The Coronavirus Aid, Relief, and Economic Security (CARES) Act, which provides economic aid to employers and employees affected by the coronavirus pandemic, became law on March 27, 2020. Among other things, the 880-page CARES Act creates the Paycheck Protection Program (PPP) by amending the Small Business Act’s provisions regarding loans to small businesses. The PPP is intended to create an incentive for small businesses to retain their workers where possible and to rehire those they are unable to retain due to coronavirus-related business disruption. As described below, the PPP does so by streamlining the process for small businesses to obtain loans, and providing for full or partial loan forgiveness in specified circumstances. The following is a summary of the CARES Act’s Paycheck Protection Program.
The PPP Expands the Small Business Act’s Section 7(a) Loan Program
The PPP is found in new subsection 36 under Section 7(a) of the Small Business Act (15 U.S.C. §636(a)(36)). In addition to the purposes for which small businesses have historically been able to obtain loans under the Small Business Act, business entities who qualify may now receive a loan under the PPP to cover specified operating expenses, including payroll costs, during the economic crisis resulting from the coronavirus pandemic. “Payroll costs” for which loan proceeds can be used are defined broadly, and include salary, wages, commissions, tips, paid vacation and other leave, severance payments, payments related to provision of health or retirement benefits, and payment of state or local taxes assessed on employee compensation. Payroll costs do not include compensation of an individual employee in excess of $100,000 per year (prorated for the covered period), federal taxes assessed on employee compensation during the covered period, compensation of employees whose principal residence is outside of the U.S., and sick leave or family leave wages under the Families First Coronavirus Response Act.
Other purposes identified in the PPP for which the use of loan funds will be allowed include costs related to the continuation of healthcare benefits, interest on mortgage obligations, rent, utilities, and interest on other debt obligations that were incurred before the covered period.
The PPP also expands the businesses and organizations that are eligible for 7(a) loans beyond those that already meet the definition of a “small business concern” under 15 USC § 632 to include:
- Any business, non-profit organization, veterans’ organization, or Tribal business that employs fewer than 500 employees (or, as applicable, the threshold number of employees for their industry as established by the Small Business Administration);
- Sole proprietors, self-employed individuals, and independent contractors, provided they are able to submit certain documentation required under the PPP;
- Restaurants and other businesses assigned a North American Industry Classification System (NAICS) code beginning with 72 (“Accommodation and Food Services”) with more than one location if they have no more than 500 employees per physical location, notwithstanding that they may have more than 500 employees in total.
Additionally, the Small Business Administration’s affiliation rules are waived for: (a) businesses with a sector 72 designation and no more than 500 employees; (b) any business operated as a franchise and assigned an NAICS franchise code; and (c) any business that receives financial assistance from a company licensed under section 301 of the Small Business Investment Act.
Other Eligibility Provisions
To be eligible to receive a loan as described in the PPP, the borrower must make a good faith certification that: the loan is necessary because of the economic conditions caused by the pandemic; the funds will be used to retain workers and maintain payroll, or make mortgage, lease, or utility payments; and the borrower has not received or applied for a duplicative loan under the program. No collateral or personal guarantees are required however, and there is no need for a borrower to demonstrate any actual economic harm. The “credit elsewhere” requirement—pursuant to which a borrower must show that it is unable to obtain credit elsewhere before obtaining an SBA loan—is also waived during the covered period.
The maximum loan amount for any borrower that is in business during the PPP’s covered period is the lesser of (a) $10 million or (b) the sum of two-and-one-half times the average monthly payroll costs for the borrower during the one-year period before the date on which the loan is made, plus certain other amounts. Different calculations apply for seasonal employers, and for organizations that were not in business between February 15, 2019 and June 30, 2019, but that are otherwise eligible.
Expansions Apply Only During The PPP’s “Covered Period”
As alluded to above, loans covered under the PPP, and the streamlined eligibility requirements discussed below, are limited to loans made during the “covered period,” defined in the PPP as beginning on February 15, 2020 and ending on June 30, 2020. Further, the expansions discussed above apply only during the covered period.
Loan Forgiveness
One of the key provisions of the CARES Act is that PPP loans are forgivable under certain circumstances. While funds received as a PPP loan may technically be used for any purpose outlined in Section 636(a) of the Small Business Act, in order to have the loan forgiven, the funds must be used for one of the purposes contemplated in the borrower’s good-faith certification—namely, payroll costs, payment of interest on mortgages, or payment of rent and/or utilities.
The recipient of a PPP loan who otherwise meets the requirements for loan forgiveness is eligible to have its indebtedness reduced in an amount equal to payroll costs, interest on covered mortgage obligations, rent payments, and utility payments that were made or incurred during the covered period. Note, however, that the “covered period” under the forgiveness provisions of the CARES Act is defined as the 8-week period beginning on the date of the origination of PPP loan—a significant difference from the definition of the “covered period” of the PPP itself, which spans the four and a half month period from February 15, 2020 to June 30, 2020.
The PPP also reduces the amount to be forgiven based on (1) reductions in the number of employees or (2) reductions in salaries or wages. The CARES Act provides specific methods for calculating those reductions. The reductions may be avoided, however, if the employer eliminates the reduction in employee numbers or eliminates the salary and wage reductions by June 30, 2020. An employer seeking to have all or a portion of a loan under the PPP forgiven must apply to the lender and submit certain documentation showing how the loan money was spent. Thus, employers seeking a loan under the PPP should make certain that they observe the program’s record-keeping requirements.
Conclusion: The Paycheck Protection Program should help to give small businesses some breathing room to keep their workers employed and allow them to more quickly resume normal operations once the COVID-19 pandemic subsides. As noted above, this Alert provides only a summary of the PPP, and as the Small Business Administration issues additional guidance, our understanding of the program may change.
If you have any questions regarding this Alert, please contact the author, Becky Kalas, bkalas@fordharrison.com, who is counsel in our Chicago office. Of course, you may also contact the FordHarrison attorney with whom you usually work.
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