Payroll Protection Program

Businesses with fewer than 500 employees (including sole proprietors and nonprofits) have access to “paycheck protection loans” under Section 7 of the Small Business Act until June 30, 2020.

• The loans are fully guaranteed by the US federal government through December 31, 2020.
• The maximum loan amount is the lesser of $10 million OR:
• The sum of the business’s average monthly “payroll costs” for the one-year period ending on the date the loan was made (an alternative calculation is available for seasonal employers) multiplied by 2.5, PLUS any disaster loan (see following pages) taken out after January 31, 2020 that has been refinanced into a paycheck protection loan.
• The loans will have a maximum maturity of 10 years and an interest rate not to exceed 4%.
• Proceeds may be used to cover payroll, mortgage payments, rent, utilities, and any other debt service requirements.

No personal guarantee is required by the business owner(s).

• The standard fees imposed under Section 7 of the Small Business Act are waived.
• For this legislation, “payroll costs” is defined as:
• Wages, commissions, salary, or similar compensation to an employee or independent contractor up to $100,000 per year
• Payment of a cash tip or equivalent
• Payment for vacation, parental, family, medical or sick leave
• Allowance for dismissal or separation
• Payment for group health care benefits, including premiums
• Payment of any retirement benefits
• Payment of state or local tax assessed on the compensation of employees
• Payroll costs do not include payroll taxes, any compensation of an employee whose principal place of residence is outside the U.S., or any qualified sick leave or family medical leave for which a credit is allowed under the Coronavirus Relief Act passed earlier this year.

Example:

• ACME Services applies for a paycheck protection loan on May 1, 2020.
• The business had $3.6 million in payroll costs for the period May 1, 2019 through May 1, 2020, for a monthly average of $300,000.
• ACME is entitled to a fully guaranteed federal loan equal to the lesser of $10 million or 2.5 times the monthly payroll costs of $300,000 which is $750,000—so $750,000 is ACME’s loan limit
• Loan must be made before December 31, 2020.
• CARES provides for possible deferment of repayment of the loans for a period of at least six months, but not to exceed a year.

Forgiveness of Paycheck Protection Loans

• CARES permits a portion of any paycheck protection loans to be forgiven on a tax-free basis.
• The amount that may be forgiven is the sum of the following payments made by the borrower during the eight-week period beginning on the date of the loan:
• Payroll costs (as defined earlier)
• Mortgage interest or rent
• Certain utility payments
• The loan forgiveness is contingent upon the employer:
• Not reducing its workforce during the eight-week period compared to other periods in 2019 or 2020, or
• Not reducing the salary or wages paid to any employee who had earned less than $100,000 in annualized salary by more than 25% during the covered period.

Example:

• Assumed ACME Services borrowed $750,000 in a paycheck protection loan.
• During the eight-week period after taking out the loan, ACME pays $650,000 in payroll costs, rent, and certain utilities.
• ACME is thus eligible to have $650,000 of the $750,000 loan forgiven on a tax-free basis.