Download materials from Akin Gump including aid summaries and how-to guides on qualifying for tax credits and deferments and applying for financial assistance.
Section 1102 provides $349 billion for expedited individual loans up to $10 million through approved lenders that are guaranteed 100% by the U.S. government. The loan proceeds can be used to cover payroll support (such as employee salaries, paid sick or medical leave, insurance premiums) and mortgage, rent and utility payments incurred from February 15, 2020 through June 30, 2020.1 The maximum amount of a loan equals 2.5 months of average historical monthly payroll expenses, subject to certain exclusions.
On March 31, 2020, the Department of Treasury issued preliminary guidance regarding the imminent implementation of the Paycheck Protection Program (PPP). On April 2, 2020, the Small Business Administration (SBA) issued an interim final rule providing additional implementation guidelines and requirements for the PPP.
Small businesses and sole proprietorships started to apply for and receive PPP loans on April 3, 2020. Independent contractors and self-employed individuals can begin applying on April 10, 2020. The loans are first come, first served.
Benefits for Borrowers: Borrowers are eligible for loan forgiveness equal to the amount spent by the borrower during an 8-week period after the origination date of the loan on payroll costs, interest payment on any mortgage incurred prior to February 15, 2020, payment of rent on any lease in force prior to February 15, 2020, and payment on any utility for which service began before February 15, 2020. All borrower and lender fees, collateral and personal guarantee requirements are waived. The fixed interest rate is 1 percent and loan maturity is two years. No prepayment fees will be charged. Loan repayments can be deferred for six months.
Benefits for Lenders: Allows loans to be sold on the secondary market. Provides the regulatory capital risk weight of loans made under this program, and temporary relief from troubled debt restructuring (TDR) disclosures for loans that are deferred under this program. Lender compensation for servicing the loan is 5 percent for loans of not more than $350,000;
3 percent for loans of more than $350,000 and less than $2,000,000; and 1 percent for loans of not less than $2,000,000. Interim SBA regulations provide some protection for banks in the underwriting process.
The SBA lender list can be found at https://www.sba.gov/paycheckprotection/find.
SBA counts all individuals employed on a full-time, part-time or other basis, so this includes employees obtained from a temporary employee agency, professional employee organization or leasing arrangement. Contractors receiving IRS Form 1099 and volunteers are not considered employees.
The method for determining size includes the following principles:
The SBA’s affiliation rules substantially impact the ability of many entities to qualify for small business loans. On April 3, 2020, SBA issued an interim final rule (Affiliation IFR) about the applicability of affiliation rules at 13 C.F.R. §§ 121.103 and 121.301 to PPP loans. This supplements the SBA’s April 2 interim final rule.
The Affiliation IFR clarifies that SBA’s affiliation rules apply to all PPP applicants unless an exemption provided in the CARES Act applies. It also adds a new exemption, providing that affiliation rules do not apply to relationships of any church, faith-based organization, or entity that is based on religious teaching or belief. Affiliation rules a waived for:
Concerns and entities are affiliates of each other when one controls or has the power to control the other, or a third party or parties controls or has the power to control both. It does not matter whether control is exercised. SBA’s affiliation rules applicable to financial assistance programs, found at 13 C.F.R. §§ 121.103, provide that any of the following circumstances is sufficient to establish affiliation.
Eligible borrowers can seek a total loan amount equal to monthly average of payroll over the past 12 months, multiplied by 2.5. “Payroll costs” include salary, wages, commissions, cash tips, paid vacation or leave, insurance premiums and other group health care payments, allowance for separation or dismissal, paid retirement benefits and state or local taxes. The statute also allows a business to include the “sum of any compensation to or income of a sole proprietor that is a wage, commission, or income, net earnings from self-employment, or similar compensation” in payroll costs to the extent these amounts are in an amount that is not more than $100,000 in one year.
“Payroll costs” do not include individual compensation in excess of $100,000, certain taxes (including the employer’s share of the social security portion (6.2% of employee wages) and the Medicare portion (1.45% of employee wages) of payroll taxes known as Federal Insurance Contributions Act (FICA)) and ordinary income tax withholding, compensation paid to an employee if their place of residence is outside the United States and paid leave under the Families First Coronavirus Relief Act.
Example: An employer with total payroll costs of $12 million over the past 12 months is eligible for a PPP loan of $2.5 million ($1 million average monthly payroll cost x 2.5).
If you received an Economic Injury Disaster Loan (EIDL) between January 21, 2020 and April 3, 2020, you can add the outstanding amount of that loan (less the amount of any “advance” under a COVD-19 EIDL) to your calculated total (average monthly payroll cost x 2.5) for purposes of calculating your maximum loan amount.
Example: An employer calculated the $2.5 million amount in the above example, and also has an outstanding COVID-19 EIDL of $600,000, $100,000 of which was an advance. The employer is eligible for a PPP loan of $3 million ($2.5 million plus
$600,000, minus $100,000 advance).
Borrowers that were not in business between February 15, 2019 and June 30, 2019 can receive a loan amount equal to 2.5 times their average payroll costs between January 1, 2020 and February 29, 2020. Borrowers that have existing loans under certain SBA programs may be subject to different limits.
Lenders must consider whether the borrower was in operation before February 15, 2020 and had employees for whom the borrower paid salaries and payroll taxes, (or paid independent contractors under Form 1099-MISC). Borrowers also must make a good faith certification on the PPP application form that:
The PPP waives certain fees typically required for SBA loans, including those under Sections 18(A) and 23(A) of the statute. Applicants also do not need to certify that they are unable to obtain credit elsewhere, or provide a personal guarantee or collateral for a covered loan. However, loan proceeds received under PPP cannot be used for the same costs for which proceeds from a loan received through the Economic Disaster Loan Assistance Program are used.
Loan proceeds may only be used to pay: (1) payroll costs; (2) costs related to the continuation of group health care benefits during periods of paid sick, medical or family leave, and insurance premiums; (3) mortgage interest payments; (4) rent payments; (5) utility payments; (6) interest on any debt obligation incurred before the covered period; or (7) refinancing EIDL made between January 31, 2020 and April 3, 2020.
Loan amounts expended during the eight-week period following the loan origination will be forgiven, up to the total amount of the loan, if used for payroll costs (up to an annualized rate of
$100,000 per employee). In addition, up to 25 percent of the loan forgiveness amount may be attributable to qualifying non-payroll costs including: (1) interest on a mortgage obligation; (2) rent; or (3) covered utilities. The CARES Act provides an exception from the general rule that debt forgiveness is taxable, so that that amount of loan forgiveness will not be included in the borrower’s taxable income.
The forgiveness amount will be reduced if the employer reduces the number of full-time equivalent employees, or reduces employees’ salary and wages beyond a certain amount during the eight-week period.
First, the forgiven amount will be reduced by multiplying the amount of forgivable costs by:
*Seasonal employers must measure the average number of FTE employees for the period from February 15, 2019 to June 30, 2019.
Example: Borrower had average FTEs of 300 employees per month from February 15- June 30, 2019, and average FTEs of 250 employees per month from January 1- February 29, 2020. The borrower obtains a $2.5 million loan and uses all of the loan proceeds to pay for forgivable expenses. During the eight-week period following the loan, the borrower employ an average of 150 FTEs per month. Employer elects January 1-February 29, 2020 baseline period. Forgiveness on the loan is reduced as follows:
150 Covered Period FTEs / 250 Baseline Period FTEs = 0.6
$2.5 million x 0.6 = $1.5 million forgiven
*Remaining $1 million principal must be repaid at applicable interest rate over remaining term of loan
Second, the forgiven amount will be reduced by the amount of any reduction in total salary or wages during the eight weeks after origination that exceeds 25 percent of an employee’s total salary or wages during most recent full quarter during with the employee was employed.
Employees that earned annualized pay in excess of $100,000 in 2019 are not counted for these purposes.
Example: Borrower obtains a $2.5 million loan and uses all of the loan proceeds to pay for forgivable expenses. During the eight-week period following the loan, the borrower reduces pay of hourly employees by 50 percent, resulting in a total reduction in compensation of $1,500,000. The borrower also reduces the pay of its five officers, all of whom earn more than $100,000, by 50 percent. The reduction in officer pay produces a savings of $250,000. No reduction in FTEs occurs. Forgiveness on the loan is reduced as follows:
$2.5 million – $750,000 (comp. reduction in excess of 25 percent to employees earning less than $100,000) = $1.75 million forgiven
(Remaining $750,000 principal must be repaid at applicable interest rate over remaining term of loan)
Borrowers may “cure” reductions in FTEs or compensation for purposes of forgiveness in certain circumstances. Specifically, these reductions will not reduce the forgiveness amount if:
Borrowers must provide sufficient documentation to demonstrate compliance with these requirements, including: (1) payroll tax filings reported to the Internal Revenue Service; (2) state income, payroll and unemployment insurance filings; and (3) other documentation, including cancelled checks, receipts or account transcripts, to verify mortgage interest, rent and utility payments.
Borrowers also must certify that the amounts for which forgiveness is requested were used to retain employees and make covered mortgage interest, rent or utility payments.
SBA intends to issue additional guidance on the loan forgiveness provisions of the PPP loan.
Beginning on April 3, 2020, you can apply at any lending institution that is approved to participate in the Small Business Administration’s 7(a) lending program. Additionally, upon completion of the CARES Act Section 1102 Lender Agreement (SBA Form 3506), the following types of lenders will be “automatically qualified” to issue PPP loans provided they are not currently designated in Troubled Condition:
However, the $349 billion in funds may not still be available by the time additional qualified lenders submit the requisite Lender Agreement. You will not have to visit any government institution to apply for the loan. Applicants are eligible to apply for the PPP loan until June 30, 2020.
For eligibility purposes, lenders will not be determining eligibility-based repayment ability, but rather whether the business was operational on February 15, 2020 and had employees for whom it paid salaries and payroll taxes (or paid independent contractors).
If the answer to all of the questions above is “yes,” keep reading.
First, check your payroll records to see how much you paid in total over the past 12 months:
Second, take that total number, divide by 12, and multiply this result by 2.5. This is your loan amount. The loan cannot be more than $10 million.
You can use the loan proceeds to pay your employees, pay health insurance premiums, pay rent, pay utilities, and pay interest on any debts your business had before February 15, 2020.
If in the eight weeks after the loan is issued, the following is true, the loan will be entirely forgiven:
*If you are required to layoff employees or reduce payroll during the eight week period, only a portion of your loan may be forgiven. Any portion of the loan that must be paid back will be at an interest rate of 1.0 percent over a two year term with the first payment being deferred six months after such determination is made.
Any bank or credit union will be able to offer these loans, and most will. All you need to do to apply is go to them with proof you were in business on February 15, 2020 and provide evidence of your payroll expenses (as defined in Step 2) for the 12 months leading up to the application. You should be able to get a loan disbursed to you the same day. Deadline is June 30, 2020. Application can be found here: Paycheck Protection Program Application Form.
© 2020 Akin Gump Strauss Hauer & Feld LLP
Read a summary of President Trump’s proposed stimulus package developed by analysts from AAA lobbying firm Akin Gump.
As was the case following September 11, and during the Great Recession, President Trump and Congress have managed to bridge partisan divides and quickly develop several legislative packages to address the expanding impact of the coronavirus (COVID-19) on America’s public health system and the broader economy. Phase 1—the supplemental appropriations bill—has already become law. Phase 2—targeted relief for individuals, including paid family leave—has passed the House and is poised to pass the Senate this week. Phase 3—broader economic stimulus designed to deliver cash to individuals to help them weather the downturn, as well as industry-specific relief—is being crafted as we write, hopefully with a bipartisan agreement and quick enactment in a matter of days, not weeks. Continue reading►