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CARES Act: Payroll Protection Plan

Updated: 4/1/20

On March 27th, 2020, the Senate passed “Coronavirus Aid, Relief, and Economic Security Act” or the “CARES Act”. The CARES Act includes the PPP (Paycheck Protection Program), which is summarized below.

Important Disclaimer:

We are providing this information as a service to the business community, but please understand that we are are not lawyers nor are we experts in the implementation of federal grant programs. Please consult an attorney and accountant before making any decisions impacting your business or employees.

Summary:

The CARES Act allocates $350 billion towards the Paycheck Protection Program, which is meant to help small businesses (fewer than 500 employees) impacted by the pandemic and economic downturn to make payroll and cover other expenses from February 15 to June 30. Small businesses may take out loans up to $10 million—limited to a formula tied to payroll costs—and can cover employees making up to $100,000 per year. Loans may be forgiven if a firm uses the loan for payroll, interest payments on mortgages, rent, and utilities and would be reduced proportionally by any reduction in employees retained compared to the prior year and a 25 percent or greater reduction in employee compensation.

Paycheck Protection Program:

  • Employers with up to 500 employees are eligible.
  • Loans will be made by banks, credit unions and some other lenders, guaranteed 100% by the SBA.
  • Loans are up to the lesser of:
    • Total average monthly payroll costs for the preceding 12 months (April 2019 to March 2020) multiplied by 2.5
    • $10,000,000.
  • Permissible uses of the proceeds include most employee-related expenses, interest payments on mortgages, rent, utilities and interest on existing debt.
  • The borrower must support its prior payroll costs and:
    • Certify that “the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient.
    • Certify that funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments.
    • Certify that hat there is no pending application for a loan for the same purpose and amounts and no proceeds have or will be received from such a loan.
  • Terms will be as for other SBA §7(A) loans, but with no personal guarantees and no recourse to principals except for misuse of proceeds.
  • These loans are eligible for forgiveness. Remaining balances after forgiveness can have a maximum term of 10 years and a maximum rate of 4%.
  • Complete payment deferrals are available for six months to one year pursuant to a deferment process set by the SBA in guidance due out in 30 days.
  • Lenders should be able to immediately begin applying to the SBA for a guaranty of eligible loans. Lenders will most likely be your current banker. They will receive funding from the Small Business Administration.

Loan Forgiveness:

  • Businesses that qualify for a small business loan under section 7(a) of the Small Business Act may qualify for loan forgiveness on portions of their SBA disaster loan. Eligibility can be determined by visiting the SBA 7(a) website.
  • Borrowers that qualify for small business loans will be eligible to have only those portions of their loans forgiven for the amounts spent during an 8-week period after the origination date of the loan for payments related to the following expenses:
    • Payroll costs.
    • Interest payments on a mortgage if the mortgage was incurred prior to February 15, 2020 (does not include principal or prepayment).
    • Rent payments under a lease that was in effect prior to February 15, 2020.
    • Utility payments made on utility services if such services were in use prior to February 15, 2020.
  • Limits on the amount of forgiveness for which the loan will not be forgiven include the following:
    • Amounts in excess of the principal on the loan will not be forgiven.
    • Forgiveness will be reduced proportionately by any reduction in employees retained compared to either (i) the prior year, or (ii) the period of January 1, 2020, thru February 29, 2020 (measured based on average employees per month).
    • Forgiveness will be reduced proportionately by any reduction in pay of any employee >25% of their prior year compensation (measured from the most recent full quarter prior to the origination date of the loan).
    • Payroll costs eligible for forgiveness do not include compensation paid to employees >$100,000 annually.
  • If borrowers re-hire workers that have already been laid off due to COVID-19 (within 30 days of the enactment of the CARES Act), they will not be penalized or have the loan forgiveness reduced by any reduction of employees or reduction in payments to employees, so long as the workers are re-hired on or before June 30, 2020.
  • The amounts that are forgiven will not be included in gross income of the borrower as cancellation of debt income for federal income tax purposes.
  • Any loan amounts that are not forgiven at the end of one year is carried forward for a max term of 10 years at max interest rate of 4%, and the 100% loan guarantee remains during the term.

Links / sources:

While we will make every effort to update this page if/when new information becomes available, please do not rely on the accuracy of the information provided above. We recommend consulting with your attorney and accountant about the proper course of action for your business.

If you have any questions, please reach out to us: employers@murrayresources.com