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Coronavirus Aid, Relief, & Economic Securities (Cares) Act Payroll Protection Loans

The CARES Act which was already passed by the Senate passed in the House of Representatives on Friday, March 27, 2020 and will be signed by the President.  Among its many provisions, the CARES Act provides for so-called “paycheck protection loans” to eligible small businesses.  These paycheck protection loans will greatly aid employers in retaining their employees so that they will be in the position to get immediately up and running after the pandemic has subsided, which is crucial to facilitating the rebound of the economy and the return to normalcy.

The loans will be granted through the SBA 7(a) program and are limited in amount to the lesser of (i) the average total monthly “payroll costs” for the one-year period ending on the date that the loan was made (an alternative calculation is available for seasonal employers) multiplied by 2.5 plus the outstanding amount of any loan made under the SBA Economic Injury Disaster Loan program between January 31, 2020 and the date on which such loan may be refinanced with this new program; and (ii) $10 million.

In the draft of the legislation, payroll costs INCLUDE the following: wages, commissions, salary, or similar compensation to an employee or independent contractor, payment of a cash tip or equivalent, payment for vacations, parental/family/medical/sick leave (see exclusion exception below), allowance for dismissal or separation, payment for group health care benefits, including premiums, payment of any retirement benefits, and payment of state or local tax assessed on the compensation of employees.

On the flipside, payroll costs EXCLUDE payroll taxes, compensation to any employee or principal if their primary residence is OUTSIDE of the United States, compensation of any individual employee that exceeds $100,000 annually, and any qualified sick leave or family medical leave for which a credit is allowed under the Families First Act.

In contrast to typical SBA 7(a) loans, the proposed legislation provides very few requirements that a borrower needs satisfy in order to receive the loan. The requirements include a good faith certification by the borrower that it needs loan proceeds in order to continue its operations during the pandemic, that the funds will be used to retain its workers or to cover other costs, such as payroll, mortgage and rent payments, utilities, and any other debt service requirements (what other debt service requirements covers is not yet certain), borrower does not have any other loan applications pending under the program for the same purpose and that it has not received any duplicative payments under the program from the covered period of February 15, 2020 through December 31, 2020.

To further aid small businesses, a personal guaranty by the principals of the borrower is not required and standard SBA fees are being waived. The loans will have a max maturity of 10 years and interest rates not to exceed 4%.

The CARES Act is also drafted to provide loan forgiveness for paycheck protection loans, which will be on a tax-free basis. The amount that can be forgiven will be determined on the following equation with the sums determined during the eight-week period beginning on the disbursement date of the loan:  sum of eligible payroll costs (as set forth above) plus mortgage interest plus rent payments plus certain utility payments. Borrowers should keep in mind that the amount forgiven can be reduced in the event that the borrower reduces its number of employees and/or cuts wages.

Borrower’s must submit an application to apply for loan forgiveness and provide supporting documentation that verifies the number of employees and the respective pay rates and bank statements and/or cancelled checks showing mortgage, rent and permitted utility payments.

Should the CARES Act be passed into law, the hopes are that the application process will be up and running by the end of next week.  The goal is to have the application to funding process be as painless and quick as possible, with the ultimate goal of application to funding being within in one to two business days.

We are closely monitoring this continually developing legislation and will endeavor to keep our clients updated as the matter progresses.  We encourage our clients to reach out not only to us, but also to their local lenders with any questions that they may have regarding the economic assistance programs available.

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