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CARES Act: Treasury Department Issues Additional Guidance on the SBA Paycheck Protection Program
Practical Law Legal Update w-024-8351 (Approx. 5 pages)
CARES Act: Treasury Department Issues Additional Guidance on the SBA Paycheck Protection Program
by Practical Law Finance
| Published on 02 Apr 2020 • USA (National/Federal) |
On March 31, 2020, the Treasury Department issued additional guidance on the Small Business Administration's (SBA) Paycheck Protection Program created under Title 1 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) (Pub. L. No. 116-136 (H.R. 748)). This Update focuses on revisions to and further guidance provided for that Program.
On March 27, 2020, the US Congress passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) (Pub. L. No. 116-136 (H.R. 748)), which President Trump signed into law, effective immediately. The CARES Act is the third major piece of legislation enacted in response to the COVID-19 outbreak in the US and is intended to provide economic relief to individuals and businesses facing economic hardship due to the outbreak. Under the CARES Act, the Small Business Administration (SBA) is offering loans under the Paycheck Protection Program (PPP) and Economic Injury Disaster Loan Program. This Update focuses on revisions to and additional guidance provided for the PPP by the Treasury Department on March 31, 2020.
For a summary of the SBA PPP, see CARES Act: Stimulus for Small Businesses Under the SBA Checklist.
On March 31, 2020, the Treasury Department issued further guidance and made certain revisions to the PPP.
Loan Terms
- PPP loans now have a maturity of two years and can be prepaid without penalty.
- The interest rate has been reduced to 0.5%.
- Payments of principal and interest on PPP loans are deferred for six months but interest will continue to accrue over this period.
- All loan terms will be the same for everyone. Only one PPP loan can be requested by a business under this program.
Application Process
- Businesses may apply for a PPP loan beginning:
- April 3, 2020, for small businesses and sole proprietorships; and
- April 10, 2020, for independent contractors and self-employed individuals.
- A sample form of PPP loan application is now available on the SBA (see loan application). Applications and payroll documentation should be submitted to an approved lender by June 30, 2020. However, businesses are encouraged to apply as early as possible since there is a funding cap and lenders will need time to process the application. The SBA's Credit Elsewhere requirement that a business try to obtain loan funds from another source first, is waived. Certain certifications are required in the application.
- Businesses may apply through any existing SBA lender or through any participating federally insured depository institution, federally insured credit union, and Farm Credit System institution. Other regulated lenders may be available once approved and enrolled in the program.
Eligible Applicants
- All businesses, including nonprofits, veterans organizations, Tribal business concerns, sole proprietorships, self-employed individuals, and independent contractors, with 500 or fewer employees can apply for a PPP loan. Businesses in certain industries can have more than 500 employees if they meet applicable SBA employee-based size standards for those industries.In addition, the SBA’s affiliation standards are waived for small businesses:
- in the hotel and food services industries (to confirm, see NAICS code 72); or
- that are franchises in the SBA’s Franchise Directory; or
- that receive financial assistance from small business investment companies licensed by the SBA.
The Treasury Department may release additional guidance on affiliation standards as appropriate.
Use of Proceeds
- Loan proceeds can be used for:
- payroll costs, including benefits;
- interest on mortgage obligations, incurred before February 15, 2020;
- rent, under lease agreements in force before February 15, 2020; and
- utilities, for which service began before February 15, 2020.
- Payroll costs include:
- salary, wages, commissions, or tips, up to $100,000 on an annualized basis per employee;
- employee benefits including costs for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payments required for the provisions of group health care benefits including insurance premiums; and payment of any retirement benefit;
- state and local taxes assessed on compensation; and
- for a sole proprietor or independent contractor: wages, commissions, income, or net earnings from self-employment, up to $100,000 on an annualized basis per employee.
Loan Forgiveness
- The loan amounts will be forgiven as long as:
- the loan proceeds are used to cover payroll costs, and most mortgage interest, rent, and utility costs over the eight week period after the loan is made; and
- employee and compensation levels are maintained.
Payroll costs are capped at $100,000 on an annualized basis for each employee. It is expected that not more than 25% of the forgiven amount may be for non-payroll costs.Loan amounts used for any other purpose will not be forgiven. - Loan forgiveness will be reduced if the business:
- reduces its full-time employee headcount;
- decreases salaries and wages by more than 25% for any employee that made less than $100,000 annualized in 2019.
- Businesses have until June 30, 2020 to restore their full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020.
Loan Forgiveness Procedure
- To request loan forgiveness, businesses should submit a request to their participating lender with the following information:
- documents that verify the number of full-time equivalent employees and pay rates, and payments on eligible mortgage, lease, and utility obligations; and
- a certification that the documents are true and that the forgiveness amount was used to retain employees and make eligible mortgage interest, rent, and utility payments.
The lender has 60 days to make a decision on the forgiveness. - The Treasury Department highlighted that, while there is no personal guarantee required, if the loan the proceeds are used for fraudulent purposes, the US government will pursue criminal charges against the responsible party.
For guidance from the Treasury Department, see: