The CARES Act Includes Potentially Forgivable Loans for Small Businesses, Including Self-Employed Individuals!

Loans

Loans

On Friday March 27, 2020, President Trump signed into law the CARES Act, which was the third coronavirus stimulus package. The Act included wide ranging programs and benefits designed to provide economic relief to individuals and businesses facing financial hardship due to the coronavirus outbreak. That relief includes, among other things, unemployment assistance, payroll tax credits and deferrals, and individual rebates. The CARES Act also includes potentially forgivable loans to small businesses under the Payroll Protection Program (PPP).

The PPP will be administered by the Small Business Association through participating banks and provides $350 billion in funding for the program. Eligible businesses generally include those with less than 500 employees and includes sole-proprietors, independent contractors, and self-employed individuals.

Eligible businesses may borrow 2.5 times their average monthly “payroll costs” (excluding compensation over $100,00 per year), up to $10 million. “Payroll costs” are broadly defined, with respect to employees, to include:

  • Salaries, wages, commissions, or similar compensation;

  • payments of cash tips or equivalent;

  • payments for vacation, parental, family medical, or sick leave (excluding leave under the Families First Coronavirus Response Act);

  • allowances for dismissal or separation;

  • payments required for provisions of group health care benefits, including insurance premiums;

  • payments of any retirement benefits; or

  • payments of State or local taxes assessed on the compensation of employees.

Presenting a significant benefit to self-employed individuals, “payroll costs” also include “the sum of payments of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment, or similar compensation and that is in a amount of note more than $100,000 in one year, prorated for the covered period.” Thus, a self-employed individual, independent contractor, or sole proprietor could be eligible for a PPP loan of up to $20,833.33 based solely on his or her income. Businesses with employees will be eligible for larger loans.

PPP loans may be used to pay payroll costs (as noted above), rent, utilities (i.e., electric, gas, water, transportation, telephone, and internet), montage interest and other debt obligations. Obligations for non-payroll costs must have been incurred before February 15, 2020.

To qualify for a PPP loan, small businesses must certify in good faith that:

  1. The uncertainty of the current economic conditions makes the loan request necessary to support ongoing operations;

  2. The borrower will use the loan proceeds to retain workers and maintain payroll or make mortgage, lease, and utility payments;

  3. The borrower does not have an application pending for a duplicative loan; and

  4. From February 15, 2020 to December 31, 2020, the borrower has not received, and will not receive, a duplicative loan.

If a business retains it workforce during the covered period (February 15, 2020 through June 30, 2020) and uses the loan for permitted purposes, it will 100% forgivable and the forgiveness will not count as gross income. If a business does reduce its workforce or reduced wages paid to employees by more than 25%, the amount of the forgiveness of the PPP loan will be reduced by a corresponding percentage. For businesses that have already laid off employees (or reduced wages), the loan will still be forgiven if the employer rehires all employees that were laid off since February 15, 2020 (or increases previously reduced wages) by June 30, 2020.

PPP loans, unlike other SBA loans, will not require collateral or personal guarantees. The interest rate will be 0.50% of the loan balance after forgiveness, with no prepayment penalty. Reportedly, lenders will be able to start taking PPP loan applications starting Friday, April 3, 2020.

The PPP creates a tremendous potential lifeline for small businesses negatively impacted by the coronavirus outbreak and is something that most small businesses owners should look into. If you have questions about your business’s handling of coronavirus related employment or business issues, please contact us at (201) 345-5412 / (646) 503-5358 or through our online scheduling system to schedule a consultation.

Business Law, Employment LawMichael Moreacoronavirus, SBA, payroll, Pay Check Protection Program, CARES Act