On June 5, 2020, a CARES Act (“Act”) amendment changed the loan forgiveness provisions of the Paycheck Protection Program. The key takeaways are:
- Only 60% of Loan must be Used for Payroll Costs. At least 60% of the loan must be used for Payroll Costs (as defined in the Act and- discussed below) and up to 40% may be used for permitted non-Payroll Costs (i.e., rent, interest on mortgages and utilities). The SBA previously required at least 75% of the loan must be used for Payroll Costs. This amendment is applicable to loans already received.
- Time Period to use Loans Increased from 8 Weeks to 24 Weeks. A borrower will be eligible for loan forgiveness for Payroll Costs (capped at $100,000 per employee), rent, interest on mortgages and utilities incurred during the “covered period.” The “covered period” has been extended from 8-weeks post-loan origination to the date commencing on the loan origination date and ending on the earlier of: (a) the date that is 24-weeks after the date of loan origination and (b) December 31, 2020. This amendment is applicable to loans already received.
- Amendments to Reductions in Forgiveness Amounts due to Workforce and Salary Reductions. The loan forgiveness amount is subject to reductions for certain workforce and salary reductions. The amendments extend the date by which a borrower must reverse reductions in number of employees and/or salary to December 31, 2020 in order to mitigate or eliminate loan forgiveness reductions. There are also additional exemptions relating to the inability to rehire certain employees and/or the inability to return to the same level of business. These amendments are applicable to loans already received.
- New Loans to have 5 Year Terms as Opposed to 2 Years. The SBA previously mandated 2-year loan terms for all loans. The amendments provide for loan terms of at least 5 years for new loans made after the amendments become effective. Borrowers that have already received loans will need to contact the lender to negotiate an extension.
The following is the Paycheck Protection Program loan portion of our previous Client Bulletin updated to include the proposed amendments discussed above [originally released 3/30/20, and previously updated 4/1/20 and 4/3/20].
Paycheck Protection Program Loans of up to $10 million will be available through approved SBA lenders and will be 100% guaranteed by the federal government. These loans are designed to encourage employee retention and may be forgiven as discussed below.
- Eligible businesses.
- In addition to businesses already eligible for SBA programs (see https://www.law.cornell.edu/cfr/text/13/121.201 for size guidelines), any business concern (include sole proprietorships), nonprofit organization, veteran organizations, and tribal small business concerns with 500 or fewer employees is eligible. In addition, businesses that are classified as Accommodation or Food Service under the NAICS (e.g., hotels, hotels with casinos, and restaurants) and do not have more than 500 employees per physical location of the business are eligible.
- You will need to certify that the uncertainty of current economic conditions makes necessary the loan request to support your ongoing operations and that funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments.
- If your business meets the foregoing requirements, your business is eligible no matter what type of business in which you are engaged.
- Key Loan Terms.
- The maximum principal amount of a loan is: (a) 2.5X the average total monthly Payroll Costs (as defined in the Act) incurred during the one-year period before the date of the loan plus (b) the amount of any Economic Injury Disaster Loan (EIDL) being refinanced; capped at $10 million. Payroll Costs includes wages for employees (capped at $100,000 per employee), health care, other benefits, and state and local taxes assessed on employee compensation.
- These loans are to be used for the following costs: Payroll Costs (capped at $100,000 per employee), interest on mortgage payments, rent, utilities and interest on other debt obligations.
- The interest rate is 1%.
- The term is at least 5 years.
- No collateral or guarantees will be required.
- Businesses are eligible for loan forgiveness equal to the amount spent during the “covered period” on Payroll Costs (including wages for employees capped at $100,000 per employee), rent, interest on mortgages, and utilities; provided that not more than 40% of the loan forgiveness amount may be attributable to non-Payroll Costs. The “covered period” is the date commencing on the loan origination date and ending on the earlier of: (a) the date that is 24-weeks after the date of loan origination and (b) December 31, 2020.
- The amount forgiven is subject to reduction for certain reductions in number of employees or compensation but, if your company hires back employees or reinstates compensation by December 31, 2020, this reduction may be mitigated or eliminated. The amendments discussed above also provide additional exemptions relating to the inability to rehire certain employees and/or the inability to return to the same level of business. Please contact us to discuss if this is applicable to your business.
The attorneys at Gozdecki, Del Giudice, Americus, Farkas & Brocato LLP are available to answer your questions and help you navigate the maze of regulations, ordinances, and guidance.
Please note that information contained in this Client Bulletin is not and should not be construed as legal advice or opinion nor does this news alert create an attorney-client relationship.