The Paycheck Protection Program (“PPP”) is part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), which was signed into law on March 27, 2020. The PPP expands the Small Business Administration’s (“SBA”) existing Section 7(a) loan program. Once up and running, it promises to allow more flexible eligibility criteria and a loan forgiveness feature for certain businesses who keep their workers employed and do not reduce wages during this crisis.
The PPP is generally available to business concerns with no more than 500 employees. Eligible applicants in business since February 15, 2019, may obtain loans up to a maximum loan amount of $10,000,000, subject to limitations based on a multiple of the business’ annual payroll costs.
Businesses wishing to apply for the PPP should do so through banks and other institutional lenders qualified under Section 7(a) of the Small Business Act. As part of the loan application process, borrowers must certify that the uncertainty of current economic conditions makes the loan request necessary to support ongoing business operations.
The interest rate of a PPP loan cannot exceed 4%, and SBA fees are waived by the CARES Act. There are several restrictions on the use of funds. Included among these, loan proceeds should be used to retain workers and maintain payroll, rent, and/or utility payments. Borrowers with pending applications under Section 7(a), or who receive Section 7(a) funds from an existing loan between February 15, 2020 and December 31, 2020, may not be eligible.
The PPP provides for loan forgiveness provisions under certain circumstances. The amount forgiven is based on the amounts spent on payroll costs, interest on covered mortgage obligations, rent and utilities during the eight-week period following the origination of the loan, not to exceed the principal amount of the loan. The total amount spent for eligible purposes is then adjusted based on how many of its workers the businesses keeps employed.
If the employer reduces the salary of one of its employees by 25% during the eight-week period following the grant of the loan, the amount of the salary reduction must be subtracted from the amount to be forgiven. If employees are furloughed between February 15, 2020 and April 26, 2020, the business may be permitted to reinstate employees by June 30, 2020, and still be eligible for loan forgiveness. The rules and particulars of how that will work have yet to be implemented.
A key tax benefit of the amount of loan forgiveness is that it will not be treated as “cancellation of debt” income, but instead is to be excluded from gross income for U.S. federal income tax purposes. Participating businesses who are eligible for loan forgiveness may therefore be able to avoid taxation on “phantom income.”
The CARES Act also contains payroll tax deferral and payroll tax credit provisions which may be available to eligible small businesses, but the payroll tax credit, at least, may not be used by a business who participates in the PPP program. Businesses should carefully evaluate whether these credits, if applicable, or the PPP program will better meet their needs.
As the PPP is rolled out in the coming days and weeks, potentially eligible businesses should reach out to their bank or local lending institution to determine whether they are eligible to participate.
By Keith Hasson
678-701-2869 The author is managing partner of the Hasson Law Group, LLP, an Atlanta based firm that assists businesses in making claims under their insurance policies, provides advice with respect to coverage, and represents policy holders in disputes with their insurance carriers. The firm also represents businesses and their owners in contract and tort disputes. Please contact the Firm if you need help evaluating coverage under your property insurance, commercial general liability, errors and omissions, director and officer, all risk, or specialty policy, or if you need advice about how to track losses, mitigate damages, notify your insurance company of a potential claim, or navigate the claims process. Learn more at www.hassonlawgroup.com.