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CARES Act – SBA Loan Enhancements

The Congress recently passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act in response to the COVID-19 pandemic. The CARES Act was designed to stimulate the economy with over $2 trillion in relief and provide support for taxpayers.  Loan Enhancements were added to the Small Business Administration Loan Programs under the CARES Act.  Please find a summary of these important enhancements below.

Paycheck protection program: Federally guaranteed loans for small businesses. The Loans are limited to the lesser of the average monthly payroll costs times 2.5 or $10,000,000 and may be used for payroll costs, health care benefits, salaries, commission, or other compensation, interest on a mortgage or other loan obligation, rent, and utilities.

Payroll costs under this program include wages, salaries, commissions, payments to independent contractors, paid time off, health care benefits, and retirement benefits.  Payroll costs do not include compensation in excess of an annual salary of $100,000 (prorated), payroll taxes, compensation of an employee whose principal residence is outside of the United States or any sick or family leave allowed under the Families First Coronavirus Response Act.

The Paycheck Protection Loans are eligible for a tax-free loan forgiveness program.  The loans will be forgiven for any portion of the loan used to pay payroll costs, utilities, rent, and mortgage interest in the immediate 8-week period after the date of the loan. The amount forgiven is decreased by the amount the employer reduces its workforce for that 8 week period as compared to specific periods within 2019 and 2020 as detailed in the bill.

As an example, assume a taxpayer receives a $200,000 loan and uses $100,000 to pay for eligible costs in the first eight weeks.  After eight weeks, $100,000 will be forgiven tax-free upon submission and acceptance of substantiating documentation, provided there was no reduced workforce.  If the workforce, calculated by Full Time Equivalent Employees, was decreased by 50% the loan forgiveness also decreases by 50% to $50,000.

Questions and Answer for the Paycheck Protection Program:

Q. Is my business eligible for the SBA 7(a) program (paycheck protection program)? I heard there is an employee or revenue limitation?

A. The CARES Act created an exception for this program. The SBA loan authorizes any business that employs not more than the greater of (1) 500 employees or (2) the SBA size standard in number of employees. In plain english this means if you employ 500 employees or less you are eligible.  If you are in an industry that the SBA has determined generally employs more than that number then you can take the higher number to determine eligibility.

Q. I have multiple locations, do I have to count all of my employees by location for the employee count?

A. Short answer is yes. You must count all of your employees. However there is an exception for any business concern with a North American Industry Classification System (NAICS) code beginning with 72 (i.e. Accommodation and Food Service sectors).

Q. OK so I have a NAICS beginning with 72, what does that mean and how does that help me?

A. Congress designed a special carevout in the program to specifically help the food and accommodation industry. Therefore each separate physical location can be counted separately. For example, a Company owns several hotels (in separate and distinct entities) and employs over 1,500 people. So long as each hotel individually does not employ more than 500 people the Company would be eligible for a loan under the proposed exception

Q. How much can I get from the SBA paycheck protection program (PPP)?

A. The maximum loan amount is the lesser of (1) your average monthly payroll over the last one-year period multiplied by 2.5 or (2) $10 million.

Q. I took out a loan before the CARES Act because I need money to float my business. Can I get in on the action still?

A. If you took out a loan during the period beginning on January 31, 2020 and ending on the date you received the SBA loan, you may be able to refinance those loans into the PPP loan.

Q. Do I have to give a personal guarantee on this debt? Also what does it cost me to get this loan?

A. No, personal guarantees and collateral are waived for this specific loan program. As for cost, the SBA fees are being waived during the covered period.

Q. I heard there is a way that I can get this loan and not have to pay back part of it. How do I qualify for that?

A. Congress outlined what costs are eligible for forgiveness of debt. These costs must be paid in the first eight-weeks post receipt of loan disbursements. Additionally these costs are only eligible to the extent that you maintained the same number of FTE employees during the eight-week period and/or rehired employees that were previously laid off. Those costs are:

  • Payroll costs
    1. Costs related to continuation of health care benefits
    2. Employee salaries, commissions or similar type of compensation
    3. Retirement contributions
  • Mortgage interest payments. This does NOT include prepayment interest penalties or principal portion of debt payments
  • Rent
  • Utilities

Q.  Are all of my employees and payroll costs eligible for forgiveness?

A. No. Eligible payroll costs for employees include only the first $100,000 of any employee’s or self-employed person’s annual wages or self-employed compensation.

Q. What is the process of the loan forgiveness? What documentation do I need?

A. You will need to provide documentation to the lender that originated the loan providing the number of FTE employees and the payroll paid. Additionally any documentation for mortgage obligations, rental payments and utilities including cancelled checks, payment receipts, transcripts of accounts, or other documentation verifying payments.

Q. What are the loan terms?

A. There is a maximum loan term of 10-years and the interest rate is not to exceed 4-percent.

Q. I’m a self-employed individual, can I qualify for this loan?

A. Yes, absolutely. You just need to submit documentation that establishes you are self-employed individual to the SBA so they can determine your eligibility. This would include payroll filings, Income tax filings, and profits and loss statements. Basically the SBA wants to make sure you’re actually self-employed and not an employed individual trying to get some free money.

Q. Can an S-corp use the SBA loans to pay wages to its owners?

A. Yes, however, there are anti-abuse rules meant to ensure that owners are not self-enriched through this program. Bonuses are not allowed to be paid to owners and only the first $100,000 is eligible for forgiveness.

Small Business Administration (SBA) Disaster Loan Program:

The Small Business Disaster Loan Program is not new with the passing of the CARES Act.  This loan program allows taxpayers to borrow guaranteed funds provided that they show economic injury as related to any disaster declaration.  Every county in the state of New York has been declared a disaster area.

The CARES Act removes the SBA requirement for a personal guarantee on loans up to $200,000, and removes the requirement that the taxpayer has to utilize all other avenues of credit before applying for these funds.  Additionally, you can couple this loan program with the Paycheck Protection Program, as long as you are not duplicative in the use of the loan proceeds.  Therefore, if you have loans under both programs, you can use these funds for items such as inventory purchases, outstanding accounts payable for inventory, payment of principal on current loan obligations, and supplies.

SBA EIDL (Economic Injury Disaster Loan) Grants: As a part of the SBA disaster loan program noted above, small businesses are eligible for a maximum $10,000 grant for use to maintain payroll, pay rent or mortgage payments, or repay obligations that cannot be met due to revenue losses.  The Small Business needs to apply for the Economic Injury Disaster Loan to receive the grant.  The grant does not have to be paid back if the EIDL is denied.

Subsidy for certain loan payments: The Administration is offering a 6 month subsidy for all loan payments on covered loans.  This subsidy will come in the form of direct principal and interest payments to lending institutions for loans that are in a regular servicing status.  A covered loan in this instance is any loan guaranteed by the Administration under (1) §7(a) Small Business Act, excluding the payroll protection loans detailed above, and  (2) title V of the Small Business Investment Act of 1958, or made by an intermediary under §7(m) of the Small Business Act.  This would include new loans under the Economic Injury Disaster program noted above.

Questions and Answer for Other SBA Loan Programs:

Q. Are there other SBA loan programs that I qualify for?

A. Depending on the size of the organization, Small Business owners can apply for the Economic Injury Disaster Program.  For more information on this program, click on the following link. https://www.sba.gov/page/coronavirus-covid-19-small-business-guidance-loan-resources#section-header-0

Q. How does the SBA define small business?

A. The SBA defines small business differently for each industry, defined by either number of employees or average annual revenue. You can check for your specific industry by using the SBA size standard tool.  https://www.sba.gov/size-standards/.

Q. I heard that the SBA was offering a $10,000 advance on an Economic Injury Disaster Loan (EIDL) for emergency capital. Is this true?

A. When you apply for an EIDL you can request a $10,000 advance on your loan.  This advance does not need to be repaid. If the taxpayer also receives a payroll protection program loan, this advance decreases the amount of loan forgiveness.

Q. Are there any loan subsidy programs I can take advance of?

A. For any loan, guaranteed by the SBA, except Payroll Protection Loans, the SBA will pay for the principal, interest, and any associated fees that are owed on the loan for 6 months. You should contact your lender to discuss this program.

For information on the SBA Loan Program and Application Process please go HERE.

Disclaimer: This post was current as of the date of posting.  Any changes made to the law or regulations since original posting has not been incorporated.  Please view the recent postings for current information or contact us directly with any questions.