CARES Act Summary Briefing Part 6: Keeping American Workers Employed & Paid Act

Keeping American Workers Employed & Paid Act:

One of the important cornerstones of the CARES Act is what is described in the bill as the “Paycheck Protection Program.” Congress understands that the majority of jobs in the American economy are generated by small to mid-size businesses, and the CARES Act seeks to shore up payroll in those businesses by leveraging the Small Business Administration’s Section 7(a) loan program because it’s the primary program for providing financial assistance to small businesses.

The CARES Act increases the maximum 7(a) loan amount to $10 million and expands the allowable uses of 7(a) loans to include “payroll support,” which includes paid sick or medical leave, employee salaries, mortgage payments, insurance premiums and any other debt obligations.

Under the CARES Act, the loan period for this program starts on February 15, 2020, and ends on June 30, 2020. The program generally only covers businesses with fewer than 500 employees.

To determine whether a business is eligible for this program, the CARES Act requires lenders to ascertain: (1) whether a business was operational on February 15, 2020, and (2) whether the business had employees to whom it paid salaries and payroll taxes, or paid independent contractors, and (3) whether the business was substantially impacted by COVID-19. The legislation also gives more authority to lenders regarding eligibility determinations without having to run those determinations through the normal SBA approval channels.

Business eligible for the expanded 7(a) loans under the CARES Act includes small businesses, nonprofits, and veterans organizations with 500 or fewer employees. During the covered period, individuals who operate under a sole proprietorship or as an independent contractor and eligible self-employed individuals shall be eligible to receive a covered loan.

The CARES Act says that the allowable uses of 7(a) loans include salary, wages, commissions, tips, paid leave, healthcare payments, and retirement benefit payments.

It’s important to note that allowable payroll costs do not include compensation to an individual employee in excess of an annual salary of $100,000 as prorated for the covered period. Qualified sick leave or family leave wages for which a credit is allowed under the Families First Coronavirus Response Act are not included in the allowable uses. It also does not include any compensation of an employee whose principal place of residence is outside of the United States.

One of the most important aspects of the CARES Act is that the 7(a) loans are nonrecourse, except if the proceeds are used for an unauthorized purpose. In addition, no personal guarantee or collateral is required. That said, “Good Faith” certification is required and certification has the following elements:

? The current uncertainty makes the loan necessary to support ongoing operations;

? The funds will be used to retain works and maintain payroll or make mortgage payments, lease payments, and utility payments;

? There are no duplicative amounts.

The terms of these loans are as follows:

? Interest Rate: During the covered period, a covered loan shall bear an interest rate not to exceed 4 percent

? Payment Deferment: 6-12 month of deferment including principal, interest, and fees

? Origination Fees: Lender reimbursed by the SBA

One of the most important aspects of the program is the way in which the loan principal can be forgiven. Under the terms of the legislation, the principal can be forgiven in an amount equal to the following costs incurred during the covered period of February 15, 2020, through June 30, 2020:

? Payroll costs

? Mortgage interest

? Rent

? Utilities

Any amounts forgiven will be reduced proportionally by any reduction in the number of employees retained compared to the prior year and reduced by the reduction in pay of any employee beyond 25 percent of their prior-year compensation. Borrowers that re-hire workers previously laid off will not be penalized for having a reduced payroll at the beginning of the period. Most importantly, indebtedness canceled will not be included in the borrower’s taxable income.

I hope this provides you some useful/actionable insight.

Stay safe out there. -Corwin