Paycheck Protection Program and other CARES Act financing options

ALERT: CARES Act: Paycheck Protection Program and other financing options

March 31, 2020

Act creates a new SBA Paycheck Protection Program to provide funding to qualified small businesses and certain non-profit organizations.

The following is an overview of the Paycheck Protection Program and other financing options included in the CARES Act. There are numerous other provisions in the Act designed to provide economic stimulus and tax relief. We will continue to provide information on other items of interest in the coming days.

Paycheck Protection Program

  • Administered by the U.S. Small Business Administration (SBA)
  • Purpose: provide funding to qualified small businesses and certain non-profit organizations
    • Small business is defined as a business with not more than 500 employees or the applicable size standard for the industry as provided by SBA, if higher
  • Traditional SBA requirements waived: personal guarantees, collateral requirements, “credit elsewhere” and most fees commonly associated with SBA financing
  • Loan forgiveness: ability to have loans forgiven if the borrower meets certain requirements
  • Program eligibility includes sole-proprietors, independent contractors and other self-employed individuals

Funding eligibility and use

  • Covered period: February 15, 2020, through June 30, 2020
  • Maximum amount of loan: up to $10 million (limited to a formula tied to payroll costs: the lesser of $10 million or the average total monthly payments for payroll costs incurred during the one-year period before the loan origination date multiplied by 2.5)
    Payroll costs include payment for: Payroll costs do not include:
    • Salary, wages, commission or similar compensation
    • Cash tip or equivalent
    • Vacation, parental, family, medical or sick leave
    • Dismissal or separation allowance
    • Health care and retirement benefits
    • State unemployment tax expense
    • Compensation in excess of a $100,000 annual salary
    • Compensation for employees not residing in the U.S.
    • Qualified family leave wages or emergency sick leave benefits for which a credit is allowed under the Families First Coronavirus Response Act
  • Funds from the program can also be used for payments of interest on mortgages, rent, utilities and interest on any other debt obligations that were incurred before Feb. 15

Payment terms

Loan forgiveness eligibility:

  • Limited to the principal amount borrowed and may not exceed the amount spent by the borrower during the eight-week period after the loan origination date on:
    • payroll costs
    • interest payment on any mortgage in place prior to February 15, 2020
    • rent on any lease in force prior to February 15, 2020
    • utility costs incurred during the coverage period
  • Documentation will be required to verify the number of full-time equivalent employees to be eligible for forgiveness.
  • Amounts forgiven under this program will not be subject to taxation.

Amount eligible for forgiveness will be reduced for the following:

  • Any reduction in employees retained compared to:
    • average number of full-time equivalent employees per month in the period February 15, 2019, through June 30, 2019; or
    • during the period January 1, 2020, through February 29, 2020.
  • Reduction in pay of any employee beyond 25% of their prior-year compensation.

Other items to note:

  • To encourage employers to rehire laid off employees or reinstate compensation reductions due to COVID-19, borrowers that re-hire employees and re-instate compensation to at least 75% of an employee’s prior year compensation by June 30, 2020, will not be penalized.

Payment terms for amounts not eligible for forgiveness:

  • Amounts borrowed that are not eligible for forgiveness are payable for a period of up to 10 years with an interest rate of 4% or less.
  • There are no adjustments to the loan agreement required, and the loan will continue to be 100% backed by the SBA.

Other programs and subsidies available during the covered period

Subsidies for certain existing SBA loan payments:

  • With some exceptions, businesses with an SBA 7(a) loan, excluding loans under the PPPF, may be eligible for relief.
  • If your loan is covered by this provision, the SBA will provide a payment subsidy covering payments of interest, principal and fees for six months.

Economic Injury Disaster Loans (EIDL):

  • Expanded for access and maximum amount available increased to $2 million.
  • SBA allowed to approve based solely on applicant’s credit score.
  • SBA will waive personal guarantees on advances and loans below $200,000.

Emergency grants:

  • Available to allow an eligible entity that has applied for an EIDL loan due to COVID-19 to request an advance of up to $10,000, which must be distributed within three days.
  • Such advances are not required to be repaid.

Steps you can take right now

The SBA is working to soon provide implementation guidelines. In the meantime, we recommend contacting your lender to determine how you may be able to access funds and what information you can begin gathering in preparation for the application process. Current SBA lenders are in the best position to administer these programs quickly, but financial institutions who haven’t traditionally provided SBA financing will also be able to participate in this program.

More details to come

AGH will continue providing new information as it becomes available and can work with you and your lender on information specific to your situation. To discuss your situation, contact your AGH tax advisor or Shawn Sullivan using the information below.

Shawn Sullivan

Executive Vice President
Tax Services

Shawn leads the firm’s tax group and serves on AGH’s board of directors. In addition to enhancing business performance to minimize tax consequences, he has extensive experience in mergers and acquisitions, international tax and business structuring. Shawn has public and private experience in the fields of tax and accounting and works frequently with clients in the manufacturing, automotive, wholesale distribution, real estate development and construction industries.

A certified public accountant, Shawn is a member of the American Institute of Certified Public Accountants, the Kansas Society of Certified Public Accountants (KSCPA) and chairs the KSCPA Committee on Taxation.

NOTE: Any advice contained in this material is not intended or written to be tax advice, and cannot be relied upon as such, nor can it be used for the purpose of avoiding tax penalties that may be imposed by the IRS or states, or promoting, marketing or recommending to another party any transaction or matter addressed herein.

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