Senate Proposes Paycheck Protection Program

The Senate has passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), and it is expected to go to the House tomorrow for a vote.  This bill includes a “Paycheck Protection Program.”  The Program is “loan” issued by the SBA to an eligible business.  “Loan” is in quotes because you may be able to get all or part of the loan “forgiven” (so it functions like a grant).

What is the Maximum Loan Size?

The maximum loan size is two and half times of your average monthly payroll for the prior year (so, 2.5 months-worth of payroll).  If you’ve already received a disaster assistance loan between January 31, 2020 and the date on which these loans are made available, then you can also refinance that prior loan under this new program (this amounts to an increase in the maximum loan authority).  There is an additional cap of $10,000,000 for the loan amounts.

What Can I Use the Loan For?

You can use the loan for

  • Payroll costs for US residents (which include compensation up to $100,000 annual salary)
  • Group health care costs and insurance premiums
  • Employee salaries and commissions
  • Mortgage interest (but not principal)
  • Rent
  • Utilities
  • Interest on pre-existing debt

Only some of these uses are eligible for loan forgiveness.

What is the Loan Interest Rate?

An amount set by SBA, not to exceed 4 percent.

When Do I Start Repaying the Loan?

Repayment is deferred for between 6 months and one year.  The period for repayment can be up to ten years, and only the amount remaining after loan forgiveness needs to be repaid.

Do I Have to Repay the Loan?

Not if you spend it on the right things and meet the right requirements!  You can receive loan forgiveness for amounts spent, during the eight weeks after origination of the loan, on:

  • Payroll
  • Mortgage interest
  • Rent
  • Utilities

Note that this is a slightly smaller list than the list of things for which you can use the loan, so you can use the loan as a typical loan for the other eligible expenses, as well.

Another important element is that the amount of forgiveness is reduced if your headcount goes down or your payroll goes down.

Headcount Reduction: You compare the average monthly headcount during the eight weeks from the origination of the loan to the average monthly headcount during the period beginning on January 1, 2020 and ending on February 29, 2020.  If headcount has gone down then you get a percentage of forgiveness correlative to the percent of remaining employees.  For example, if you had 20 employees during the 2019 period, but only 18 during the eight weeks after origination of the loan, then you would only get 90% forgiveness (and the remaining ten percent of the loan would be subject to repayment).

Payroll Reduction: The amount of loan forgiveness is also reduced by the amount of any reduction in total salary or wages of any employee (except for employees who received more than $100,000 pay in 2019).  This applies if the employee’s wages during the eight weeks after origination of the loan are reduced in excess of 25 percent of the total salary or wages of the employee during the most recent full quarter during which the employee was employed before the covered period.  I think this clause may have been improperly drafted by the Senate, because we are comparing wages over an eight week period to wages over a thirteen week period; but it is clearly meant to be an incentive to continue wages at (or near) their pre-loan amounts.

To get loan forgiveness, you will have to submit an application to the lender.

Is There Anything Else I Should Know?

Some of the normal small business loan preconditions are waived for these loans.  The most important ones are:

  • Waiver of the requirement to show that the small business concern is unable to obtain credit elsewhere
  • Waiver of the requirement for a personal guarantee
  • Waiver of any requirement for collateral

The amount forgiven will be treated as cancelled indebtedness (but another clause in the Bill would exclude this forgiveness amount from gross income so this may mitigate subsequent tax consequences).

This is merely a bill – not yet a law – so look at the final Public Law language before acting in reliance on this program!

 

UPDATE: The House took up debate on this bill at 9:05 am on March 27, 2020

About Jason Dickstein
Mr. Dickstein is the President of the Washington Aviation Group, a Washington, DC-based aviation law firm. Since 1992, he has represented aviation trade associations and businesses that include aircraft and aircraft parts manufacturers, distributors, and repair stations, as well as both commercial and private operators. Blog content published by Mr. Dickstein is not legal advice; and may not reflect all possible fact patterns. Readers should exercise care when applying information from blog articles to their own fact patterns.

2 Responses to Senate Proposes Paycheck Protection Program

  1. Pingback: House Passes 2 Trillion Dollar Package, Featuring Loans Permitting Small Businesses to Make Payroll | ASA Web Log

  2. Pingback: ASA Web Log

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