The largest federal stimulus bill in U.S. history, the Coronavirus Aid, Relief and Economic Security (CARES) Act, was signed into law on March 27, triggering $2.2 trillion in spending and relief measures for businesses and families grappling with the impact of coronavirus on their livelihoods and bottom lines. In this post, we’ll look at a new provision, Paycheck Protection Loans, targeted for small businesses and help employers know what to expect.
Small Business Loans (a.k.a. Paycheck Protection Loans)
The CARES Act dedicates $349 billion for potentially forgivable loans to most businesses with 500 or fewer employees, as well as select nonprofits and sole proprietorships.
Borrowers must make a good faith certification that coronavirus-related “business concerns” necessitate the loan and that the funds will be used to retain workers and/or pay mortgage, rent, utilities and any other debt service requirements. Qualifying business concerns include staffing challenges, decrease in sales or customers, closures or supply chain disruptions.
How large a loan can eligible businesses get? Loans will be the lesser of two and a half months of payroll costs (based on an annual average of the 12 months prior to the loan origination date or calendar year 2019) OR $10 million. The CARES Act defines payroll costs as:
- Salary, wages, commissions or tips (capped at $100,000 annually for each employee); PLUS
- Payment for vacation, parental, family, medical or sick leave; PLUS
- Allowance for separation or dismissal; PLUS
- Payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums and retirement; PLUS
- Payment of state and local taxes assessed on compensation of employees; PLUS
- For an independent contractor or sole proprietor: wage, commissions, income or net earnings from self-employment or similar compensation.
Excluded from payroll costs are:
- Employee income tax withholdings and FICA taxes (both employer and employees), but only for 2/15/2020 through 6/30/2020
- Compensation of employees with a principal residence outside the United States
- Qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act
- Independent contractors (1099-MISC)
What are the terms of these loans? The covered loan period begins February 15, 2020 and ends June 30, 2020. Loans are fully guaranteed by the federal government for two years from settlement. The maturity is two years and the interest rate is one percent. No personal guarantee from the business owner or collateral is required, and the borrower may defer repayment of the loan for six months.
Loan forgiveness: Borrowers can apply directly to their lender for the loan to be forgiven on a tax-free basis for qualifying costs incurred during the eight-week period after the loan’s origination date. The amount of forgiveness (subject to substantiation requirements) may be payroll costs, mortgage interest, rent or certain utility payments. Potential reduction in loan forgiveness amount may occur unless:
- 2020 full-time equivalent employee (FTE) count remains equal to or greater than 2019 FTE count during February 15 through June 30 testing period of each year.
- Employee compensation does not drop more than 25 percent compared to prior year.
A reduction can be avoided if an employer rehires a furloughed employee or increases the employee’s pay within an allotted time period.
If you have questions about these or other aspects of the CARES Act, contact your RKL advisor or reach out to the RKL team using the form at the bottom of this page. Visit RKL’s Coronavirus Employer Resource Center to learn more about the CARES Act, read our latest guidance and register for our weekly webinar series.