CARES Act Paycheck Protection Program: What Small Businesses Need to Know

Paycheck Protection Program

This article was originally posted on March 30, 2020 and includes updates as of April 21, 2020.

The economic fallout from the COVID-19 pandemic is impacting nearly all Americans. Small businesses and the individuals they employ are in critical need of assistance. The Paycheck Protection Program included in the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) became law on Friday, March 27, 2020. It aims to provide that assistance.

The Paycheck Protection Program is a $349 billion program designed to allow the Small Business Administration to make through its certified lenders loans to small businesses, 501(c)(3) nonprofit organizations, independent contractors and gig workers, and certain other organizations (collectively “Potential Borrowers”). To the extent utilized for certain specified expenses, and subject to provisions encouraging Potential Borrowers to maintain employees and their compensation, these loans could become forgivable up to 100% of the principal amount borrowed.

The Paycheck Protection Program (PPP) has provided to hundreds of thousands of small businesses and other entities a significant financial injection and short-term relief to address the immediate economic impact of the COVID-19 pandemic.  However, as of April 16, 2020, the SBA has announced that the initial funding of $349 billion has been used up.  So, if you did not get in line on time, you're left waiting and hoping Congress agrees to another round of funding for the program. On April 21, 2020, media reports indicated that the United States Senate and House of Representatives had reached a deal which would provide additional funding for this program, but details are not yet known.

Who Is Eligible for the Paycheck Protection Program?

  1. Businesses, 501(c)(3) nonprofits, or 501(c)(19) nonprofits (collectively, “Eligible Entities”) that employ fewer than 500 employees; or
  2. Eligible Entities having greater than 500 employees but less than SBA employee-based size standards (only applicable for businesses in certain industries;; or
  3. Restaurant, Hotel, or Accommodation and Food Service  business with more than one physical location and with fewer than 500 employees at each individual location; or
  4. Sole-proprietors, including independent contractors/gig workers.

Note that the Paycheck Protection Program waives the SBA’s typical affiliation rules, which would typically bar from obtaining an SBA loan certain businesses that are affiliates of each other where one has the power to control the other. If these rules stopped your business from obtaining SBA loans in the past, you should analyze your ability to qualify under the Paycheck Protection Program.

Required Certification for applicants

An applicant for a loan under the Paycheck Protection Program is required to make a good faith certification:

  • the applicant was in operation on February 15, 2020 and had employees for whom it paid salaries and payroll taxes or paid independent contractors, as reported on Form 1099-MISC
  • that current ecomomic uncertainty makes this loan request necessary to support ongoing operations of the applicant;
  • that the funds will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments;
  • that the applicant understands that if the funds are knowlingly used for unauthorized puruposes, the federal government may hold it legally liable as such for charges of fraud, and that not more than 25% of loan proceeds may be used for non-payroll costs;
  • that the applicant will provide to the lender verification of the number of full-time equivalent employees on payroll as well as the dollar amonts of payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities for the eight week period following the loan;
  • that loan forgiveness will be provided for the sum of documented payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities. As explained above, not more than 25 percent of the forgiven amount may be for non-payroll costs.
  • that during the period beginning on February 15, 2020 and ending on December 31, 2020, the applicant has not and will not receive another loan under this program;
  • that "the information provided in this application and the information provided in all supporting documents and forms is true and accurate in all material respects. I understand that knowingly making a false statement to obtain a guaranteed loan from SBA is punishable under the law, including under 18 USC 1001 and 3571 by imprisonment of not more than five years and/or a fine of up to $250,000; under 15 USC 645 by imprisonment of not more than two years and/or a fine of not more than $5,000; and, if submitted to a federally insured institution, under 18 USC 1014 by imprisonment of not more than thirty years and/or a fine of not more than $1,000,000; and that 
  • "that the lender will confirm the eligible loan amount using tax documents I have submitted. I affirm that these tax documents are identical to those submitted to the Internal Revenue Service. I also understand, acknowledge, and agree that the Lender can share the tax information with SBA’s authorized representatives, including authorized representatives of the SBA Office of Inspector General, for the purpose of compliance with SBA Loan Program Requirements and all SBA reviews."

Who Makes the Paycheck Protection Loans?

SBA-certified lenders. We recommend contacting your bank or credit union to inquire whether they are a SBA-certified lender.  If not, ask if they have recommendation to alternative lenders.

How Much Can Be Borrowed under the Paycheck Protection Program?  

Generally, the lesser of 2.5 times the average monthly payroll costs incurred in the one-year period before the date of the loan, or $10 million. To the extent that a borrower has already obtained an SBA disaster loan, then the balance of that loan can be added to a Paycheck Protection Program loan.

For this purpose, payroll costs include payments of any compensation with respect to employees that is for (i) salary, wage, commission, or similar compensation; (ii) cash tip or equivalent; (iii) vacation, parental, family, medical or sick leave; (iv) severance pay; (v) the provision of group health care benefits; (vi) state or local tax assessed on the compensation of employees; any compensation of a sole proprietor or independent contractor that is not more than $100,000 in 1 year, as prorated for the period February 15, 2020 through June 30, 2020.

However, payroll costs do not include for this purpose (i) the compensation of any individual in excess of an annual salary of $100,000, as prorated for the period February 15, 2020 through June 30, 2020; or (ii) taxes withheld under chapters 21, 22, or 24 of the Internal Revenue Code (FICA, FUTA, or the Railroad Retirement Tax Act); or (iii) compensation of an employee whose principal place of residence is outside of the United States; or (iv) qualified sick leave wages or qualified family leave wages for which a credit is already allowed under the Families First Coronavirus Response Act.

If an Eligible Entity has not been operating for at least one year as of the loan date, then the maximum loan amount is the lesser of 2.5x the average monthly payments for payroll costs incurred from January 1, 2020 to February 29, 2020, or $10 million.

Loan Terms

According to the law, loans made under the Paycheck Protection Program are on a 10-year term with deferred payments for at least 6 months and up to one year.  Interest rates are not to exceed 4%, and no collateral or personal guarantee is required.  However, on or around March 31, 2020, fact sheets were posted on the US Department of Treasury's website. You can see them here.  These fact sheets say that the loans will be on a 2-year term with interest rates at 0.5%.  Finally, the SBA issued regulations on April 2, 2020.  You can see them here.  The regulations say the loans will be on a 2-year term with interest rates at 1%.  Since the regulations are the most recent information provided, we believe them to be the best guidance for borrowers and lenders.  However, it is important to check with your lender for final details on these subjects, particularly given the fluidity of guidance.

Loan Forgiveness

The key component of loans made under the Paycheck Protection Program is that the loans can become forgivable to the extent the proceeds are used to pay payroll costs, mortgage interest payments, rent, and utilities during the 8-week period beginning on the date of the origination of the loan (collectively, the “Forgivable Costs”). 

However, the forgivable amount of the Forgivable Costs cannot exceed the original principal amount of the loan and will be reduced (but not increased) based upon reductions in numbers of full-time equivalent employees (FTEEs) or certain reductions in salaries in wages. The following formulas are used to determine reductions in forgivable amounts.

Forgivable Costs x [(Average Number of FTEEs per month during the 8-week period following the loan origination)/Average Number of FTEEs per month from February 15, 2019 to June 30, 2019)]

OR, at the election of the borrower,

Forgivable Costs x [Average Number of FTEEs per month during the 8-week period following the loan origination)/Average Number of FTEEs per month from January 1, 2020 to February 29, 2020]

Additionally, if total salary of wages of any employee during the 8-week period following loan origination are reduced by more than 25% of the total salary or wages paid to that employee during the most recent full quarter, then the Forgivable Costs will be reduced by the same dollar amount as the reduction in salary/wages.

There are exemptions for these reductions if the reductions in the number in FTEEs or wages/salary occurs between February 15, 2020 and April 26, 2020, and such reduction is eliminated before June 30, 2020.

Finally, the regulations make clear that not more than 25% of the loan proceeds should be used for non-payroll costs, and that not more than 25% of the forgivable amount should be used for non-payroll costs.

What Should You Do Now?

  1.  Identify your desired SBA lender and make contact about a loan under the PPP.
  2. Determine and document your total payroll costs over the trailing calendar year.
  3. Determine and document the number of full-time equivalent employees per month during February 15, 2019 to June 20, 2019.
  4. Determine and document the number of full-time equivalent employees per month during January 1, 2020 to February 29, 2020.
  5. Determine and document the total salary and wages paid to each of your employees in the most recent full quarter during which said employees were employed.
  6. Fill out an application provided by your lender or, if your lender has not provided one, the form application supplied by the US Treasury.

If you have questions about this program or need further guidance, our Paycheck Protection Program team can help.

Bell, Davis & Pitt Paycheck Protection Program Team: 

Kris Bryant:
Andrew Freeman:
Justin Hardy:
Alan Ruley:

NOTE:  This post was originally written on March 30, 2020 and was updated on the date indicated at the top of the post.


About the Authors

Kris Bryant Winston Salem attorney Bell Davis Pitt

Kris Bryant

Kris Bryant primarily practices in the area of general corporate law. Kris has been a member of the Bell, Davis & Pitt team since 2009. Kris’s principal areas of practice are:
Email Kris

Andrew A. Freeman

Andrew Freeman litigates matters in all levels of trial and appellate courts, including business, employment, banking, insurance,
Email Andrew

Alan M. Ruley

Alan Ruley is a seasoned civil trial and appellate lawyer. He represents clients in a wide variety of disputes in federal court, state court, and the North Carolina Business Court, focusing primarily on business litigation, intellectual property, insurance coverage and recovery, banking and employment.
Email Alan

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