Many employers will miss out on this historic loan forgiveness because they don’t understand it or think it’s too good to be true. “Paycheck Protection” is real and will be the saving grace for countless companies and their employees – if they act upon this provision now.
By Lee Allphin, Employer Advantage Founder and Chairman of the Board
The purpose of the CARES Act forgiveness provision is to prevent layoffs during this unprecedented period of business shutdown, in compliance with government guidelines to stop the spread of the COVID-19 Coronavirus.
My very first loan was for a car for $1,000. My father warned me if I didn’t make the monthly payments the loan company would take the car back, so I made these payments faithfully. As a traditional loan, these payments were a calculation of loan principal and interest. Small business owners understand how traditional loans work. Perhaps this is why so many small businesses aren’t taking swift action on the CARES Act’s unprecedented offer for loan forgiveness – it is very non-traditional. In my lifetime, I have never seen an offer or opportunity for loan forgiveness of this magnitude.
The idea of “taking out a loan” may initially seem too burdensome for businesses who are finding it difficult to continue operations due to the devastating economic impact of coronavirus. But the CARES Act is more than an interest-free loan. It is “Paycheck Protection” that offers total loan forgiveness, which in essence makes it a government grant.
HERE ARE THE FACTS THAT WILL HELP MAKE THE BENEFITS CLEAR:
What is a Small Business “Paycheck Protection” Loan?
One of the most significant provision of the CARES Act for employers is to establish new “Paycheck Protection” loans administered by the Small Business Administration (SBA) to help employers continue to cover payroll costs and other expenses during the COVID-19 crisis.
What Can the Loans Be Used For?
The loans may be used for payroll costs, healthcare, rent, utilities, and other debts incurred by the business. Notably, the definition of “payroll” costs excludes “leave payments” made pursuant to the new Families First Coronavirus Response Act (FFCRA). Reimbursement for those leave payments is made through the tax credit process enacted as part of that legislation.
What Period of Time Does “Paycheck Protection” Cover?
The covered period for loans is February 15, 2020 through June 30, 2020. The federal government will forgive the loans in an amount equal to the amount of qualifying costs spent during an eight-week period after the origination of the loan. These qualifying costs include payroll costs (except of wages above $100,000 per employee), interest on secured debt obligations, and rent and utilities in place prior to February 2020.
Who Is Eligible for Loans?
These loans are available for businesses with not more than 500 employees. Exceptions include:
- The hospitality industry (those with a NAICS Code of 72). They are eligible for a loan if they employ not more than 500 employees “per physical location.” For example, a restaurant franchise with 3,000 employees (but no more than 500 employees at any one location) could qualify for the loans.
- Affiliation rules are waived for:
- NAICS Code 72 businesses that employ not more than 500 employees.
- businesses that receive financial assistance from a small venture investment company licensed under the SBA.
How Much Are the Loans?
As with many things, a formula is used. The amounts available will be the lesser of:
- Average monthly payroll costs during the prior year x 2.5 or
- $10 million
If the employer had an average monthly payroll of $400,000 over the prior year, it would be eligible for a loan of $1 million ($400,000 average monthly payroll x 2.5).
How Much of the Loans Can be Forgiven, and Under What Conditions?
The loan will be completely forgiven if the employer re-hires all employees laid off (going back to February 15, 2020), or increased their previously reduced wages, no later than June 20, 2020. It is very clear these provisions are designed to provide an incentive to employers to not lay off workers (or rehire them) and instead utilize the loan amounts to pay payroll and other expenses.
How Do Businesses Get the Loans?
Loans will be available immediately through SBA-certified lenders, which include banks, credit unions, and other financial institutions with these provisions:
- Lenders will determine eligibility for the loans based on whether the business was operational as of February 15, 2020, had employees on payroll, and paid wages and payroll taxes.
- The SBA will also be required to streamline the process to include additional lenders into the program and to ensure that funds are dispersed to qualified businesses as soon as possible. The deadline to apply for paycheck protection loans is June 30, 2020.
- The standard fees under section 7 of the Small Business Act are waived and there is no requirement that the loans be personally guaranteed by the borrower.
- Paycheck protection loans are fully guaranteed by the federal government through December 31, 2020 (previously guaranteed at 85%).
COVID-19 will go down in history books as one of the great examples of reaction to crisis. As an employer, you can benefit from taking the lead. Every employer must reconsider laying off anyone for unemployment, or taking leaves of absence.
Employer Advantage is proud to be managing Human Resources Management and Services for our clients to guide them in implementing and benefiting from the CARES Act and Families First Coronavirus Response Act (FFCRA).
Click HERE to see our FREE On Demand Webinar: The Paycheck Protection Program | Vital Relief for Your Business During COVID-19.
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