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 06/29/2020)
In general, any business in operation as of February 15, 2020, that was harmed by the COVID pandemic at any time between February 15, 2020 and December 31, 2020—including any business entity, nonprofit, veterans organization, tribal business concern, sole proprietorship—provided it has 500 or fewer employees. Additionally, self-employed individuals and/or independent contractors who were operation as of February 15, 2020 may apply. (Larger businesses in certain industries can also apply, even if they have more than 500 employees, if they meet certain SBA criteria.)

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?

(UPDATED 06/29/2020)
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 12 calendar months prior to obtaining the loan—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.)

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

(UPDATED 06/29/2020)
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 the business had to be started prior to February 15, 2020.

[Note: If you acquired an existing business, you can apply for a PPP loan provided the business you acquired was in existence before February 15, 2020.]

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”?

(UPDATED 06/29/2020)
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, and (c) qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act. Although inconsistent with the language of the act, SBA guidance does not exclude federal employment taxes imposed or withheld, 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. Thus, as the SBA sees it, payroll costs are calculated on the “gross” amount of pay rather than the “net amount.”

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?

(UPDATED 06/29/2020)
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 (i.e. electricity, gas, water, transportation, telephone or internet service), for which service began before February 15, 2020; and
  • Interest on other debt obligations that were incurred before February 15, 2020.

[Note: It is unclear from the SBA guidelines what “transportation” means in this context. It is also unclear if heath care costs include dental plans, health saving accounts, etc. are included.]

20. What is my interest rate?

(UPDATED 06/29/2020)
The interest rate is 100 basis points or one percent.

21. When is my loan due?

(UPDATED 06/29/2020)
For loans made prior to June 5, 2020, the loan must be repaid within 2 years unless the borrower and lender mutually agree to extend the loan up to the maximum allowable maturity date of 5 years. For loans made on or after June 5, 2020, the loan must be repaid within 5 years.

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

(UPDATED 04/03/2020)
No. Loan payments (including both interest and principle) are deferred until forgiveness remittances are made to lenders. However, for borrowers that do not apply for forgiveness within 10 months after its forgiveness covered period ends, the borrower must immediately begin repaying the loan.

[Note: Interest continues to accrue during any deferment period.]

23. Can I pay off my loan early?

(UPDATED 06/29/2020)
Yes. There are no prepayment penalties or fees.

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

(UPDATED 06/29/2020)
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 spend on the allowable uses of the funds (i.e. payroll costs as defined above under $100,000 annualized, mortgage interest, rent and utility costs) over a specified covered period after disbursement of the loan. Under the PPP Flexibility Act, the borrower can elect as its “covered period” either the 8-week period after the loan is made or a 24-week period after the loan is made (up to December 31, 2020), 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 newest guidelines require that borrowers not use more than 40 percent of the loan proceeds on 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.]

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?

(UPDATE 06/29/2020)
Not for federal tax purposes. The amount of forgiveness of loans made under the PPP will not be treated as taxable income to you at the federal level. However, it is important to note that the IRS will not allow businesses to deduct from taxable income those expenses for which forgiveness was received. So, effectively, the amount is still taxed at the federal level. [Note: there may be state tax implications for the amounts received in forgiveness.]

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

(UPDATED 06/29/2020)
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 during your covered period.

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

(UPDATED 06/29/2020)
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 December 31, 2020. Specifically:

  • Decrease in Average Compensation: Loan forgiveness will be reduced if you have decreased salaries and wages by more than 25% for employees during your applicable covered period. Specifically, the amount of loan forgiveness will be reduced by the amount of any reduction in salary or wages of any employee during the applicable covered period as compared to the salary or wages of that employee during the most recent full quarter during which the employee was employed before the covered period, provided that employee that made less than $100,000 annualized in 2019.
  • Decrease in Average Staffing: Your loan forgiveness amount will be reduced if you decrease your full-time equivalent employee headcount relative to an earlier comparison period. If you are not considered a seasonal employer, the amount of this reduction is determined by dividing the average full-time equivalent employee headcount during the covered period by the average full-time equivalent employee headcount for one of two alternative periods before the loan and then multiplying that number by the amount you spent for covered expenses in the applicable covered period. More specifically, you first divide the average number of full-time equivalent employees you employed for each pay period falling within a month during your covered period by either—at your election—the average number of full-time equivalent employees you employed for each pay period falling within a month during the period beginning on February 15, 2019 and ending on June 30, 2019 or the average number of full-time equivalent employees you employed for each pay period falling within a month during the period beginning on January 1, 2020 and ending on February 29, 2020. [Note: as noted below, there are two options for determining your full-time equivalent employee headcount: (a) for each employee, take the average number of hours of each employee paid per week, divide that number by 40 and then round to the nearest tenth or (b) assign a “1” to each employee who works 40 hours per week or more and “.05” for each employee who works less than that.]
  • 60/40 Reduction: Current SBA guidelines somewhat contradict the PPP Flexibility Act, which would seemingly eliminate all forgiveness in the event a borrower has not used at least 60% of the loan proceeds on payroll costs (as defined above). Instead, the guidelines indicate that there would be a pro rata reduction in the forgiveness amount—reducing the total amount of forgiveness to a point where the amount spent on payroll costs represents at least 60% of the forgiveness amount. [Note: This reduction should be applied last after the above two reductions are applied, if applicable.]

29. What if I rehire the employees I had laid off and/or restored pay levels?

(UPDATED 06/29/2020)
The above reductions to the forgiveness amount will not be applied to you if you restore—before you apply for forgiveness or by December 31, 2020, whichever comes first—your full-time equivalent employee headcount and pay 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, the SBA guidelines do not require that you rehire the same employees previously laid off or furloughed, but instead only looks at total headcount levels. However, to the extent you attempt to rehire the same employees and they decline to return to work, that employee may be excluded from your basis period and covered period calculations (provided it is all documented in writing).

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

(UPDATED 06/29/2020)
For purposes of the PPP loans, the SBA is looking at the headcounts for full-time equivalent employee (FTE) headcount based on a 40 hour work week. Accordingly, more than one part time employee can add up to a full-time equivalent employee. There are two ways to do the calculations, one more difficult than the other but potentially more beneficial. For each headcount period (i.e. your applicable covered period and your selected comparison period), you can take the average number of hours of each employee paid per week, divide that number by 40 and then round to the nearest tenth and then add up the numbers (or add up the total hours worked over the entire covered period and divide the total hours by the number of weeks in the period and then divide that again by 40—and round to the nearest tenth). (No employee should get more than a “1” under this method and employees working less than 40 hours will have a fraction such as .9 or .8 etc. These numbers are all added to get the total headcount figure.) This method will give you the most accurate average FTE headcount—and for many, it will be the most beneficial headcount methodology. Alternatively, to make things easier, the SBA allows borrowers to simply assign a “1” to each employee who works 40 hours per week or more and “.05” for each employee who works less than that. All of the 1’s and .05’s are added up to get the total headcount. [Note: We recommend doing both calculations and determining which provide the best result.]