By Laura Roussel, CPA, Vice President Regional Services, EXIT Realty Corp. International

This is the first of a series of posts to inform and hopefully provide some clarity to the vast array of programs and loans that have become available very recently to small businesses, as well as individuals, who have suffered economic hardship due to the Coronavirus Pandemic.  The following are some key points of the “Paycheck Protection Program” which is a part of the U.S. Senate’s Coronavirus Aid, Relief, and Economic Security Act (the CARES Act).

The Paycheck Protection Program is designed to provide a direct incentive for small businesses to keep their workers on payroll by providing each small business a loan up to $10 million for payroll and certain other expenses.  If all employees are kept on payroll for eight weeks, the Small Business Administration will forgive the portion of the loans used for payroll, rent, mortgage interest, or utilities. Up to 100 percent of the loan is forgivable.

What is This?

  • SBA Act section 7(a) guaranteed loan program
  • Loans of up to $10 million
  • Loans must be received before June 30, 2020
  • No SBA fees
  • No collateral or personal guarantees required
  • No SBA recourse against any individual shareholder, member, or partner if the proceeds are used as allowed.

Who Qualifies?

  • Business concerns, including:
    • Business entities
    • Nonprofit organizations: must be both a 501(3)(c) and 501(a) status
    • Sole proprietorships or other eligible self-employed individuals
    • Independent contractors
    • Veterans organizations and tribal concerns
    • Companies defined as small businesses in SBA Act
  • Business with 500 or fewer employees
  • In business on February 15, 2020 with:
    • Compensated employees (salaries and payroll taxes) and/or
    • Compensated independent contractors (payments reported on IRS Form 1099-MISC)

Who Makes the Loans?

  • Currently authorized SBA Act 7(a) lenders that opt to participate
  • Borrower must make a good faith certification that proceeds will be “used to retain workers and maintain payroll”
  • Small businesses and sole proprietorships can apply starting April 3, 2020 and independent contractors and self-employed individuals can apply starting April 10, 2020.

How Much Can Be Borrowed?

  • Maximum amount is the lesser of $10 million or 2.5 times the borrower’s average total monthly payments for payroll costs during the “1-year period before the date on which the loan is made”
  • Eligible payroll costs include:
    • Salaries, wages, and commissions, “or similar compensation (Limitations apply to salaries greater than $100,000)
    • Cash tip or equivalent
    • Payment for vacation, parental, family, medical or sick leave
    • Separation payments
    • Group health care benefits/premiums
    • Payment of any retirement benefit
    • Payment of state or local tax assessed
    • 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 less than $100,000 in 1 year, as prorated for the covered period

How May Loan Proceeds Be Used?

  • Payroll costs (as defined in the Act)
  • Costs related to continuation of group health care benefits during periods of paid sick, medical or family leave, and insurance premiums
  • Rent (including rent under a lease agreement)
  • Utility payments (power, water, transportation, telephone, internet access)
  • Mortgage interest payments and interest on any other debt obligations incurred before 2/15/2020
  • Existing SBA Act Section 7(a) loan allowable uses, including working capital.

How Much of the Loan May Be Forgiven?

  • Actual specified costs incurred, and payments made during the 8-week period following the loan origination date for the following things, as defined in the Act:
    • Payroll costs
    • Payments on covered rent obligations
    • Covered utility payments
    • Payments of interest on any covered mortgage obligation
  • Total forgiveness cannot exceed the principal amount of the loan
  • The forgiven debt will not be taxable income for federal income tax purposes
  • Reductions in loan forgiveness for the following:
    • Decrease during the 8-week period of employee wages in excess of 25% for employees whose pay rate was less than $100,000 per year
    • Decrease during the 8-week period in full-time equivalent employees (employees previously laid off and rehired by 6/3/2020 will not reduce loan forgiveness

What Happens to the Debt That is Not Forgiven?

  • Unforgiven portion to be repaid over a 2-year period
  • Interest rate of 0.5%
  • No prepayment penalty
  • Deferral of repayment for 6 months

In my previous profession I owned a CPA practice and researched and advised my clients on financial matters such as these. Currently, I have been researching these programs in order to provide information as a free resource to our EXIT Associates as well as friends and family.  I recommend you discuss these programs with your CPA if possible, as they know your situation/business best. The key factor here is that you need to be gathering the documents and information that may be required now, so you can apply ASAP. You will need to know how much you paid out in payroll in the past year and the number of employees you have. In addition, be prepared by having copies of current YTD and prior year financial statements and 3 prior years’ returns. There are limited funds for this program, so the people who file first will most likely be the ones who receive the loans.  As the old saying goes, “The early bird gets the worm”.

Other helpful resources:

If you wish to start preparing your application, download a sample form here.

Additional information on the Paycheck Protection Program.

In response to the COVID-19 pandemic, small business owners in all U.S. states, Washington D.C., and territories are currently eligible to apply for disaster assistance.

Disclaimer: The information above is only a non-exhaustive summary of select provisions of the CARES ACT (H.R. 748).  The full text of the act can be read here. To the best of my knowledge, this information was correct at the time of publication. Given the fluid situation, and with rapidly changing new guidance issued daily, be aware that some of this information may no longer apply. 


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