and (2) the size of the concern combined with its affiliates is not greater than the size standard designated for either the primary industry of the concern alone or the primary industry of the concern and its affiliates, whichever is greater.
- Specifically, during the covered period, the normal requirement that an applicant be unable to obtain credit from nonfederal sources on reasonable terms and conditions does not apply to a covered loan.
- In addition, SBA has no recourse against any individual shareholder, member or partner of an eligible recipient of a covered loan for nonpayment of any covered loan, except to the extent that the shareholder, member or partner uses the covered loan proceeds for a purpose not authorized.
Allowable Uses. Payroll costs, healthcare benefits, mortgage interest obligations (not principal repayments), rent obligations, utilities, and interest on other debt obligations incurred prior to February 15, 2020.
For purposes of the covered loans, “payroll costs” means:
- For Businesses with Employees. The sum of payments of any compensation with respect to employees that is a:
- salary, wage, commission or similar compensation;
- payment of cash tips or equivalent;
- payment for vacation, parental, family, medical or sick leave;
- allowance for dismissal or separation;
- payment required for the provision of group health care benefits, including insurance premiums;
- payment of any retirement benefit; or
- payment of state or local tax assessed on the compensation of employees.
- For Self-Employed Persons. The sum of payments of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment or similar compensation and that is in an amount not more than $100,000 in one year, as prorated for the covered period.
- Not Payroll Costs.
- Compensation of an individual employee in excess of an annual salary of $100,000, as prorated for the covered period.
- Social Security and Medicare taxes (both employee and employer portion), and income tax withholding obligations from employees
- Compensation of an employee whose principal place of residence is outside the U.S.
- Qualified sick leave wages and qualified family leave wages, in each case, for which a credit is allowed under the Families First Coronavirus Response Act.
Maximum Amount. The maximum amount that can be borrowed is 2.5x average monthly payroll costs during the 1-years period before the loan was made (up to a maximum of $10 million).
Repayment/Forgiveness. Loans may be repaid over a maximum of 10 years. Some amounts can be FORGIVEN (see below).
Loan Forgiveness. Loan recipients will be eligible for loan forgiveness for a period of 8 weeks after the loans origination date in an amount equal to the sum of the following costs incurred during that period:
- Payroll costs (not to exceed $100,000)
- Payments of interest on mortgage obligations
- Rent obligations
- Utility payments
Amounts forgiven are not included as cancellation of debit income for federal income tax purposes.
Loan Forgiveness Exclusions and Limitations. The amount forgiven is subject to the following limitations:
- Amount forgiven cannot exceed the total amount borrowed.
- The amount forgiven will be proportionately reduced if the average number of employees is reduced during the covered period, as compared to the same period in 2019.
- The amount forgiven will be reduced by the amount of any reduction in the total employee salary or wages during the covered period that exceeds 25% of the total salary or wages.
- Borrowers that rehire laid-off workers by June 30 will not be penalized for having a smaller workforce at the beginning of the period.
Limitations Based on Reduction in Workforce. The amount of loan forgiveness is reduced by multiplying the forgivable amount by the quotient (expressed as a percentage) obtained by dividing the average number of full-time equivalent employees per month employed by the borrower during the eight-week period after the covered loan is originated by:
- in the case of nonseasonal employers — either of the following (as elected by the borrower):
- the average number of full-time equivalent employees per month employed by the borrower during the period beginning on February 15, 2019 and ending on June 30, 2019; or
- the average number of full-time equivalent employees per month employed by the borrower during the period beginning on January 1, 2020 and ending on February 29, 2020.
- in the case of seasonal employers — the average number of full-time equivalent employees per month employed by the borrower during the period beginning on February 15, 2019 and ending on June 30, 2019.
The average number of full-time equivalent employees is determined by calculating the average number of full-time equivalent employees for each pay period falling within a month.
In addition, the amount of loan forgiveness is reduced by the amount of any reduction during the eight-week period after the origination of the covered loan in the total salary or wages of any employee who did not receive, during any single pay period during 2019, wages or salary at an annualized rate of pay in an amount more than $100,000 by more than 25 percent of the total salary or wages of the employee during the most recent full quarter during which the employee was employed before the beginning of that eight-week period.
However, the amount of loan forgiveness will be determined without regard to a reduction in the number of full-time equivalent employees or a reduction in the salary or wages of one or more employees that occurred during the period beginning on February 15, 2020 and ending on the date that is 30 days after the date of enactment of the CARES Act if, as applicable:
- in the case of any such reduction of employment — not later than June 30, 2020, the borrower has eliminated the reduction in the number of full-time equivalent employees, as compared to the number of full-time equivalent employees as of February 15, 2020; or
- in the case of any such reduction in salary or wages — not later than June 30, 2020, the eligible employer has eliminated the reduction in the salary or wages of such employees, as compared to the salary and wages of such employees as of February 15, 2020.
Maximum Interest Rate (for portions not forgiven). The interest rate for a covered loan is not to exceed 4 percent. There is no prepayment penalty for any payment made on a covered loan.
Is There a Forgiveness Feature of Covered Loans?
A borrower is eligible to have its covered loan forgiven. The amount eligible to be forgiven is the sum of the following costs incurred and payments made during the eight-week period after the covered loan is originated (forgivable amount):
- payroll costs (as previously described)
- payments of interest on any liability of the borrower that is a mortgage on real or personal property and that was incurred before February 15, 2020 (covered mortgage obligation)
- payments on any rent obligated under a leasing agreement in force before February 15, 2020 (covered rent obligations)
- payments for a service for the distribution of electricity, gas, water, transportation, telephone or internet access for which service began before February 15, 2020 (covered utility payments).
A borrower with tipped employees, as described in the Fair Labor Standards Act of 1938, may receive forgiveness for additional wages paid to those employees.
Applying for Loan Forgiveness. A borrower seeking loan forgiveness is required to submit to the lender that is servicing the loan an application that provides certain documents and makes certain certifications. A borrower is not permitted to receive forgiveness without submitting to the lender the documentation required. These required documents and certifications include:
- documentation verifying the number of full-time equivalent employees on payroll and pay rates for the relevant pay periods, including:
- payroll tax filings reported to the Internal Revenue Service
- state income, payroll and unemployment insurance filings.
- documentation verifying payments on covered mortgage obligations, payments on covered lease obligations, and covered utility payments, including cancelled checks, payment receipts, transcripts of accounts, or other documents
- a certification from a representative of the borrower 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.
- any other documentation SBA determines necessary.
The lender is required to issue a decision on the forgiveness application no later than 60 days after the date on which it receives the application.