Today, Congress is expected to pass, and the President is expected to sign into law, the Coronavirus Aid, Relief, and Economic Security Act, H.R. 748 (the “CARES Act”).  The CARES Act is a sweeping $2.2 trillion dollar stimulus bill, designed to help American individuals and businesses weather the current COVID-19 outbreak.  In order to assist small businesses in keeping employees on their payroll during the unprecedented economic slowdown, the CARES Act creates the Small Business Administration’s (“SBA”) new Paycheck Protection Program.

Under the SBA Paycheck Protection Program, small businesses would be eligible to receive SBA loans for purposes of maintaining payroll and covering other expenses.  Businesses who receive these covered loans and use them for those designated purposes will be generally entitled to have the loans forgiven so long as the business does not terminate its employees or reduce its employees’ wages.

Who is eligible for a covered loan under the SBA Program? 

Loans available under the SBA program will generally be available to small businesses who were in operation on February 15, 2020.  For purposes of this program, eligible businesses must employ fewer than 500 employees (other businesses may qualify if they fall into the size standard established by the SBA for a particular industry).  Sole proprietorships and independent contractors may be eligible, as well as certain franchises.  Finally, businesses that have more than one (1) physical location will generally also be eligible so long as each physical location employs fewer than 500 employees.

What time period will these loans cover? 

The CARES Act defines the covered period as running from February 15, 2020 through June 30, 2020.

What is the maximum amount an eligible business can receive? 

Generally, eligible businesses will be entitled to receive a loan of up to 2.5 times their monthly payroll costs with the available amount capped at $10 million.

What can the loan be used for? 

A covered loan can be used to cover: (1) payroll costs; (2) costs related to continuation of group health care benefits during periods of paid sick leave, family or medical leave, and insurance premiums, (3) employee salaries, commissions, or other similar compensation; (4) rent payments and payments on mortgage interest; (5) utility payments; and (6) interest on other previously accrued debt obligations.

What portion of the loan can be forgiven? 

An eligible business who receives an SBA loan under this program will be able to have any portion of the loan forgiven that is used to cover payroll costs (which includes wages for employees making less than $100,000.00 per year, most paid time off, retirement benefits, payments for group health care benefits, and taxes assessed on the compensation to employees); payments to cover rent or mortgage interest; and utility payments.  Businesses will be required to provide documentation related to such costs in order to receive the forgiveness (such as payroll tax filings, receipts for covered payments, etc.) as well as a certification about the use of the funds, and other documentation as determined by the SBA.  Importantly, forgivable portions of such loans will not be treated as gross income.

Can the amount of forgiveness be reduced for any reason? 

Yes, SBA will reduce the amount of forgiveness available to businesses who reduce their number of employees or who reduce their employee wages by more than twenty-five percent (25%).  The reduction in forgiveness will be proportional to any such reductions in wages or employees.  For example, a business who has 10 employees, but terminates 2 of them during the covered period would likely only be able to receive 80% of the forgiveness for which it would have otherwise been eligible.

What are the repayment terms on any portion that is not forgiven?

The CARES Act caps the interest rate on these loans at four percent (4%).  There will generally be no prepayment penalty, and lenders are required to offer between six months to one year of complete deferment, including payment of principal, interest, and fees.  Loans under this program have a maximum maturity of ten years from the date on which the business applies for forgiveness.

What else should businesses know about these loans?

Unlike other SBA loans, this program does not have a requirement that a business be unable to obtain credit from other sources.  The loan program also waives all personal guarantee and collateral requirements.  Additionally, if a business has already received a COVID-19 Emergency SBA loan between now and January 31, 2020, the business may refinance the outstanding amount under this program at more favorable terms.  Business who have received COVID-19 Emergency SBA loans for different purposes than a loan under this program are also eligible to obtain a loan under the Paycheck Protection Program as well.

If you have questions about the SBA Paycheck Protection Program or any other parts of the CARES Act, please contact Nathan Duggins at Nduggins@tuggleduggins.com  or (336) 271-5246, or Ross Hamilton at rhamilton@tuggleduggins.com or (336) 271-5279, or Denis Jacobson at djacobson@tuggleduggins.com or (336) 271-5242 or Daniel Stratton at dstratton@tuggleduggins.com or (336) 271-5240.  Please also follow our Twitter account @TuggleDuggins at https://twitter.com/TuggleDuggins for continuing, up-to-date information related to navigating the law during the COVID-19 outbreak.

© 2020 Tuggle Duggins P.A. All Rights Reserved. The purpose of this bulletin is to provide a general summary of significant legal developments. It is not intended to constitute legal advice or a recommended course of action in any given situation. It is not intended to be, and should not be, relied upon by the recipient in making decisions of a legal nature. Moreover, information contained in this bulletin may have changed subsequent to its publication. This bulletin does not create an attorney-client relationship between Tuggle Duggins P.A. and the recipient. Therefore, please consult legal counsel before making any decisions or taking any action concerning the issues discussed herein.