By Jennifer Kobylarz, CPA, MST
In an effort to protect employee wages, the CARES Act established a Small Business Administration (SBA) – Business Loan Program called the Paycheck Protection Program. The SBA will guarantee 100% of the loans made under the program from February 15, 2020 through June 30, 2020. The SBA loans are only available to organizations that employ the lesser of:
- 500 employees; or
- The industry standard employee size under the SBA.
Additionally, the program waives the affiliation rules that are normally required for SBA loans for any business that is assigned a franchise identifier code by SBA and Small Business Investment Company (SBIC) portfolio companies.
The amount available for a loan under this program is up to 2.5 times the average monthly payroll costs based on last year’s payroll or a maximum of $10 million. Compensation over $100,000 for a self-employed person is excluded from the calculation. For this purpose, monthly payroll costs include wages, health care benefits, retirement benefits, and unemployment taxes.
Loan proceeds may be used for any of the following expenses that existed as of February 15, 2020:
- Monthly payroll costs (as noted above);
- Mortgage interest;
- Utilities; or
- Other debt.
In order to provide faster access to funds, the Act allows lenders the authority to determine a borrower’s creditworthiness on their own without having to go through the formal SBA channels.
Furthermore, the Act provides for loan forgiveness in certain cases when the loans obtained under the Paycheck Protection Program are used for the above noted items for an eight-week period beginning after the loan origination date (again the expenses must have existed on or before February 15, 2020 to qualify). The debt forgiveness is reduced based on a formula that takes into account reductions in full-time employees and certain reductions in the amount of compensation paid to retained employees. The SBA will not penalize any borrowers who re-hire workers they have previously laid off or for having a reduced payroll at the beginning of the eight-week period. The Act also excludes any debt forgiveness under this program from taxable income.
Our firm is preparing now for the filing of the proper forms with the SBA and will be ready to assist imminently when the forms are available. We are currently in the process of developing the methods to obtain the required information to complete the forms and file quickly and working with a large law firm to ensure all legal requirements are met.