American Rescue Plan Act
A: On Thursday, March 11, the president signed into law the American Rescue Plan Act of 2021 (the “Act” or “ARPA”). The Act provides funding for education, COVID-19 vaccination and testing, economic injury disaster loans, restaurant grants, expanded paycheck protection program eligibility, and support for struggling live venues.
A: The Act provides financial assistance for individuals, such as additional direct payments, extended pandemic-related unemployment benefits, and enhancements to refundable tax credits like the Child Tax Credit and the Earned Income Tax Credit designed to help low-income Americans.
Targeted Economic Injury Disaster Loan Advance
The CARES Act, passed in March 2020, included grants of $10,000 to small businesses that were treated as advances on Economic Injury Disaster Loans (“EIDL”) and did not have to be paid back. The Act provides an additional $15 billion for the EIDL grant program to ensure that all eligible businesses can access the $10,000 grants. Businesses are eligible if they are located in low-income communities and previously received an EIDL grant for less than $10,000 or applied but received no funds due to lack of available program funding.
The Small Business Administration will disburse any funds remaining after all eligible businesses have claimed the $10,000 grants as supplemental grants to severely impacted small businesses that have (1) suffered a revenue loss of at least 50 percent; (2) are located in a low-income census tract; and (3) have 10 or fewer employees.
The Act provides $25 billion for a new program at the Small Business Administration that offers assistance to restaurants. Five billion dollars of funding is set aside for businesses with less than $500,000 in 2019 annual revenue.
The grants are available for up to $10 million per entity, with a limitation of $5 million per physical location. Entities are limited to 20 locations. The grants are calculated by subtracting 2020 revenue from 2019 revenue. During the first 21 days, applications from restaurants owned and operated controlled by women, veterans, or socially and economically disadvantaged individuals will receive priority. The grants may be used for a wide variety of expenses, including payroll, mortgage, rent, utilities, supplies, food and beverage expenses, paid sick leave, and operational expenses.
Expanded Paycheck Protection Program Eligibility
The Act expands eligibility for initial and second-draw Paycheck Protection Program loans to additional non-profits listed in Section 501(c) of the Internal Revenue Code, except for 501(c)(4) organizations, as long as the non-profit meets restrictions on lobbying activities. Larger non-profits are eligible for Paycheck Protection Program loans based on employee headcounts per physical location of the organization, rather than a headcount of all employees throughout the entire organization.
In addition, the Act makes internet-only news and periodical publishers eligible for Paycheck Protection Program loans as long as the publisher has more than one physical location, fewer than 500 employees per physical location, and certifies that the loan will support locally-focused or emergency information.
Support for Struggling Live Venues
The Small Business Administration’s Office of Disaster Assistance administers the Shuttered Venue Operations Grant program, that provides grants to struggling live venue operators equal to the lesser of 45 percent of the venue operator’s gross earned revenue or $10 million. The Act provides an additional $1.25 billion for the program, including funding set aside for technical assistance to help entities apply for grants.
The Act includes a partial exclusion from gross income for unemployment payments received in 2020. Under the Act, taxpayers can exclude up to $10,200 of unemployment payments they received if their adjusted gross income is below $150,000. If the taxpayer’s adjusted gross income is $150,000 or more, then the exclusion does not apply and gross income includes all unemployment payments made to the taxpayer.
Direct Payments to Individuals
In addition, the Act creates a refundable tax credit of $1,400 ($2,800 for joint filers) plus $1,400 per dependent. The credit phases out for taxpayers with adjusted gross income above $75,000 (above $150,000 for joint filers; above $112,500 for head of household filers). Advance payments of the credit will be made as rapidly as possible.
Changes to Paycheck Protection Program Specifically Impacting Small Businesses
A: The changes announced on February 22, 2021, to the Paycheck Protection Program (the “PPP”) specifically impact small businesses with fewer than 20 employees. The SBA announced a two-week exclusive application period during which only small businesses with less than 20 employees can apply for PPP loans. This exclusive application period began on February 24, 2021, and will run through March 9, 2021.
A: Loan amount calculation and eligibility. It is important to note that while the two-week exclusive application period began on February 24, 2021, changes to loan eligibility and the loan calculation formula took effect on March 3, 2021.
A: One important change included in the interim final rule is a revision to the PPP loan calculation formula for sole proprietors, independent contractors, and self-employed individuals. Previously, PPP loan amounts for these individuals were based upon the net profit reported on annual tax returns, which prevented unprofitable individuals from receiving a PPP loan. Under the new calculation formula, PPP loan amounts can be based on an individual’s gross income.
A: The restrictions preventing a small business owner with: (i) a past non-fraud felony conviction; or (ii) a delinquent or defaulted federal student loan from obtaining a PPP loan have been eliminated. Previously, a business was ineligible for a PPP loan if at least 20% of its ownership is held by an individual who: (i) has an arrest or conviction for a felony related to financial assistance fraud within the previous five years; (ii) has any other felony within the previous year; or (iii) is currently delinquent or has defaulted within the last seven years on any federal debt, including a student loan. The updated eligibility guidelines now only prevent a business from obtaining a PPP loan if at least 20% of its ownership is held by an individual who is: (i) presently incarcerated; or (ii) for any felony, presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction; or (iii) has been convicted of, pleaded guilty or nolo contendere to, or commenced any form of parole or probation (including probation before judgment) for a felony involving fraud, bribery, embezzlement, or a false statement in a loan application or an application for federal financial assistance within the last five years.
A: It is important to note that while the two-week exclusive application period began on February 24, 2021, the changes noted on loan calculations and eligibility did not go into effect until March 3, 2021. PPP loan applications are determined based upon the rules in effect when the PPP loan application is submitted. Thus, only PPP loan applications submitted after the release of the SBA’s interim final rule on March 3, 2021, will be able to take advantage.
New and Temporary Changes to the PPP Loan for Small Businesses
A: On February 22, 2021, President Biden announced a two-week window during which only small businesses with fewer than 20 employees can apply for loans. The two-week period began February 24, 2021, and will end on March 9, 2021.
Other changes to the program include measures to increase racial equity in paycheck protection program lending. These changes are aimed at helping sole proprietors and independent contractors by setting aside at least $1 billion.
A: The two-week period began February 24, 2021, and will end on March 9, 2021.
CARES Act Employee Retention Credit – Defining Qualified 2020 and 2021 Paid Wages
A: The employee retention credit is a refundable tax credit for qualified wages paid from March 13, 2020, through June 30, 2021 (extended from December 31, 2020), by eligible employers. But, different rules apply to credits for qualified wages paid in 2020 and qualified wages paid in 2021.
A: For wages paid in 2020, the credit amount is 50% of qualified wages, taking into account up to $10,000 of qualified wages, yielding a maximum credit of $5,000 per employee.
A: The wages eligible for the credit depend on an employer’s average number of full-time employees in 2019. Under the credit, an eligible employer with more than 100 full-time employees can only take into account the wages paid to the employees who were not providing services during the period the employer is eligible for the credit. But, employers with 100 or fewer full-time employees can take all wages paid into account.
A: We contacted an attorney at the Service Chief Counsel Office to discuss the employee retention credit. The Service had released the guidance before the Joint Committee on Taxation released its interpretation, and it recognized that the Service’s position in the guidance was more favorable to taxpayers.
Because the Joint Committee on Taxation and the Service have different interpretations of the 100-employee limit under the employee retention credit, there is a concern that the Service could change its mind to include full-time equivalents in the 100-employee limit. But, there is a reasonable argument that full-time employees do not include full-time equivalents for purposes of the employee retention credit’s 100 employee limit. And, an attorney in the Chief Counsel Office believes that the Service will follow the position the Service took in the FAQs.
A: For wages paid in 2021, the credit amount is 70% of qualified wages, taking into account up to $10,000 of qualified wages per quarter, yielding a maximum credit of $14,000 per employee. And, an eligible employer with fewer than 500 full-time employees can take into account all wages paid during the period the employer is eligible for the credit.
A: For an employer to be eligible for the employee retention credit, the employer must have been fully or partially suspended during the calendar quarter due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to COVID-19. If an employer’s workplace is closed by a governmental order for certain purposes—but the employer’s workplace may remain open for other purposes, or the employer is able to continue certain operations remotely—then the employer’s operations would be considered to be partially suspended. But, if all of an employer’s business operations may continue—even if subject to a modification—such a modification of operations is not considered to be a partial suspension of business operations, unless the modification has more than a nominal effect on the business operations under the facts and circumstances.
A: Under the employee retention credit for 2021, an eligible employer with fewer than 500 full-time employees can take into account all wages paid during the partial suspension.
New COVID-19 Stimulus Bill Provides Clarifications and Expansions to the Paycheck Protection Program
A: On Sunday, December 27, 2020, despite voicing initial criticisms of the act, President Trump signed into law the Consolidated Appropriations Act of 2021 (the “Act”). While the Act covers a variety of different fields, it provides much needed clarification, as well as certain expansions, to the Paycheck Protection Program (“PPP”), the immensely popular loan program for struggling small businesses enacted under the Coronavirus Aid, Relief and Economic Security Act back in March of 2020 (“CARES Act”).
A: The Act allocates $284 billion to the U.S. Small Business Association (SBA) in order to facilitate new PPP loans. Prospective PPP borrowers now have until March 31, 2021 to apply for a PPP loan. The SBA has 10 days from December 27, 2020 (the date upon which the President signed the Act into law) to establish any new regulations concerning the administration of this new PPP funding.
While this new round of PPP funding is available to first-time qualified borrowers, the Act also reopens the PPP for select businesses that previously received PPP funding. Specifically, borrowers that have already received PPP funding are eligible to receive a second round of PPP funding of up to 2.5x their average monthly payroll (capped at $2 million per borrower), so long as they meet the following criteria:
- The borrower has 300 or fewer employees;
- The borrower has used or will use the full amount of their first PPP loan; and
- The borrower can show a 25% gross revenue decline in any 2020 quarter compared with the same quarter in 2019.
In addition, while most borrowers will only be eligible for a loan of up to 2.5x their average monthly payroll, borrowers within the accommodation and food services industries will be eligible to receive a second round of PPP funding of up to 3.5x their monthly average payroll (still capped at $2 million per borrower).
The “covered period” is the time allotted for borrowers to spend PPP loan proceeds on qualified expenses for purposes of forgiveness. The Act gives borrowers the option to choose a “covered period” of 8 or 24 weeks. These options are the same as they were in the first round of PPP funding.
Also similar to the first round of PPP funding, costs eligible for forgiveness include payroll, rent, and certain mortgage, interest, and utility expenses. However, the Act now expands the definition of “eligible expenses” to include supplier costs, covered worker protection and facility modification expenditures (including PPE), as well as certain operating costs, such as software and cloud computing services and accounting needs.
A: The Act also officially deems business expenses paid with forgiven PPP loans as tax-deductible, finally putting to bed the argument that has raged on ever since the passage of the CARES Act. While the CARES Act excluded PPP loan forgiveness from gross income, it did not specifically address whether the expenses used to achieve that loan forgiveness would continue to be deductible, even though they otherwise would be deductible. Guidance from both the IRS and the Treasury Department subsequently came out affirmatively stating that such expenses would not be tax deductible. However, experts argued that by passing the CARES Act, Congress intended that these business expenses would be tax deductible. The clarification regarding tax deductions comes as a welcome relief to many PPP borrowers who were uncertain about the deductibility of these expenses.
The Act also expanded and clarified what types of borrowers are eligible for PPP loans. The Act grants eligibility to Sec. 501(c)(6) organizations, so long as they have a) less than 300 employees, b) do not receive more than 15% of receipts from lobbying, c) the lobbying activities do not comprise more than 15% of total activities of the entity and d) the cost of lobbying activities did not exceed $1,000,000 during the most recent tax year that ended prior to February 15, 2020.
In addition, the following types of borrowers have received eligibility rights for the second round of PPP funding:
- Businesses with 500 or fewer employees that are eligible for other SBA 7(a) loans.
- Sole proprietors, independent contractors, and eligible self-employed individuals.
- Not-for-profits, including churches.
- Certain news organizations that were previously ineligible due to affiliation rules.
- Accommodation and food services operations (those with North American Industry Classification System (NAICS) codes starting with 72) with fewer than 300 employees per physical location.
A: The Act now excludes publicly traded companies from PPP loan eligibility. As noted in guidance from the SBA and the Department of Treasury following the implementation of the CARES Act, this Act officially codifies Congress’ intent to prohibit large publicly traded companies from receiving PPP funding.
A: If a borrower is applying for forgiveness for a PPP loan of less than $150,000, the borrower only needs to make a certification of the change in their gross receipts in order to apply for the loan. The SBA will provide such certification no later than 24 days after December 27, 2020. The certification will be no more than one page in length and will verify the loan recipient’s eligibility to their lender. Simply requiring a certification, rather than supporting documentation, will likely expedite the forgiveness process for smaller PPP loans.
COVID-19 Economic Relief and the Employee Retention Credit
A: The employee retention credit is a refundable employment tax credit for qualified wages.
A: The credit amount is 50% of qualified wages, taking into account up to $10,000 of qualified wages, yielding a maximum credit of $5,000 per employee.
A: The wages eligible for the credit depend on an employer’s average number of full-time employees in 2019. Under the credit as originally enacted, an eligible employer with more than 100 full-time employees could only take into account the wages paid to employees who were not providing services during the period the employer is eligible for the credit. But, for eligible employers with 100 or fewer full-time employees, all wages paid during the period an employer is eligible for the credit are taken into account. The definition of eligible wages depends, in part, on the average number of full-time employees employed by an eligible employer during 2019.
A: IRS guidance provides that a full-time employee means an employee who, with respect to any calendar month in 2019, had an average of at least 30 hours of service per week or 130 hours of service in the month, as determined in accordance with Section 4980H. See IRS, COVID-19-Related Employee Retention Credits: Determining Qualified Wages FAQ number 49. The guidance does not specifically address whether employers must include full-time equivalents for determining whether the employers averaged more than 100 full-time employees in 2019.
A: See Description of the Tax Provisions of Public Law 116-136, JCX-12E-20 (April 23, 2020), n. 145. The Joint Committee based its interpretation on the language of the CARES Act, which refers to the “average number of full-time employees (within the meaning of section 4980H of the Internal Revenue Code of 1986).” Section 4980H specifically includes full-time equivalents in its definition of full-time employees for purposes of determining whether an employer is a large employer. 26 U.S.C. § 4980H(c)(2)(E).
A: Importantly, the IRS guidance was not published in the Internal Revenue Bulletin, and the guidance specifically states that it may not be relied upon as legal authority and cannot be used to support a legal argument in a court case. The IRS guidance may not be binding, but it is persuasive and is a good indication of how the IRS will treat taxpayers who apply for the credit. But, there is an argument that the interpretation of the Joint Committee on Taxation is more persuasive than the IRS guidance. The Supreme Court has ruled that, when a federal agency’s interpretation of law is not published under certain specific procedures, the agency’s interpretation is entitled to respect. U.S. v. Mead Corp., 533 U.S. 218 (2001). But, the agency’s interpretation does not control and a court could ultimately side with the Joint Committee on Taxation in interpreting the requirements of the employee retention credit.
A: On December 21, 2020, Congress passed the Consolidated Appropriations Act, 2021 (the “Act”). Among other things, the Act made several changes to the employee retention credit. The Act extends the employee retention credit to July 1, 2021, meaning that an eligible employer can take the credit for wages paid between January 1, 2021, and July 1, 2021. The Act also increases the credit percentage from 50% to 70% and the per-employee limitation from $10,000 for all quarters to $10,000 for any quarter during the extension period. And, the Act modifies the threshold for treatment as a large employer, increasing the threshold to 500 full-time employees. But, the foregoing amendments to the CARES Act apply only to calendar quarters beginning after December 31, 2020. Consequently, the originally-enacted maximum credit and qualified wages definitions apply between March 13, 2020, and December 31, 2020. If President Trump signs the Act, a business with up to 500 full-time and full-time equivalent equivalents could be eligible for the extended employee retention credit.
But, President Trump recently expressed dissatisfaction with the Act and several of its provisions. There is a possibility that President Trump will veto the Act. We are watching out for any changes and will update accordingly.
Paycheck Protection Program Loan Necessity Questionnaire
A: The Small Business Association (the “SBA”) has begun requesting new and additional information from borrowers of Paycheck Protection Program (“PPP”) loans of $2 million or more, specifically related to the good faith certification. The SBA is using a new information request form, the Paycheck Protection Program Loan Necessity Questionnaire (the “Necessity Questionnaire”), to request the information from borrowers.
A: The category of borrowers that this may impact includes a borrower and any affiliates of the borrower with combined PPP loan totals of at least $2 million.
A: The Necessity Questionnaire for for-profit entities contains two sections, a Business Activity Assessment, and a Liquidity Assessment. The Business Activity Assessment includes questions regarding the borrower’s gross revenue for periods in 2019 and 2020, whether or not the borrower was subject to a governmental shutdown or other government order, whether or not the borrower has changed or altered its operations since March 2020, and whether or not the borrower has begun any new capital improvement projects since March 2020. The Liquidity Assessment includes questions regarding the borrower’s cash holdings at the time of the PPP loan application, capital distributions made after March 2020, payments of outstanding debt after March 2020, compensation payments to highly-compensated employees after March 2020, the shareholder’s equity value at the time of the PPP loan application, the ownership structure of borrower’s entity, and whether or not the borrower received any other funds from any other governmental program.
A: The Small Business Association (the “SBA”) has begun requesting new and additional information from borrowers of Paycheck Protection Program (“PPP”) loans of $2 million or more. Currently, the SBA is not requiring all PPP borrowers of $2 million or more to complete the Necessity Questionnaire.
A: If the SBA selects a PPP borrower to complete the Necessity Questionnaire, the PPP borrower will receive a copy of the Necessity Questionnaire directly from the lender servicing their PPP loan. The PPP borrower will then have ten days to complete the Necessity Questionnaire and return it to the lender for submission to the SBA. A failure to complete the Necessity Questionnaire could cause the SBA to determine that the borrower was ineligible for the PPP loan or any PPP loan forgiveness.
A: The SBA has indicated the purpose of the Necessity Questionnaire is to obtain information from a borrower that supports the good-faith certification made by the borrower on the PPP loan application. The SBA will use the information provided by the borrower on the Necessity Questionnaire to confirm that the PPP loan was necessary due to the borrower’s economic uncertainty. The SBA has specified that a request to complete the Necessity Questionnaire should not be considered a challenge to a borrower’s good-faith certification.
A: No. The lenders that we work with have indicated PPP borrowers should not proactively complete the Necessity Questionnaire, and should wait until they are contacted by their lenders or the SBA to complete the Necessity Questionnaire. Please contact us if you have questions regarding the Necessity Questionnaire, or if you have received a request to complete the Necessity Questionnaire from your lender.
New Ohio Small Business Relief Grant Program Created to Help Small Businesses Harmed by the Effects of COVID-19
A: Ohio Governor Mike DeWine recently designated $125 million in funding received from the federal CARES Act for a small business relief grant program (the “Grant Program”). The Grant Program will provide $10,000 grants to Ohio small businesses that have been negatively impacted by the effects of COVID-19. The Grant Program will help businesses pay for a variety of expenses, including mortgage expenses, salaries, wages, or compensation for employees, and other COVID-related expenses.
A: Eligible businesses can only use the Grant Program funds for certain COVID-related expenses. In addition, businesses that receive funds from the Grant Program must keep records of the specific eligible expenses they incurred for five years from the final expenditure of received funds. For more on the eligibility requirements, use of funds requirements, or the maintenance of records requirements, please visit the Grant Program website terms and conditions section, here.
A: Only eligible businesses can receive funding from the Grant Program and must meet all of the criteria listed in the application.
A: Businesses can start applying for Grant Program funds starting November 2, 2020, at 10:00 AM with a new or existing OH|ID online at businesshelp.ohio.gov. Applicants must provide certain required information during the application process. A list of the required information is available on the Grant Program website, here.
A: It is critical that grant applicants follow the Grant Program’s terms and conditions, including conditions related to eligibility, use of funds, and maintenance of records. Otherwise, the State of Ohio can deny grant applications or claw-back any funds it distributes.
Paycheck Protection Program, Change of Ownership Requirements
A: A change of ownership will be considered to have occurred when: (1) at least 20 percent of the common stock or other ownership interest of a PPP borrower—including a publicly-traded entity—is sold or otherwise transferred, whether in one or more transactions, including to an affiliate or an existing owner of the entity, (2) the PPP borrower sells or otherwise transfers at least 50 percent of its assets—measured by fair market value—whether in one or more transactions, or (3) a PPP borrower is merged with or into another entity.
A: Regardless of any change of ownership, the PPP borrower remains responsible for: (1) performance of all obligations under the PPP loan, (2) the certifications made in connection with the PPP loan application, including the certification of economic necessity, and (3) compliance with all other applicable PPP requirements. Additionally, the PPP borrower remains responsible for obtaining, preparing, and retaining all required PPP forms and supporting documentation, and providing those forms and supporting documentation to the PPP lender or lender servicing the PPP loan (referred to as the “PPP Lender”) in the SBA Notice or to the SBA upon request.
A: The PPP borrower must notify the PPP Lender in writing of the contemplated transaction and provide the PPP Lender with a copy of the proposed agreements or other documents that would effectuate the proposed transaction. The SBA Notice lays out different procedures depending on the circumstances of the change of ownership. We have included a link to the SBA Notice for careful review and consideration here.
Paycheck Protection Program (PPP) Loan
A: In light of several large, well-known businesses receiving PPP funding, which prompted public outcry, the SBA recently updated its PPP guidance. It now states that borrowers must certify in good faith that their PPP loan request is necessary. Borrowers must also carefully review the required certification for the loan. The certification needs to demonstrate the loan’s necessity as the means to support ongoing business operations.
A: In weighing whether to apply for a PPP loan, the SBA states that businesses need to take into account their current business activity as well as their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.
A: Since the release of this guidance, a significant number of larger borrowers have voiced concerns, and are worried their business could be held liable for receiving PPP funding. Treasury Secretary Steven Mnuchin added more fuel to these concerns by recently stating the SBA would audit any company that received more than $2 million in PPP loan money. The Secretary also stated any company could face “criminal liability” if it turns out the company was not eligible to apply.
A: Businesses that have already received funding through the PPP may need to reevaluate whether they have sufficient support to justify the necessity of PPP money for ongoing business operations. Any such decision should be vetted through competent legal counsel.
A: Businesses that have had a change of heart may return the loan money by May 18, 2020 without penalty.
A: PPP borrowers should be prepared to answer requests for information concerning the use of the funding from both the SBA and the Department of Justice. Fraud and abuse will be a strong focus of the government, post funding. There will be auditors and investigative task forces.
A: Companies should keep proper documentation outlining decisions relative to the need to apply for a PPP loan. Such documentation may include memoranda, e-mails, and resolutions authorized by the company to enter into the loan.
A: There are certain steps the company should do on the front end of the loan period in order to position itself for complete forgiveness of the loan. These include accounting practices, personnel decisions, and additional record-keeping considerations.
A: On May 13, 2020, the Small Business Administration (SBA) updated its Paycheck Protection Program (PPP) FAQ guidance to explain how it will review the necessity of a business’s PPP funds. This guidance comes as a welcome relief to many eligible small businesses, as previous SBA guidance seemed to emphasize that borrowers needed to prove the loan is “necessary to support the ongoing operations” of the borrower or face financial consequences. The updated guidance states that any borrower that received PPP loans with an original principal amount of less than $2 million will have met the required certification concerning the necessity of the loan request in good faith. The SBA gave this automatic safe harbor to borrowers who received less than $2 million because it determined that borrowers with loans below this threshold are generally less likely to have access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans.
A: Borrowers that received PPP loans for more than $2 million will be subject to review by the SBA for compliance with program requirements as set forth in the PPP Interim Final Rules and in the Borrower Application Form. If the SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification of the loan request, the SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness.
A: If the borrower repays the loan after receiving notification from the SBA, the SBA will not pursue administrative enforcement. In addition, the guidance states that the SBA’s determination concerning the necessity of certification for the loan will not affect the SBA’s loan guarantee.
A: The U.S. Small Business Administration (SBA) released the loan forgiveness application which Paycheck Protection Program (PPP) borrowers will use to determine and report to their lender how much of their PPP loan is eligible for forgiveness. While most PPP borrowers have a top-line understanding of the program, the application provides new information, and attempts to resolve some outstanding questions that many borrowers had concerning forgiveness.
A: In order to accommodate PPP borrowers with a bi-weekly (or more frequent) payroll, borrowers now have the option on the application to calculate eligible payroll costs using the eight-week (56-day) period that begins on the first day of their first pay period following their PPP Loan Disbursement Date (the “Alternative Payroll Covered Period”). For example, if the Borrower received its PPP loan proceeds on Monday, April 20, and the first day of its first pay period following its PPP loan disbursement is Sunday, April 26, the first day of the Alternative Payroll Covered Period is April 26, and the last day of the Alternative Payroll Covered Period is Saturday, June 20—56 days from April 26.
This comes as a relief to many PPP borrowers, as the language of the CARES Act and the subsequent rules and regulations issued by the SBA made it appear as though payroll costs would only be eligible for forgiveness if the expenses were “paid and incurred” during the eight-week period that started the day of the first disbursement of the PPP loan (the “Covered Period”). For certain borrowers, this would have been an accounting nightmare, as their payroll schedule did not coincide with when their business received PPP funding. Borrowers now have the option to use the Alternative Payroll Covered Period for a borrower’s payroll costs, employee health insurance, retirement plan contributions, and state and local taxes assessed on employee compensation calculations if the period would better coincide with their business’s payroll schedule.
A: The application allows a PPP borrower to deduct payroll costs that were either “paid” or “incurred” during the borrower’s Covered Period (or Alternative Payroll Covered Period). Per the application, payroll costs are considered paid on the day that paychecks are distributed or when the borrower originates an ACH credit transaction. Payroll costs are considered incurred on the day that the employee earned the pay. Payroll costs incurred but not paid during the borrowers last pay period of the Covered Period (or Alternative Payroll Covered Period) are eligible for forgiveness if paid on or before the borrower’s next regular payroll date. Otherwise, payroll costs must be paid during the Covered Period (or Alternative Payroll Covered Period).
The guidance also outlines that for each individual employee, the total amount of cash compensation eligible for forgiveness may not exceed an annual salary of $100,000, as prorated for the covered period. This means that no employee is entitled to earn more than $15,385 in cash compensation during the borrowers’ Covered Period of Alternative Payroll Covered Period. This $15,385 cap in cash compensation also applies to any owner-employees, self-employed individuals, or general partners of the business.
A: Per the application, the following nonpayroll costs are eligible for forgiveness:
- covered mortgage obligations: payments of interest (not including any prepayment or payment of principal) on any business mortgage obligation on real or personal property incurred before February 15, 2020 (“business mortgage interest payments”)
- covered rent obligations: business rent or lease payments pursuant to lease agreements for real or personal property in force before February 15, 2020 (“business rent or lease payments”)
- covered utility payments: business payments for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020 (“business utility payments”)
An eligible nonpayroll cost must be paid or incurred during the Covered Period and paid on or before the next regular billing date. This is true even if the billing date is after the Covered Period. Eligible nonpayroll costs cannot exceed 25% of the total forgiveness amount. Allowing this distinction of costs being paid or incurred during the Covered Period allows some flexibility for borrowers to use their PPP funding.
A: The loan amount eligible for forgiveness may change depending on whether the borrower’s average weekly number of FTE employees during the Covered Period or the Alternative Payroll Covered Period was less than during the borrower’s chosen reference period. Many borrowers have expressed concern over what constitutes the calculation of a “full-time equivalent” employee. The application provides a calculation method to determine the average FTE in either the Covered Period or the Alternative Payroll Covered Period. For each employee, the borrower shall enter the average number of hours paid per week, divide by 40, and round the total to the nearest tenth. The maximum for each employee is capped at 1.0. Borrowers can use a simplified method, where the borrower can use 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer hours.
There are a few exceptions in the FTE calculation listed on the application. The application asks the borrower to indicate whether there any positions for which the borrower made a good-faith, written offer to rehire an employee during the Covered Period or the Alternative Payroll Covered Period which was rejected by the employee. It also asks if there were any employees who during the Covered Period or the Alternative Payroll Covered Period were either fired for cause, voluntarily resigned, or voluntarily requested and received a reduction of their hours. In all of these situations, if the position was not then filled by a new employee, the borrower can include these cases as FTE in their calculation.
A: The CARES Act specifically states that a borrower’s loan forgiveness amount will be reduced if the borrower reduced the salary/hourly wages of eligible employees by more than 25%. The application has a Salary/Hour Wage Reduction column for borrowers to complete for employees whose salaries or hourly wages were reduced by more than 25% during the Covered Period or the Alternative Payroll Covered Period as compared to the period of January 1, 2020 through March 31, 2020. The column outlines a three-step process that borrowers will have to go through to analyze whether they are susceptible to loan forgiveness reduction.
A: Borrowers who, along with their affiliates, received more than $2 million in PPP funding will have to check a box on the application stating that they received more than $2 million. As prior SBA and Treasury guidance has stated, any borrower who received more than $2 million will face audits. This box within the application will help the SBA flag PPP loans that are eligible for audit.
Federal Reserve Main Street Lending Program
A: As part of the CARES (Coronavirus Aid, Relief, and Economic Security) Act, the Federal Reserve is making low-interest loans available to qualified small and mid-sized U.S.-based businesses impacted by the COVID-19 pandemic. The loans are part of what’s called the Main Street Lending Program. Businesses and non-profits are eligible to receive between $1 million – $150 million if it has fewer than 10,000 employees or up to $2.5 billion in 2019 revenue. Participation in the Small Business Administration (SBA) Paycheck Protection Program (PPP) does not disqualify a business from applying for a Main Street loan. It may participate in both.
A: The Federal Reserve (Fed) expects to launch its Main Street Lending Program by the beginning of June. The news comes after the Fed announced the formation of the program in early April and an expansion of it on April 30, 2020. The program’s goal is to get funds to small and medium-sized businesses, and its expansion allows a wider variety of lenders and borrowers to participate in the program.
The Main Street Lending Program now operates through three facilities: the Main Street New Loan Facility (“MSNLF”), the Main Street Expanded Loan Facility (“MSELF”), and the Main Street Priority Loan Facility (“MSPLF”).
A: To be eligible to borrow through one of the Main Street Facilities, a business must meet all of the following requirements:
- Domestic business established prior to March 13, 2020
- Not an Ineligible Business, as defined by the Small Business Administration, including but not limited to
- Business primarily engaged in financial and lending services
- Passive businesses
- Life Insurance Companies
- Meet one of the following two conditions: (i) has 15,000 employees or fewer, or (ii) had 2019 annual revenues of $5 billion or less
- Has not received support under the sections of the CARES Act, which authorized up to $46 billion for direct Treasury support for passenger air carriers (and certain specified related businesses), cargo air carriers, and businesses critical to maintaining national security
A: The four-year Main Street loans are not subject to forgiveness and must be repaid. Principal and interest payments will be deferred for one year. Businesses that take advantage of the program must make a reasonable effort to maintain payroll and retain workers.
A: You can apply for any of the Main Street loans by contacting an eligible lender. The eligible lenders are U.S. federally insured depository institutions (including a bank, savings association, or credit union), a U.S. branch or agency of a foreign bank, a U.S. bank holding company, a U.S. savings and loan holding company, a U.S. intermediate holding company of a foreign banking organization, or a U.S. subsidiary of any of the foregoing. After the application, eligible lenders will conduct an assessment of each potential borrower’s financial condition.
A: Regardless of which loan facility a business is eligible for, participating borrowers much adhere to the following conditions:
- The proceeds of the loan will not be used to repay or refinance preexisting loans or lines of credit or repay other debt of equal or lower priority (with the exception of mandatory principal payments, unless the borrower has first repaid the Main Street loan in full).
- The business must attest that it requires financing due to the COVID-19 pandemic.
- The business must attest that it will not seek to cancel or reduce any of its outstanding lines of credit with the lender or any other lender.
- The business must attest that it will follow compensation, stock repurchase, and capital distribution restrictions that apply to direct loan programs under the CARES Act.
- The business must attest that it meets specific EBITDA leverage conditions.
A: A business may only participate in one of the Main Street Facilities: the Main Street New Loan Facility (MSNLF), the Main Street Expanded Loan Facility (MSELF), or the Main Street Priority Loan Facility (MSPLF). Further, a business is not eligible if it participates in the Primary Market Corporate Credit Facility (“PMCCF”) offered by the Fed. The PMCCF is a separate lending program that provides access to credit for investment-grade companies.
The features of each facility are detailed below:
Main Street New Loan Facility
- Principal amortization of one-third at the end of the second year, one-third at the end of the third year, and one-third at maturity at the end of the fourth year
- Minimum loan size of $500,000
- Maximum loan size that is the lesser of (i) $25 million or (ii) an amount equal to four times the eligible borrower’s 2019 adjusted EBITDA plus the amount of any credit lines (whether drawn or undrawn)
- At the time of origination, or at any time during the term, a MSNLF loan may not be contractually subordinated in terms of priority to another loan of the borrower
Main Street Expanded Loan Facility
- Principal amortization of 15% at the end of the second year, 15% at the end of the third year, and a balloon payment of 70% at maturity at the end of the fourth year
- Minimum loan size of $10 million
- Maximum loan size that is the lesser of (i) $200 million, (ii) 35% of the eligible borrower’s existing outstanding and undrawn available debt that is equal in priority with the eligible loan and is equal in secured status (i.e., secured or unsecured), or (iii) an amount equal to six times the eligible borrower’s 2019 adjusted EBITDA plus the amount of any credit lines (whether drawn or undrawn).
Main Street Priority Loan Facility
- Principal amortization of 15% at the end of the second year, 15% at the end of the third year, and a balloon payment of 70% at maturity at the end of the fourth year
- Minimum loan size of $500,000
- Maximum loan size that is the lesser of (i) $25 million or (ii) an amount equal to six times the eligible borrower’s 2019 adjusted EBITDA plus the amount of any credit lines (whether drawn or undrawn).
- At the time of origination and at all times the eligible loan is outstanding, the eligible loan is senior to or equal with, in terms of priority and security, the eligible borrower’s other loans or debt instruments, other than mortgage debt.
A: The following conditions apply to lenders:
- Lenders must attest that the proceeds of the loan will not be used to repay or refinance preexisting loans or lines of credit made by the lender to the borrower, including the preexisting portion of the eligible loan.
- Lenders must attest that it will not cancel or reduce any existing lines of credit outstanding to the borrower.
A: Businesses that have received PPP loans are not precluded from eligibility. Below are some of the required features of the Main Street Facilities:
- 4 year maturity
- Principal and interest payments deferred for one year
- Adjustable rate of LIBOR (1 or 3 month) + 300 basis points
- Prepayment without penalty