CARES Act & Paycheck Protection

On March 19, 2020, Congress introduced the CARES Act, a significant economic stimulus package program. One of the most critical aspects of this package was the highly publicized Paycheck Protection Program (PPP). While many members of the public are aware of the broad details of the PPP, local banks, accountants, and businesses of all kinds are struggling to understand the finer details of the program. Recent proposed regulations published by the U.S. Small Business Administration have begun to provide additional clarity.

But first, the basics.

For eligible small businesses and other organizations, the program makes forgivable loans available on an emergency basis. Business owners will need to apply for the loans to be forgiven and they will functionally operate as a combination of a grant and/or a loan. However, if a business is not careful to master the details of these SBA regulations, they may instead be required to repay a significant portion of the loans. Up to $349 billion dollars in aid is available to applicants on a first-come, first-serve basis.

Contradictory information has been repeatedly provided regarding the interest rates of the loans, however, the latest proposal from the SBA sets the interest rate at 1%. The loans will mature within two years, and payments will begin within six months. Applications must be received prior to June 30, 2020, and a natural person is eligible to receive funds under only a single PPP loan, no matter how many businesses they operate.

It is recommended that borrowers carefully review the formulas and instructions for the calculation of maximum loan amounts. Many businesses will find that they may not have applied for the maximum amount of funds that they are eligible for, in their original applications for aid. Others may find that they have elected to apply during a look-back period with payroll costs that may significantly reduce their eligibility for loan forgiveness. Borrowers may wish to consult their lenders and/or accounting professionals regarding whether it is prudent or possible to revise their applications without losing their position in the application queue, and/or without losing access to the funds entirely due to the intense competition for relief, and the limited funds available. Many banks have already expended all fees allocated to them under the program, while others have yet to begin processing applications.

Who is Eligible?

The most relevant eligible categories are U.S. businesses with 500 employees or less, non-profit organizations with 500 employees or less and 501(c)(3) status (which includes many churches), veterans organizations under 501(c)(19), independent contractors, certain self-employed individuals, and sole proprietorships. Certain other businesses and organizations may also be covered. You must also have been in operation as of February 15, 2020.

CARES and SBA regulations also require businesses to meet the definition of a small business concern, under 15 U.S.C. 632. This includes criterion such as being independently owned and operated, and not dominant in its field of operation. Other criterion under Section 121.103 of Title 13, C.F.R, have been waived, which may allow greater loan access to businesses operating under a franchise model, and other similar arrangements.

Certain categories are specifically excluded. These include household employers (individuals who employ nannies or housekeepers), businesses that engaged in any activity deemed illegal under federal, state, or local law (e.g. marijuana dispensary), an owner with 20 percent or more of the equity ownership who has been convicted of a felony within the past five years, or is incarcerated, on probation, on parole, or subject to an indictment, arraignment, or criminal charges.

What is the Maximum Loan Amount?

The maximum amount that can be received is the lesser of $10 million dollars, or a payroll calculation formula, designed to provide roughly 2.5 times the amount of average monthly payroll. For example, if a business has average monthly payroll of $100,000 per month, it could receive $250,000 in proceeds ($100,000 x 2.5).

Ready for some math?

Several methods of calculating payroll can be used. The payroll calculation formula recommended by the proposed SBA regulations as of the present date, is to aggregate all payroll costs over the last 12 months for employees who reside in the United States. Compensation paid at a rate that exceeds $100,000 a year, should be excluded. This payroll amount over the past twelve months should be divided by twelve. Then, multiply by 2.5.

However, other payroll calculation methods may be more advantageous, depending on the nature of your business and its payroll history. While the instructions on the SBA application form recommend that payroll costs be calculated based upon the average monthly payroll for calendar year 2019, the recent proposed SBA regulations instead suggest using the last twelve months of payroll. The CARES Act itself suggests that the applicant use “payroll costs incurred during the 1-year period before the date on which the loan is made…”, which gave rise to these rival interpretations. These different methodologies could easily result in substantive differences. As of the time of this writing, this ambiguity may not have yet been fully resolved. The proposed SBA regulations describe their recommended 12-month look back period as “one of the methodologies contained in the act” that can be used to calculated payroll costs.

For seasonal businesses, applicants may choose to instead use monthly payroll for the time period between February 15, 2019 and June 30, 2019. For new businesses, payroll may be calculated using the time period from January 1, 2020 to February 29, 2020.

If any Economic Injury Disaster Loans were received, those amounts should be subtracted from the loan amount.

The implementation of the CARES Act has been rapidly expedited due to the economic emergency, and as a result has received some criticism from the banking and accounting industries for being disorganized, or providing a lack of clarity in certain areas. Additional clarifications and refinements are anticipated, and should be closely monitored. The Treasury Department’s FAQ on PPP indicates that the U.S. government will not challenge lender PPP actions that conform to the guidance provided in the SBA’s PPP Interim Final Rule, or any subsequent rule-making in effect at the time. If a lender identifies errors in the borrower’s calculation, or lack of substantiation in the borrower’s submitted documents, the Treasury Department has directed lenders to work with the borrower to remedy these issues.

What Counts as Payroll Costs Under PPP?

Compensation to employees in the form of salary, wages, commissions, cash tips or a good-faith estimate of tips, payments for leave for vacations, family, parental, medical, or sickness, group health care coverage payments including insurance premiums, payments of state and local taxes assessed on compensation, and payments for separation or dismissal.

For independent contractors and sole proprietors, income is defined as wages, commissions, income, or net earnings from self-employment or similar compensation.

Payroll costs do not include payments to individuals whose principal place of residence is outside the United States, annual compensation by an individual received in excess of $100,000 on a pro rata basis (up to $100,000 remains eligible), and most critically, federal employment taxes, federal income withholding, and FICA payments imposed or withheld between February 15, 2020 and June 30, 2020. In their planning to project and to maximize the forgivable amounts of these loans, borrowers should be careful to account for the considerable effect of federal withholding exemptions not qualifying as eligible payroll costs.

Also excluded are qualified sick and family leaves wages under the Families First Coronavirus Response Act, sections 7001 and 7003. Payments to independent contractors should not be included as employee payroll costs.

How Do I Apply?

Applicants may submit applications through any SBA approved bank. Additional lenders may also be approved by the SBA. A zip-code based locator for SBA-approved lenders can be found here.

A link to the application form for the PPP can be found on the SBA website.

As funds for the program are limited and high participation in the program is anticipated, prospective applicants should move quickly to determine whether they wish to apply.

What Materials Should I Submit with My Application for the PPP?

Depending on the class of business, applicants should have available documentation of payroll records and filings, tax returns and records, a Form 1099-Misc, proof of eligible expenses such as rent, utilities, and mortgage expenses, or bank records sufficient to establish income and expenses (for sole proprietorships). Applicants should also be prepared to identify any other business entities they may own in addition to the business applying for a loan.

How Long Before Repayment Begins?

Payments do not have to begin for six months following the disbursement of the loan. However, interest will accrue immediately. Deferments of payments can be requested for up to one year.

What are the Requirements for PPP Loan Forgiveness?

PPP loans can be forgiven in whole or in part, including accrued interests. A borrower will not be responsible for any loan payments, if the borrower uses all proceeds for “forgivable purposes”, and if employee compensation levels have been maintained. If during 2019, the number of employees and/or the salary paid to employees dropped, there is a risk of reduction in the forgivable portion of the loan.

To qualify for forgiveness, 75% of all proceeds of the loan must be used to payroll costs. For non-payroll costs, businesses can receive credit for payments of interest on mortgage obligations, rent obligations, and utility payments under service agreements, each to be dated prior to February 15, 2020, and covering the eight week period following the date of the loan. This seventy-five percent figure is a clarification of wording in the CARES act, which may have led some business owners to believe that a higher proportion of non-payroll costs could be expended. Proceeds may also be used to continue group health care benefits, such as premiums, and periods of paid sick, medical, or family leave.

After calculating the amount that qualifies for forgiveness, the forgivable amount can be reduced by each of two methods in the Cares Act. A reduction based on a drop in the average number of full-time equivalent employees between one of two periods selected by the borrower (either February 15, 2019 thru June 30 2019, or January 1, 2020 thru February 29, 2020), and a second reduction based on any cuts to the compensation paid to each employee working in 2019, compared to their payment during the covered period.

For employers who have had substantial reductions in workforce since 2019, selecting the period of January 1, 2020 and February 29, 2020 may maximize the percentage of the loan that is forgivable (but also may reduce the maximum amount available as a loan).

If full-time equivalent workers are rehired no later than June 30, 2020, the employer can also eliminate the reduction in loan forgiveness from a drop in the number of full-time equivalent employees.

What Are The Penalties for Misuse of PPP Funds?

If a person negligently misuses PPP funds, the SBA will require repayment of the amounts that were misused. However, if the funds are knowingly misused, you may be subject to civil and/or criminal charge for fraud. Depending on the nature of the charges, this may include imprisonment for up to thirty years, and a fine of up to $1,000,000.

Businesses will be asked to make a variety of good faith representations on their applications, including that:

“Current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant”, and that “the funds will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments…”. The proposed SBA regulations indicate that banks may rely upon borrower submitted documentation, but that they are required to establish an anti-money laundering compliance program, and must report potential fraud or suspicious activity to federal agencies such as the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN).

What If I Have Additional Questions?

If you have additional questions regarding the PPP, the Families First Coronavirus Response Act, Ohio’s Stay at Home Order, the CARES Act, or any other business or employment related issue, our firm offers free consultations, by phone. We would be happy to clarify any of your concerns, and assist fellow small businesses throughout our community and the state of Ohio. Our firm also practices in many other areas of law, including wills, trusts and estate planning business and employment law, family law, criminal law, oil and gas, and other areas. Call us at (330) 407-1418 to set up a free consultation with one of our attorneys. We are always happy to answer any questions you may have.

Our next article will be out within several days, discussing wills, medical care documents, and other estate planning suggestions. Included in the article will be a number of simple and easy steps that you can take at any time, without the necessity of hiring an attorney, to significantly reduce costs and simplify administration of your property and other affairs. All of our essential will and estate planning documents are available through a convenient, 15-20 minute phone interview from the safety and comfort of your home.

Gregory J. McCleery, Esq., Managing Attorney

Sources and Information:

Proposed Interim SBA Regulations As of 4/8/2020

Text of CARES Act

SBA Bank Locator

SBA Application

SBA Small Business Guidance and Loan Resources

PPP Fact Sheet

Treasury Department FAQ on PPP

Definition of Small Business Concern Under 15 U.S.C. 632

Section 121.103 of Title 13, C.F.R.

Disclaimer: Please note that use of this website, in and of itself, does not create a client relationship between you and McCleery Law Firm, LLC, or any individual lawyer. This website provides only general information. It does not and is not intended to provide legal advice regarding any specific case or situation. Please contact our office if you wish to establish a client relationship.

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Greg is the founder of McCleery Law Firm and opened his own practice several months after passing the bar. During law school, Greg was awarded the Perantinides & Nolan Scholarship for his outstanding commitment to public service. Greg completed his Juris Doctorate degree at the University of Akron School of Law.

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