Kristina Rak Brown is a corporate lawyer with over 20 years of experience. She is currently practicing as senior counsel at the law firm of Brown, Moskowitz & Kallen, P.C. in Summit, N.J. As part of her practice on behalf of the firm, since the COVID-19 outbreak she has been tracking and writing about the federal funding programs and advising clients on how to navigate the programs and application process.
We publish this information as a public service to our readers and our community.
On March 27, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) went into effect in the United States. The CARES Act offers several loan and grant programs for qualifying small businesses, independent contractors and self-employed individuals who are suffering the negative economic impact of the COVID-19 outbreak disaster. The two largest programs are the Paycheck Protection Program (PPP) and the Economic Injury Disaster Loan (EIDL) program, each of which is administered by the Small Business Administration (SBA). Both the PPP and the EIDL Program have limited funding and applicants are served on a first-come, first-served basis.
FOR SMALL BUSINESSES
THE PAYCHECK PROTECTION PROGRAM
What types of businesses can participate in the PPP?
The SBA already provides loans to “small business concerns.” Depending on your industry, a small business could be defined as a business with a maximum of 250 employees or a maximum of 1,500 employees within different ranges of revenues. Small business concerns qualify for the PPP.
The PPP expands the applicability of the program to any business concern, 501(c)(3) nonprofits (including, for example, certain religious organizations and museums, subject to affiliation rules discussed below), certain veterans’ organizations, and certain Tribal business that have less than 500 employees. Sole proprietorships, independent contractors and certain self-employed individuals may also qualify.
What are “affiliation” rules and why does it matter?
Typically, when determining the number of employees of a small business concern, the SBA takes into account the aggregate number of employees of the applicant, as well as its affiliates (entities that control or have the power to control the applicant). Under this metric, applicants who believe they are within the requisite threshold for qualifying as a small business may be surprised to find out that the scope of the affiliation rules puts them over the threshold.
The PPP does away with aggregation for entities that are in the “Accommodation and Food Services” industries and have multiple locations each with fewer than 500 employees, as well as certain franchises, and businesses receiving financial assistance from a Small Business Investment Company (SBIC), a type of privately owned investment company that is licensed by the SBA. In brief, the scope of eligible applicants is bigger and more businesses may be eligible to benefit from the PPP.
Where can I apply for a PPP loan?
Loans will be made by current SBA lender banks. To expand the pool of lenders, additional banks and financial institutions may apply to be designated as SBA lenders in order to facilitate processing and disbursement of the PPP loans.
What is the maximum loan amount?
If approved, an applicant may receive the lesser of: (i) $10 million or (ii) the borrower’s average monthly payroll costs for the previous one year prior to the loan being made times 2.5. (Certain other SBA loans outstanding, like Economic Injury Disaster Loans, may be added to (ii).)The amount covers eight weeks of payroll and certain additional costs. The eight-week period can cover any time frame between February 15, 2020, and June 30, 2020. (Seasonal expenses are measured differently.)
What are the loan terms?
The loan term is two years. The interest is 1.0 percent. The principal amount may be prepaid without penalty. PPP loans are not subject to fees. There are no collateral or personal guarantee requirements. The loans are 100 percent guaranteed by the SBA. Loan payments are deferred for a period of six months to one year from the origination date.
What are permitted uses for the loan proceeds?
Compensation, excluding individual employee compensation above $100,000 per year; certain payroll costs; group health care benefits, including paid sick, medical or family leave and insurance premiums; mortgage interest (not principal) payments; rent; utilities; interest on debt incurred prior to February 15, 2020.
Is there loan forgiveness?
Generally, an amount equal to the total costs of permitted uses (excluding non-mortgage interest) paid during the eight-week period following the origination of the loan is subject to loan forgiveness.
What if I lay off employees or reduce payroll?
If employees are terminated or payroll decreases by more than 25 percent, adjustments may be made to the amount forgiven. However, if, prior to June 30, 2020, a business increases its employee count and employee salaries to levels in effect on February 15, 2020, adjustments may not be required. In other words, the loan forgiveness will stand.
Is the amount of loan forgiveness subject to interest and is it taxable?
A business will not be responsible for interest accrued during the eight-week period on amount of the loan that is forgiven. The amount of loan forgiveness is not taxable to the borrower.
When can I apply and what is the application deadline?
Applications were opened on April 3, 2020. The application deadline is June 30, 2020.
ECONOMIC INJURY DISASTER LOAN PROGRAM
The EIDL Program offers direct loans from the federal government. Eligible businesses may qualify for loans up to $2 million with interest at 3.75 percent for for-profit enterprises and 2.75 percent for nonprofit organizations. The term of the loan may be up to 30 years. Interest is deferred for the first 12 months of the loan repayment period. The loans may be used to pay fixed debt, payroll, accounts payable, and other bills and expenses that cannot be paid as a result of the disaster. There is no cost to apply or obligation to take the loan, if approved. There are no pre-payment penalties. An applicant for an EIDL loan can request an advance on the loan of up to $10,000.
The key difference between the EIDL Program and the PPP is that the EIDL loans are not subject to forgiveness. A small business can apply under both programs. However, the loan proceeds cannot be used for the same purposes.
FOR INDIVIDUALS: INDEPENDENT CONTRACTORS AND SELF-EMPLOYED
The CARES Act also provides aid to independent contractors and self-employed individuals.
The CARES Act temporarily expands unemployment insurance to cover individuals who are not traditionally covered, including the self-employed, gig-workers, independent contractors and workers with irregular work history. It also expands the list of allowable criteria for claiming unemployment compensation to include many reasons related to the COVID-19 public health emergency. State unemployment offices offer information to help individuals determine their eligibility for state unemployment.
Under the CARES Act, individuals may be entitled to receive up to $600 per week in addition to what is available under state unemployment benefits; and individuals may be entitled to up to 39 weeks of payments.
Refundable tax credits are available for independent contractors who would have qualified for coronavirus related paid leave if they were employees.
Individuals who operate a sole proprietorship or as an independent contractor and eligible self-employed individuals also may qualify for a PPP loan.
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Updates continue to be issued. Updated and important information, as well as applications, for the PPP and EIDL programs can be found at treasury.gov and sba.gov. Unemployment information is typically available on your state’s website. Information about refundable tax credits can be found at irs.gov.