Understanding a key provision in the CARES coronavirus relief act: The Paycheck Protection Program

As funding and application guidelines for the Paycheck Protection Program change, visit our Coronavirus Resource Center and our running guide to Treasury PPP updates for our latest information and guidance. You can also contact our national SBA loan task force or your CohnReznick engagement team for assistance with filing for these loans and providing required financial documentation.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act introduces the Paycheck Protection Program as a key provision in Title I – the Keeping American Workers Paid and Employed Act. The Paycheck Protection Program is administered by the Small Business Administration (SBA) to provide emergency lending under its 7(a) lending program. With $349 billion in new lending capacity, this program helps small businesses cover operating expenses and incentivizes employers to retain employees.

Note: This article is based on the PPP provisions in the CARES Act. The SBA issued changes and clarifications April 2, on the eve of the program’s launch; read our overview.

What is the Paycheck Protection Program?

The program provides $349 billion in 100% federally guaranteed loans to small businesses and 501(c)(3) nonprofit organizations, 501(c)(19) veterans' organizations, or tribal business concerns described in Section 31(b)(2)(C). Because many businesses have already laid off workers as a response to the pandemic, the program can be retroactive, with the covered loan period running from Feb. 15 to June 30, 2020, which allows previously laid off or furloughed employees to be returned to payrolls. 

What businesses are eligible?

- Only small businesses that employ fewer than 500 employees are eligible. 

- The program removes the “Credit Elsewhere Test,” which requires an extensive analysis to determine whether the borrower has the ability to obtain some or all of the requested loan funds from alternative sources, without causing undue hardship. That test could also have required them to utilize those alternative sources rather than obtain the SBA loan.

- No collateral, or personal guarantee, shall be required for the covered loan. 

-Waiver of affiliation rules:

o Restaurants, foodservice, caterers, and hotels that employ 500 or fewer employees per physical location are also eligible to receive a single loan if they operate in North American Industry Classification System Sector 72 (Accommodation and Food Services).

o Affiliation rules are also waived for:

□ Franchises that are approved on the SBA’s Franchise Directory.

□ Small businesses that receive financing through the Small Business Investment Company (SBIC) program

How big a loan can a business receive?

 The maximum loan amount must be the lesser of 2.5 average months' eligible  payroll costs or $10,000,000. In determining the 250% of average monthly payroll costs, business should consider the average monthly eligible payroll costs incurred during the one-year period before the date on which the loan originates.

Seasonal businesses should calculate the 2.5 months’ payroll using the 12-week period beginning Feb. 15, 2019. Alternatively, the business may choose the period beginning March 1, 2019, and ending June 30, 2019. Seasonal businesses will multiply this average by 2.5. 

There are important restrictions regarding the payroll calculation. Do not include:

- Any salaries in excess of $100,000 per year

- Any qualified sick and family leave wages for which a tax credit is allowed under Section 7001 or 7003 of the Families First Coronavirus Response Act

How can the funds be used?

The loan can be used for the following purposes: 

o Employee salary or wages, cash tips, or equivalent payments

o Vacation, parental, family, medical, or sick leave payments (excluding those for which a tax credit is allowed under Section 7001 or 7003 of the Families First Coronavirus Response Act)

o Payment required for the provisions of group healthcare benefits, including insurance premiums

o Payment of any retirement benefit

o Payment of state or local tax assessed on the compensation of employees

o Mortgage payments, rent, and utility payments

o Interest on debt obligations previous to Feb. 15, 2020

 How does the loan forgiveness work?

- Loan recipients can be eligible for forgiveness for an amount equal to the total amount paid for the following expenses over eight weeks starting with the loan’s origination date, but not more than the loan’s principal amount. 

o Eligible payroll costs

□ Recipients with tipped employees as described in the Fair Labor Standards Act may receive forgiveness for additional wages paid to those employees.

o Mortgage interest, rent, and utilities, provided that the mortgage, lease, and utility services were in place before Feb. 15, 2020. 

- The Act includes a possible reduction in the forgiveness amount corresponding to any reductions in the number of full time equivalent employees or in employee pay compared with 2019 numbers.

o However, this penalty will not apply to employers that reduced these numbers at the beginning of the pandemic disruption and then raise them again by June 30, 2020.

- “The Administrator and the Secretary of the Treasury may prescribe regulations granting de minimis exemptions from the requirements under this subsection,” the Act says.

- Those seeking loan forgiveness must provide certain documentation to their lenders, such as payroll tax filings and documentation of payments on mortgage, rent, and utilities. Lenders will be “held harmless” for forgiveness if they have that documentation.

- Any loan amounts remaining after this forgiveness is applied will be carried forward, with a maximum maturity of 10 years and a maximum interest rate of 4% with an option to defer payments of interest and principal no more than one year.  

Who is making the loans?

The SBA is authorizing banks and other commercial lenders currently authorized to make SBA loans to originate and administer the new loan program. The federal government is pushing for rapid adoption and expects to have numerous lenders in place within a week of the signing of the Act.

_{Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.}