FAQ on the Coronavirus Aid, Relief, and Economic Security Act (CARES Act)

COVID-19 TASK FORCE

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Title 1 of the CARES Act is referred to as the “Keeping American Workers Paid and Employed Act.” The “Keeping American Workers Paid and Employed Act” establishes an SBA Loan program called the “Paycheck Protection Program” (PPP) and process for forgiveness of the loan if certain compensation and employment metrics are met. It also expands access to Economic Injury Disaster Loans (EIDL) and provides a subsidy to help businesses repay SBA loans (with the exception of the PPP loans). Below are many of the frequently asked questions about the Paycheck Protection Program portions of the CARES Act. We will continue our analysis of the CARES Act and continue to update this FAQ as to other of its sections.

This FAQ was originally posted on April 3, 2020 and will be continually updated as more information comes in from the federal government and agencies. This is a rapidly-evolving area and guidance is constantly updating and changing. Please be sure to check back here frequently, as guidance may change.

CARES Act Title 1

“Keeping American Workers Paid and Employed Act.”

1. Who is eligible to apply for funds from PPP loan program?

(UPDATED 04/05/2020)
In general, all businesses that were in operation as of February 15, 2020—including any business entity, nonprofit, veterans organization, tribal business concern, sole proprietorship—with 500 or fewer employees can apply in addition to self-employed individuals and/or independent contractors who were operation as of February 15, 2020. Larger businesses in certain industries can also apply if it has no more than 500 employees in each location in which it operates. In calculating the number of employees, the borrowing entity will be considered together with its affiliates for purposes of determining eligibility for the PPP. (Under SBA rules, entities may be considered affiliates based on factors including stock ownership, overlapping management, and identity of interest.) However, the Act expressly waives the usual “affiliates rule” for businesses operating as a franchise, provided the franchise has been issued a Franchisor Identifier Code (FIC) by the SBA—which includes most automotive franchises.

[Note: If you operate an automotive franchise and are unsure whether that franchise has an FIC from the SBA, contacts us.]

2. What if my business is an entity that just holds real estate but has no employees?

(ADDED 04/03/2020)
Such a business would not qualify for the PPP loan program, as the program is specifically designed to assist employers/employees. In fact, the SBA guidelines state that the applicant must have “either had employees for whom you paid salaries and payroll taxes or paid independent contractors, as reported on a Form 1099-MISC.” However, that does not mean that there would not be other types of assistance available from the SBA for business concerns that are otherwise impacted by COVID-19. For example, additional funding has been allocated to the SBA for other disaster relief programs, including certain emergency loan and grant programs, although these other programs will not have the same advantages as the PPP loan program. You can find the various COVID-19 assistance programs now available through the SBA on their website.

3. How much can I borrow under the PPP?

(ADDED 04/03/2020)
If you were in business during the period beginning on February 15, 2019 and ending on June 30, 2019, the CARES Act states that the maximum amount of the loan available for you (up to $10,000,000) is: 2.5 times the average total monthly payments for payroll costs (as discussed below) incurred “during the 1-year before the date on which the loan was made” -- except for employers deemed to be seasonal employers, in which case it shall be the average total monthly payments by the applicant for payroll costs incurred during the 12-week period beginning February 15, 2019 or the period of March 1, 2019 to June 30, 2019, at the election of the applicant – plus the amount of any Economic Injury Disaster Loan received after January 31, 2020. (In other words, an Economic Injury Disaster Loan (“EIDL”) – explained below – can be rolled into your PPP loan.) [Note: There is presently an ambiguity as to whether the act’s reference to the “1-year before the date on which the loan was made” refers to the 12 calendar months before applying for the loan or whether it means during the calendar year of 2019. However, we note that the application for the PPP loans refers only to the latter – the calendar year of 2019 – which is more beneficial to the extent you have had to reduce payroll costs over the past couple of months.]

4. How much can I borrow if I was not in business before June 30, 2019?

(ADDED 04/03/2020)
If you were not in business during the period beginning on February 15, 2019 and ending on June 30, 2019, the CARES Act states that the maximum amount of the loan available for you is 2.5 times the average total monthly payments for payroll costs incurred during the period beginning on January 1, 2020 and ending on February 29, 2020. It does appear from the act, however, that you had to at least have started your business prior to February 15, 2020.

[Note: Although it is not yet clear whether this pertains to employers who started business after February 15, 2019 but before June 30, 2019, our interpretation of the act is that this alternative calculation method using just the first two months of 2020 will be applied to anyone that was not in business for the entire period beginning on February 15, 2019 and ending on June 30, 2019.]

5. What counts as “payroll costs?

(ADDED 04/03/2020)
Payroll costs include the employer’s payments for:

  • Salary, wages, commissions, tips or other compensation made to employees (capped at $100,000 on an annualized basis for each employee), including those employed on a full-time, part-time or other basis;
  • Employee leave benefits, including paid vacation, parental, family, medical, or sick leave;
  • Allowance for separation or dismissal (i.e. severance pay);
  • Employee group health care benefits including insurance premiums;
  • Employee retirement benefits;
  • State and local taxes assessed on compensation; and
  • For a sole proprietor or independent contractors, the wages, commissions, income, or net earnings from self-employment, capped at $100,000 on an annualized basis for each person.

[Note: Our interpretation of the act is that you would include those amounts actually paid out during the relevant time period being used to calculate your loan amount. Accordingly, we expect that salaries, commissions and bonuses paid out in January 2019, but which relate to a December 2018 pay period or performance during 2018, would still be counted as paid out in January 2019. Additionally, our understanding is that you can calculate payroll costs on all employees, including employees earning more than $100,000 annually, provided that you count only the first $100,000 in compensation for these higher earners.]

6. What is excluded from “payroll costs”?

(ADDED 04/03/2020)
You cannot include: (a) any compensation of an employee whose principal place of residence is outside of the United States; (b) the compensation of an individual employee in excess of an annual salary of $100,000, prorated as necessary; (c) federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020, including the employee’s and employer’s share of FICA (Federal Insurance Contributions Act) and Railroad Retirement Act taxes, and income taxes required to be withheld from employees; and (d) qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act.

[Note: Since the SBA guidelines only exclude federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020, it appears that you can include in your “payroll costs” (for purposes of calculating your maximum allowable loan) the federal taxes imposed or withheld during the 12-months prior to the loan except for the excluded period.]

7. How do I do the calculations to determine my maximum allowable loan amount?

(ADDED 04/03/2020)
If you were in business during the period beginning on February 15, 2019 and ending on June 30, 2019, the following methodology would be useful:

  • Step 1: Aggregate payroll costs (as explained above) from the last twelve months for employees whose principal place of residence is the United States.
  • Step 2: Subtract any compensation paid to an employee in excess of an annual salary of $100,000 and/or any amounts paid to an independent contractor or sole proprietor in excess of $100,000 per year.
  • Step 3: Calculate average monthly payroll costs (divide the amount from Step 2 by 12).
  • Step 4: Multiply the average monthly payroll costs from Step 3 by 2.5.
  • Step 5: Add the outstanding amount of an Economic Injury Disaster Loan (EIDL) made between January 31, 2020 and April 3, 2020, less the 9 amount of any “advance” under an EIDL COVID-19 loan (because it does not have to be repaid).

[Note: The SBA guidelines discussing rolling into the PPP loan those EIDL loans made between January 31, 2020 and April 3, 2020. It is unclear whether EIDL loans made after April 3, 2020 will also be rolled in to the PPP loans.]

8. Can you give me some examples of how to do the calculations?

(ADDED 04/03/2020)
The examples below illustrate the way to do the calculations.

  • Example 1 – You have no employees who make more than $100,000:
    Annual payroll: $120,000
    Average monthly payroll: $10,000
    Multiply by 2.5 = $25,000
    Maximum loan amount is $25,000
  • Example 2 – You have some employees make more than $100,000;
    Annual payroll: $1,500,000
    Subtract compensation in excess of an annual salary of $100,000: $1,200,000
    Average monthly qualifying payroll: $100,000
    Multiply by 2.5 = $250,000
    Maximum loan amount is $250,000
  • Example 3 – You have no employees make more than $100,000, but have outstanding EIDL loan of $10,000:
    Annual payroll: $120,000
    Average monthly payroll: $10,000
    Multiply by 2.5 = $25,000
    Add EIDL loan of $10,000 = $35,000
    Maximum loan amount is $35,000
  • Example 4 – You have some employees make more than $100,000, plus an outstanding EIDL loan of $10,000:
    Annual payroll: $1,500,000
    Subtract compensation in excess of an annual salary of $100,000: $1,200,000
    Average monthly qualifying payroll: $100,000
    Multiply by 2.5 = $250,000
    Add EIDL loan of $10,000 = $260,000
    Maximum loan amount is $260,000

9. When can I apply?

(ADDED 04/03/2020)
Based on information from the Treasury Department, applications can be submitted:

  • Starting April 3, 2020, small businesses and sole proprietorships can apply for loans to cover their payroll and other certain expenses through existing SBA lenders. [Note: Based on recent reporting, we do not expect the SBA to be able to meet this April 3rd start date.]
  • Starting April 10, 2020, independent contractors and self-employed individuals can apply for and receive loans to cover their payroll and other certain expenses through existing SBA lenders.
  • Other regulated lenders will be able to accept applications for these loans as soon as they are approved and enrolled in the program.

10. How long will this program last?

(ADDED 04/03/2020)
Although the program is open until June 30, 2020, we expect the funds allocated by Congress for the program to be fully disbursed quickly. Additionally, the loans are disbursed on a “first come, first served” basis. So you are encouraged to apply as quickly as possible so as to help ensure your loan is approved before the SBA hits it funding cap and because lenders need time to process your loan.

11. Where can I apply?

(ADDED 04/03/2020)
You can apply through any existing SBA lender or through any federallyinsured depository institution, federally insured credit union, and Farm Credit System institution that is participating. Other regulated lenders will be available to make these loans once they are approved and enrolled in the program.

[Note: We recommend that you first contact your usual lender because some lenders have restrictions on borrowers taking on additional debt without their approval.]

12. What do I need to apply?

(ADDED 04/03/2020)
You will need to complete the Paycheck Protection Program loan application and submit the application with the required documentation to an approved lender that is available to process your application by June 30, 2020. The applications are available through the lenders. However, you can view the application on the SBA's website.

13. Can I use e–signatures or e-consents if my entity has multiple owners?

(ADDED 04/03/2020)
Yes – e-signatures and e-consents are permitted regardless of the number of owners.

14. What other documents will I need to include in my application?

(ADDED 04/03/2020)
SBA guidelines indicate that you will need to “submit such documentation as is necessary to establish eligibility such as payroll processor records, payroll tax filings, or Form 1099- MISC, or income and expenses from a sole proprietorship.” For borrowers that do not have any such documentation, the borrower must provide “other supporting documentation, such as bank records, sufficient to demonstrate the qualifying payroll amount.”

15. Do I need to first look elsewhere for funds before applying for a PPP loan?

(ADDED 04/03/2020)
No. The CARES Act waives the usual SBA requirement that you try to obtain some or all of the loan funds from other sources (i.e. there is no “Credit Elsewhere” requirement).

16. Do I need to pledge any collateral for this loans?

(ADDED 04/03/2020)
No. No collateral is required.

17. Do I need to personally guarantee this loan?

(ADDED 04/03/2020)
No. There is no personal guarantee requirement.

18. How many loans can I take out under this program?

(ADDED 04/03/2020)
Only one per individual or business entity.

19. What can I use these loans for?

(ADDED 04/03/2020)
The loan funds can be used for specific expenses only, and you will have to certify that this is what the loan funds will be used for. The CARES Act states that expenses are:

  • Payroll costs, including employee salaries, commissions and other compensation, costs related to the continuation of group health care benefits and costs of paid sick, medical, or family leave and insurance premiums;
  • Interest on mortgage obligations, for mortgages obtained before February 15, 2020;
  • Rent, paid under lease agreements in force before February 15, 2020;
  • Utilities, for which service began before February 15, 2020; and
  • Interest on other debt obligations that were incurred before February 15, 2020.

[Note: The SBA guidelines state that “at least 75 percent of the loan proceeds shall be used for payroll costs.”]

20. What is my interest rate?

(ADDED 04/03/2020)
The latest SBA guidelines state that the “interest rate will be 100 basis points or one percent.”

[Note: The CARES Act provided that the interest rate could not exceed four percent Prior guidelines put out by the Treasury Department had indicated the interest rate would be .5% but the 1% rate noted in the most recent SBA guidelines appears to be the most recent information.]

21. When is my loan due?

(ADDED 04/03/2020)
In 2 years.

[Note: The CARES Act provides that the PPP loans would have a maximum maturity of up to ten years, but the SBA has now set the maturity at two years.]

22. Do I have to start repaying my loan right away?

(ADDED 04/03/2020)
No. Loan payments (including both interest and principle) will be deferred for six months. However, interest will continue to accrue during this period.

[Note: The CARES Act provides for deferment for up to one year, but the SBA has determined “that that a six-month deferment period is appropriate in light of the modest interest rate (one percent) on PPP loans and the loan forgiveness provisions contained in the Act.”]

23. Can I pay off my loan earlier than 2 years?

(ADDED 04/03/2020)
Yes. There are no prepayment penalties or fees.

24. Can my PPP loan be forgiving in whole or in part?

(ADDED 04/03/2020)
Yes. The amount of the loan forgiveness can be up to the full principle amount of your loan and any accrued interest. The amount of forgiveness is a sum equal to the amount you actually spend on the allowable uses of the funds (i.e. payroll costs, and most mortgage interest, rent, and utility costs) over the 8-week period after the loan is made, subject to the reduction that may be applied as explained below. However, to ensure that the loans are being used for the primary purpose of keeping workers employed/paid, the SBA guidelines states that “not more than 25 percent of the forgiveness amount may attributable to non-payroll costs.”)

[Note: Per the SBA guidelines, payments made to independent contractors do not count as “payroll costs” for purposes of loan forgiveness, even though they are included for determining the amount of loan you can obtain. The SBA states that this is because independent contractors “have the ability to apply for a PPP loan on their own.” Additionally, amount of forgiveness available does not seem to include payments of interest on other debt obligations, even though this is an allowable use of the funds. More guidelines on loan forgiveness are expected to come out from the SBA.]

25. How can I request loan forgiveness?

(ADDED 04/03/2020)
You can submit your request for forgiveness of the loan to the lender that is servicing your loan. You will be required to provide documents that verify the number of full-time equivalent employees and pay rates, as well as the payments on eligible mortgage, lease, and utility obligations. You must certify that the documents are true and that you used the forgiveness amount to keep employees and make eligible mortgage interest, rent, and utility payments. The lender must make a decision on the forgiveness within 60 days.

26. Will I be taxed on the amount of loan forgiveness I receive?

(ADDED 04/03/2020)
No. The amount of forgiveness of loans made under the PPP will not be treated as taxable income to you.

27. On what basis might forgiveness of my loan be refused?

(ADDED 04/03/2020)
You will not receive forgiveness, and will owe money when your loan is due, if you use the loan amount for anything other than payroll costs, mortgage interest, rent, and utilities payments over the 8-weeks after getting the loan.

28. What reductions might be applied to my loan forgiveness amount?

(ADDED 04/03/2020)
The CARES Act provides that the amount of your loan forgiveness may be reduced as a result of decreased staffing levels and/or salaries and you do not restore the staffing levels and salaries before June 30, 2020. Specifically:

  • Decrease in Average Staffing: Your loan forgiveness amount will be reduced if you decrease your full-time employee headcount. If you are not considered a seasonal employer, the amount of this reduction is determined by dividing average employee count after obtaining the loan by the average employee count for one of two periods before the loan and then multiplying that number by the amount you spent for covered expenses in the 8-weeks after obtaining the loan. More specifically, you first divide the average number of full-time equivalent employees per month you employed during the 8-week period after obtaining the loan by either – at your election – the average number of full-time equivalent employees per month you employed during the period beginning on February 15, 2019 and ending on June 30, 2019 or the average number of full-time equivalent employees per month you employed during the period beginning on January 1, 2020 and ending on February 29, 2020. [Note: If you consider yourself to be a seasonal employer, please contact us for more information.]
  • Decrease in Average Compensation: Similarly, your loan forgiveness will also be reduced if you have decrease salaries and wages for employees. Specifically, the amount of loan forgiveness will be reduced by the amount of any reduction -- by more than 25% -- in salary or wages of any employee during the 8-weeks after you obtained the loan and compared to the salary or wages of that employee during the most recent full quarter during which the employee was employed before that 8-week period, provided that employee that made less than $100,000 annualized in 2019.

[Note: The SBA has stated that it “will issue additional guidelines on loan forgiveness.” So stay tuned for updates.]

29. What if I rehire the employees I had laid off?

(ADDED 04/03/2020)
The above reductions to the forgiveness amount will not be applied to you if you restore—before June 30, 2020—your full-time employment and salary levels that were decreased between February 15, 2020 and April 26, 2020. Although the intent of this section appears to be an incentive to rehire laid off or terminated employees, it is presently unclear whether it is acceptable to hire a different employee in place of one that was laid off or terminated. [Note: Our reading of the act is that it is acceptable to hire different employees in place of any laid off or terminated.]

30. How do I calculate the average number of full-time employees?

(ADDED 04/03/2020)
For purposes of the loan forgiveness reduction calculation, the average number of full-time equivalent employees shall be determined by calculating the average number of full-time equivalent employees for each pay period falling within a month.