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By: Philip D. Speicher

The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed by the President and became law on March 27.  Here is what every small business and self-employed individual needs to know about the relief funds provided by the Act.


The Act establishes the “Paycheck Protection Program,” which provides up to $350 billion in forgivable business interruption loans to small businesses and self-employed individuals.  The primary purpose of the loans is to prevent employee layoffs and aid small businesses in retaining their employees during this period of disruption caused by the Coronavirus pandemic.


  1. How does the Paycheck Protection Program work?


The Paycheck Protection Program provides a “loan” that reimburses eligible businesses for certain covered expenses (primarily employee salaries/wages and related payroll expenses). Although the funds are initially provided as a loan, up to 100% of the loan will be forgiven by the government as long as the business uses the funds for authorized expenses and satisfies certain employee retention requirements.


  1. Who is eligible for a Paycheck Protection Loan?


Virtually all small businesses and non-profits, self-employed individuals, and sole proprietorships with fewer than 500 employees will be “eligible recipients” and may apply for a covered loan under the Act.


  1. How much money can a business receive?


An eligible recipient can receive a covered loan for 2½ times the business’s average monthly payroll expenses, subject to some limitations for highly compensated employees.  Eligible payroll expenses include, among other things:

  • Salaries, wages, commissions and other compensation for all employees, up to $8,333 per month for each employee. In other words, 100% of the compensation for any employee that makes up to $100,000 per year.
  • Payments made to employees for PTO, including vacation, parental, family, medical or sick leave.
  • Health insurance premiums.
  • Retirement benefits.
  • State and local taxes paid on the employees’ compensation.


Eligible payroll expenses do not include:

  • FICA taxes, FUTA taxes, or Federal withholdings on the employees’ wages.


Sole proprietorships and self-employed individuals are also eligible for funds to replace a portion of their lost income.


  1. What can the money be used for?


The money can be used to pay for any of the following:

  • Payroll expenses, including salaries and commissions
  • Employee benefits.
  • PTO/Vacation/Sick Pay.
  • Interest on mortgages or other pre-existing indebtedness.
  • Rent
  • Utilities


  1. How will a business get a Paycheck Protection Loan?


The loans will be made by any bank that is authorized to make SBA loans.  The Act also authorizes the Small business Administration to temporarily grant authority to non-SBA lenders to participate in the PPP Loan program.


  1. How will the business apply for a Paycheck Protection Loan?


The business must submit documentation verifying that: 1) the business was in operation on February 15, 2020; 2) had employees for which the business paid salaries or wages; or 3) paid 1099 compensation to independent contractors.


An authorized representative of the businesses must certify to the lender: 1) the uncertainty of current economic conditions make the loan necessary to support ongoing operations; 2) that the funds will be used to retain workers, maintain payroll, and pay eligible mortgage, lease, and utility payments; and 3) that the business does not have any other application pending for any other SBA loan for a similar purpose or duplicative of the amounts applied for under the PPP Loan.


  1. Will the loan have to be paid back?


Businesses will not have to pay back any portion of the loan as long as the funds are used for qualifying expenses. They may be required to repay a portion of the loan principal or interest if the loan is not used for qualifying expenses or if the business does not satisfy certain employee retention requirements, as discussed further below.  The PPP Loan program provides that all loan payments are deferred for at least 6 months and for up to 1 year. After the deferment period, the business can apply for forgiveness of the loan.


  1. How will a business qualify for forgiveness of a PPP loan?


The loan will be forgiven as long as:


  • The funds were used for eligible payroll expenses, mortgage interest, rent, and utilities expenses during the 8-week period after the loan funds are received; and
  • The business retained its employees and did not reduce the employees’ pay by more than 25%.


Although the original amount of the loan is 2½ times the business’s average monthly payroll costs, the loan is only forgivable to the extent that those funds are used for qualifying expenses within 8 weeks after the funds are received. Qualifying expenses include payroll costs, interest on pre-existing mortgages and other loans, rent payments, and utilities expenses.


For example, if a business’s average monthly payroll costs are $100,000, then the original loan amount would be $250,000.  Assuming that the payroll costs during the 8-week period following loan disbursement are $200,000, that would leave $50,000 to be paid toward loan interest, rent, and utilities expenses during that 8 weeks.  If those additional expenses are at least $50,000 during that 8-week period, 100% of the loan would be forgiven.  If those additional expenses are only $30,000 during that 8-week period, only $230,000 of the loan (plus interest on that portion) would be forgiven, and the remaining $20,000 would have to be repaid, plus interest.


Reduction in Forgiveness for Layoffs and Salary Reductions

If the business reduces its total number of full-time equivalent (“FTE”) employees, or reduces any individual’s wages by more than 25%, during the “covered period” (between February 15 and April 26, 2020), then the amount of loan forgiveness may be reduced proportionately. EXCEPT, the forgiveness amount will not be reduced if the laid off employees are rehired or employee salaries are restored to their original levels prior to June 30.


  1. Is the loan automatically forgiven or does the business need to request forgiveness?


The business must apply for forgiveness through the lender that gave the loan.  The application for forgiveness must include: 1) documentation verifying the number of FTE employees during the applicable period and payment of covered payroll expenses during the 8-week post-loan period, including copies of federal and state payroll tax returns; 2) documentation verifying payment of all eligible mortgage, rent, and utilities payments during the 8-week post-loan period; and 3) certification from an authorized representative that the above information is correct and that the loan funds were used to retain employees and pay eligible mortgage, rent, and utilities expenses.


The lender must render a decision if the loan is eligible for forgiveness within 60 days after the application for forgiveness is submitted.


  1. What happens if part of the loan is not forgiven?


Any unforgiven portion of the loan will be repayable over a period of up to 10 years at an interest rate no greater than 4%.


  1. Will the business have to pay taxes on the portion of the loan that is forgiven?


No.  The forgiven portion of the loan will not be treated as taxable “cancelation of debt” income.


  1. Will anyone have to guarantee the loan or pledge collateral to secure the loan?


No. The loans will be completely non-recourse. The business will not be required to pledge any collateral for the loan, and the loan will not require any personal guarantee.


  1. What if the business already applied for or received an SBA Disaster Relief Loan due to COVID-19 disruption?


SBA disaster relief loans received after January 31, 2020, can be converted to a forgivable Paycheck Protection Loan.  Upon applying for the PPP Loan, any business that received a disaster relief loan after January 31 is eligible for a PPP Loan amount equal to the eligible payroll expenses plus the outstanding balance of the disaster relief loan.


Forgiveness of any Disaster Relief Loan that is refinanced into a PPP Loan is subject to the same requirements as the “paycheck” portion of the PPP Loan regarding payment of qualifying expenses during the 8 week period after receiving the loan.  Therefore, if the business’s payroll costs, loan interest, rent, and utilities are greater than the amount of the “paycheck” portion of the PPP Loan, then the Disaster Relief portion would be forgivable to the extent of the overage.  If the overage is equal to or greater than the Disaster Relief portion, then the full Disaster Relief loan would be forgivable.  If the overage is less than the Disaster Relief portion, only that portion of the Disaster Relief loan would be forgiven.



This Article will be updated as additional information becomes available.

Professional Services Disclaimer: Please note that the information presented here is as an educational service, and while it contains information about legal issues, it is not legal advice. No warranty is made regarding the applicability of the information presented to a particular client situation, and the information set forth is not a substitute for original legal research, analysis and drafting for a particular client situation.