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Small Business Owners: CARES Act FAQ

Quoting from J.P. Morgan Asset Management Small Business Owners: CARES Act FAQ

On Friday, March 27, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law. The $2.2 trillion stimulus package aims to provide comprehensive relief to individuals and businesses following the unprecedented impact of COVID-19 on our economy and our communities.

Once further details are released, we will be providing the information you need to help you navigate your eligibility and options.

Who is this for?

  • The Paycheck Protection Program of the CARES Act provides relief primarily to businesses and nonprofits with up to 500 employees.
  • To be eligible, institutions must have been substantially impacted by COVID-19 and in business as of February 15, 2020.
  • Borrowers must certify that the funds will be used for approved purposes and that they are not receiving assistance for these items from another source.

Operations of the Paycheck Protection Program

What is the Paycheck Protection Program (PPP)?

  • The $349 billion Paycheck Protection Program expands loan eligibility under the Small Business Administration’s (SBA) 7(a) program with the intention of assisting businesses with covering costs related to payroll (including healthcare and certain related expenses), mortgage interest, rent, leases, utilities and interest on existing debt.
  • The PPP is part of an approximately $2.2 trillion economic stimulus package known as the CARES Act, signed into law by President Trump on March 27, 2020.

What size business can qualify for a PPP loan?

  • To qualify, the business must have no more than 500 employees (or, if applicable, the SBA’s size standard for that industry).1
    • The SBA typically counts anyone on the payroll as one employee, regardless of hours worked or temporary status.
    • The SBA typically considers the employees of affiliated businesses in the total calculation, so if the business and its affiliates in aggregate employ more than 500 people, the business typically won’t qualify. The CARES Act creates exceptions for businesses with a NAICS code beginning with 72 (accommodation and food services) and no more than 500 employees, franchisees assigned a franchise identifier code by the SBA, and businesses backed by a small business investment company (SBIC).

I am a franchisee, can I still qualify?

  • Yes. A business operating as a franchise that is assigned a franchise identifier code by the SBA can qualify for the PPP.

If my company has funding from a private equity (PE) firm or other financial sponsor, can I still participate?

  • PE portfolio companies typically have difficulty getting 7(a) loans because the SBA’s affiliation rules may require the total number of employees across all of the sponsor’s portfolio companies to be 500 or fewer.
  • The CARES Act waives the affiliation rules for businesses with a NAICS code beginning with 72 (accommodation and food services) and no more than 500 employees, franchisees assigned a franchise identifier code by the SBA, and businesses backed by an SBIC.
  • Clients with questions about the affiliation rules should check with their accountants or attorneys.

What is the maximum size of the loan?

  • The maximum loan amount is the lesser of 2.5 times the business’s average monthly payroll costs and $10 million.2
  • For non-seasonal employers, average monthly payroll is the average total monthly payments for payroll during the one-year period preceding the date of loan origination.
  • For seasonal employers, average monthly payroll is the average total monthly payments for payroll for the period from February 15, 2019, to June 30, 2019 (or March 1, 2019–June 30, 2019, at the election of the borrower).
  • For businesses that were not in operation during February 15, 2019–June 30, 2019, average monthly payroll is the average total monthly payments for payroll for the period from January 1, 2020, to February 29, 2020.

What can the loan be used for?

  • Loans can be used for payroll costs (excluding amounts above a prorated annual salary of $100,000 for employees who make more than that amount), mortgage/debt interest, rent and utilities.3

How are payroll costs calculated?

  • The CARES Act defines payroll costs as:
    • The compensation of an employee (whose principal residence is in the United States), including:
      • Salary, wage, commission or other compensation (not to exceed $100,000 per year, as prorated for the covered period)
      • Cash tip or equivalent
      • Payment for vacation, parental, family, medical or sick leave (unless the employer receives a credit under the Families First Act)
      • Allowance for dismissal or separation
      • Group healthcare benefits, including insurance premiums
      • Retirement benefits
      • State/local payroll taxes (not federal payroll taxes); and
  • Payments to independent contractors (not to exceed $100,000 per contractor per year, as prorated for the covered period).
  • Clients should work with their accountants to calculate their payroll costs.

Is there a limit on the amount of compensation I can include in my payroll costs?

  • Yes. When calculating average payroll costs, an employer may not consider any amounts paid as compensation to an employee in excess of $100,000 per year, as prorated for the covered period, or any compensation of an employee whose principal place of residence is outside of the United States.

Is there a loan forgiveness provision under the PPP?

  • Yes. There is the potential for the loan principal (and interest accrued thereon) to be forgiven up to the amount spent on payroll costs, mortgage interest, rent and/or utilities during the eight weeks after the issuance of the loan.
  • Mortgages, leases and service contracts must have originated prior to February 15, 2020, for payments to be eligible.
  • The amount of the loan forgiveness will be reduced if there is a reduction in the number of employees or wages in excess of 25% of total wages during the period.
  • The Department of the Treasury expects high subscription and has said that it is anticipated that not more than 25% of the forgiven amount may be for non-payroll costs.
  • The SBA will issue additional guidance by April 26 on how the loan forgiveness provision will function.

If I already laid off workers, am I still eligible to apply for a PPP loan?

  • Yes.

What is a NAICS code? Where do I find the NAICS code for my business?

  • The federal government uses the North American Industry Classification System (NAICS) to classify businesses by the type of economic activity in which they engage.
  • NAICS codes are a series of six-digit numbers used to identify the industry in which a business operates.
  • All businesses are required to include a NAICS code on their federal income tax returns.4
  • Clients should consult their accountants and tax advisors as to which NAICS code they fall under.

Are these loans also available for nonprofits?

  • Yes. As long as they meet all of the SBA’s criteria.

What impact does a PPP loan have on my ability to qualify for other forms of relief under the CARES Act?

  • The CARES Act creates a special payroll tax credit to encourage businesses affected by COVID-19 to keep staff on payroll.
  • The CARES Act also allows businesses to defer the payment of employer payroll taxes they incur between March 27, 2020, and December 31, 2020.
  • A business that receives a PPP loan is not permitted to claim the employee retention credit, and a business that receives a PPP loan and has a part of it forgiven is not eligible for the payroll tax deferral.
  • Clients should discuss with their accountants and tax advisors which of these forms of relief make the most sense for their businesses.

Accessing the Paycheck Protection Program

How do I gain access to the PPP?

  • Clients should work with their existing SBA lenders.

What can I be doing now to gain access to the PPP?

  • Clients should expect that many businesses will be applying for these loans and the application site may be overloaded.
  • The Department of the Treasury has released an information sheet for interested borrowers and a standard application.
  • Borrowers will be required to submit payroll documentation along with their application. We strongly encourage clients to prepare ahead by having the following items on hand:
    • The date they started the business
    • The business’s mailing address
    • The most recent IRS Form 941—Employer’s Quarterly Federal Income Tax Return
    • Expense information to help determine loan sizing, specifically:
      • Determine which employees are paid more than $100,000 per year
      • Calculate the total payroll for employees paid during the applicable base period, excluding amounts paid above a prorated annual salary of $100,000
      • Gather documentation on the business’s payroll, mortgage, rent and utilities payments for the previous 12-month period
  • Complete 2019 financials, including the business’s profit/loss and balance sheet.

What will I be required to certify?

  • On the application, borrowers will be required to certify the following in good faith:
    • Current economic uncertainty makes the loan necessary to support the borrower’s ongoing operations.
    • The funds will be used to retain workers and maintain payroll or to make mortgage, lease, and utility payments.
    • The borrower has not and will not receive another loan under this program.
    • The borrower will provide to the lender documentation that verifies the number of full-time equivalent employees on payroll and the dollar amounts of payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities for the eight weeks after getting this loan.
    • Loan forgiveness will be provided for the sum of documented payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities. Due to likely high subscription, it is anticipated that not more than 25% of the forgiven amount may be for non-payroll costs.
    • All the information provided in the borrower’s application and in all supporting documents and forms is true and accurate. Knowingly making a false statement to get a loan under this program is punishable by law.

What will be the interest rate of the loan?

  • The Department of the Treasury has said that the rate for all borrowers will be 0.5% per year.

What will be the term of the loan?

  • The Department of the Treasury has said that the term for all borrowers will be two years.
  • By law, payments of principal and interest will be deferred for at least six months, and may be deferred for up to one year.

May I repay the loan in less than two years?

  • Yes, there is no prepayment penalty.

What is the deadline to apply?

  • The CARES Act creates a deadline of June 30, 2020 to apply for PPP loans.
  • Notwithstanding the June 30 deadline, the total amount of PPP loans the Act authorizes for the entire country is $349 billion (an amount that could be increased by future legislation).

Do I need to pay my mortgage? Rent? Utilities? Credit card?

  • Yes. The loan is meant to help small business owners cover their expenses. However, check with your lender/landlord to see if any federally or state-mandated debt/rent relief applies to you.

If a business applies for a loan under the PPP, will it have issues getting additional loans/grants from other programs?

  • There is no guidance in the CARES Act on this issue; this will likely depend on the terms and conditions of the outside loans and grants.

How will this impact my credit?

  • There are no personal guarantees or collateral required for a PPP loan, so participation in this program generally should not adversely impact your credit.

How can I learn more?

The information above is based on the Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136) and is believed to be accurate as of March 31, 2020.

1 Businesses with a NAICS code beginning with 72 (accommodations and food services) can qualify if they employ no more than 500 people per physical location.

2 A business may borrow an additional amount (but not in excess of $10 million total) to refinance an Economic Injury Disaster Loan (EIDL) it received from the SBA between January 31, 2020, and the launch of the PPP.

3 A PPP loan may also be used to refinance an EIDL incurred between January 31, 2020, and the launch of the PPP.

4 Different government agencies may use different NAICS codes with respect to the same business, and businesses that carry out activities across multiple industries may need to determine the appropriate NAICS code based on such factors as the contribution of each activity to revenue. Clients should consult their accountants and tax advisors.

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