The U.S. Small Business Administration (SBA), as part of the $2 trillion CARES Act, will distribute $349 billion in loans through the new Paycheck Protection Program (PPP) and the existing Economic Injury Disaster Loan (EIDL) program to companies that meet certain criteria. The PPP was created help small businesses maintain their workforce during the COVID-19 crisis, whereas the EIDL program is designed to help those business recover economically from any type of disasters, including the current pandemic.
In addition to the existing guarantees under the SBA loan program, PPP loans are 100 percent guaranteed by the federal government, and do not require collateral and personal guarantees. Eligible businesses are those with fewer than 500 employees that were in operation on February 15, 2020, and paid employee salaries and payroll taxes. Businesses that receive an economic injury disaster loan for the same purpose are not eligible; however, the program allows those businesses to refinance their economic injury disaster loans made between January 31, 202, and the date on which loans are made available under the program.
Businesses may borrow up to $10 million or 2.5 times the average monthly “payroll costs,” based on the amount paid in employee wages/salaries between Jan. 1 and Feb. 29, 2020. “Payroll costs” include:
- salary, wage, commission, or other similar compensation
- payments of cash tips
- payments for vacation, parental family, medical, or sick leave
- allowance for dismissal / separation
- healthcare benefits (including insurance premiums)
- retirement benefits
- payroll taxes
In addition, a sole proprietor or independent contractor whose sum of payments of any compensation that is a wage, commission, income, net earnings from self-employment, or similar compensation, that does not exceed $100,000 in 1 year, as prorated for the covered period, is also included as eligible “payroll costs.”
Individual employee compensation in excess of $100,000 per year (as prorated for the covered period), employees with a primary residence outside of the United States, and any qualified sick leave or family leave wages for which a tax credit is allowed under Section 7001 or 7003 of the Families First Coronavirus Response Act should not be included when calculating payroll costs. The interest rate on PPP loans is capped at 4% annually.
The principal of the loan may be forgiven if the business applies the funds for “approved purposes,” including:
- “payroll costs”
- mortgage interest
- rent payments
- utility payments
In addition, the company will need to retain the number of full-time equivalent employees and keep wages/salary of certain employees above a designated threshold. If the company reduces its workforce or wages/salaries between February 15, 2020 and 30 days after enactment of the CARES Act, the amount of the PPP loans subject to forgiveness will be reduced unless the company rehires employees or eliminates wage/salary reductions before June 30, 2020
There are special exceptions for food/hospitality businesses
- Restaurants, food service, caterers, and hotels that employ 500 or fewer employees per physical location are also eligible to receive a single loan if they operate in North American Industry Classification System Sector 72 (Accommodation and Food Services)
- Affiliation rules are waived for businesses in the hospitality and restaurant industries, franchises that are approved on the SBA’s Franchise Directory, and small businesses that receive financing through the Small Business Investment Company (SBIC) program
- Under the CARES Act, Congress has appropriated $10 billion of additional funding for EIDLs. It is currently unclear whether applicants can apply for both a PPP loan and an EIDL loan for COVID-19 relief
- Application forms for PPP loans are not yet available. The SBA will modify existing SBA 7(a) application forms.
- Visit sba.gov/disaster for more information on SBA disaster loans.
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