CARES Act – SBA's Paycheck Protection Program

By John Thompson, Joe Price, and Anne Baggott, Dysart Taylor

On April 2, 2020, the Small Business Administration (SBA) released its Interim Final Rule regarding the Paycheck Protection Program (PPP) provisions of House Bill 748, the Coronavirus Aid, Relief and Economic Security (CARES) Act approved by Congress on March 27, 2020. Below is a brief overview of the PPP which will run starting today through June 30, 2020.

In a nutshell, what is the PPP?

It is an expansion of the SBA loan program to benefit businesses that are impacted by the Coronavirus emergency. There are $349 billion in PPP funds available to small businesses and nonprofits on a first come first serve basis. It offers low interest, nonrecourse loans to businesses as an inducement for those businesses to retain employees at current compensation levels. Furthermore, large portions of those loans may be forgiven on favorable terms. 

Which businesses may take advantage of the PPP?

Any business entity, nonprofit organization, veterans’ organization and others so long as:

• It employs no more than 500 employees
• It was in operation on February 15, 2020, and
• It had W-2 employees

Independent contractors do not count as employees of a potential borrower because independent contractors are eligible to apply on their own for a PPP loan. Starting on April 3, 2020 small businesses and sole proprietorships may apply for PPP loans. Beginning on April 10, 2020 independent contractors and independent contractors will become eligible to apply. 

Applicants must submit SBA Form 2483 and supporting payroll documentation directly to the lender. 

What are the allowable uses of a PPP loan?

• Payroll costs
• Salaries or commissions
• Continuation of group healthcare benefits
• Paid sick or medical leave programs
• Mortgage interest
• Rent
• Utilities
• Interest on other outstanding debt

What are the terms of a PPP loan?

Based on the Interim Final Rule, the interest rate for PPP loan is set at 1.0 percent per annum. 

The loan is non-recourse. No collateral or personal guaranty will be required.

If any loan balance remains after forgiveness is applied (see below), the loan will have a maximum term of 2 years and will be based on the business’s ability to repay the loan. The term will run from the date of application for forgiveness.

Loan payments may be deferred for 6 months, but interest will accrue during the deferment period.  

What assurances must the business give to the lender to obtain a PPP loan at the time of application?

The borrower was in operating on February 15, 2020 and had employees for who it paid salaries and payroll taxes or paid independent contractors, as reported on a Form 1099-MISC.

Current economic uncertainty makes this loan request necessary to support the ongoing operations of the borrower.

The borrowed amount will be used to retain employees or independent contractors or to make mortgage, rent, and/or utility payments

Documentation verifying the number of full-time equivalent employees on payroll, payroll, rent and utility payments during the eight-week period following the loan will be provided to the lender.

Loan forgiveness will be provided for the sum of documented payroll costs, covered mortgage and interest payments and covered utilities. 

The business does not have any other application pending under the Coronavirus emergency program.

The business has not received duplicate amounts under this Coronavirus emergency program

What portion of a PPP loan may be forgiven?

The sum of the amounts spent by the business during the eight-week period on the following items beginning on the date that the loan was originated:

• Payroll costs
• Mortgage interest
• Rent
• Utilities

The above sum will be reduced by the following amounts:

If the business terminated (or furloughed) employees or reduced their compensation between February 15, 2020 and June 30, 2020, such sum is reduced by:

• Any reduction in the number of employees compared to one of two prior periods, either Feb. 15, 2019, to June 30, 2019 or Jan. 1, 2020 to Feb. 29, 2020
• Any reduction in compensation of any employee in excess of 25 percent

However, if any reduction in the number of employees or amount of compensation between February 15, 2020 and April 26, 2020 is restored by June 30, 2020, the reduction will not reduce the sum that is subject to forgiveness. 

Furthermore, the Interim Final Rule clarifies that no more than 25 percent of the forgiven amount may be for non-payroll costs.            

How is the amount of loan forgiveness taxed?

It is not taxed.