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Overview of the SBA Paycheck Protection Program

The Act amends the Small Business Act (the “SBA”) 7(a) loan program to include a new guaranteed, unsecured loan program (the “Paycheck Protection Program”) to help fund operational costs of eligible businesses, organizations and self-employed persons during the COVID-19 pandemic. Congress appropriated $349 billion for guaranteed, low-interest, no-fee loans under the Program, with repayment deferred for at least six months. The Program also permits loan forgiveness up to 100% of the loan principal amount, subject to employment-number and compensation-level requirements.

Paycheck Protection Program Details:

  1. The loan program covers businesses with up to 500 employees.
  2. Eligible employees include full-time, part-time or other hires.
  3. Businesses with more than 500 employees and one physical location (hospitality / food service) are eligible for the loan program, provided that they do not have more than 500 employees per physical location.
  4. Sole proprietorships, independent contractors and self-employed individuals may also apply subject to certain additional documentation requirements.
  5. Loans cover the period between February 15, 2020 through June 30, 2020.
  6. The maximum loan amount is $10 million.
  7. The formula for determining the size of the loan for a particular borrower is tied to payroll costs of the business.
  8. Funds may be used to cover payroll costs; continuation of healthcare benefits during paid sick, medical or family leave; insurance premiums; mortgage interest payments, rent and utility payments; and interest on other existing debt obligations.

Borrower Requirements:

  • Borrowers must make a good-faith certification that:
    • the loan is necessary due to the current economic conditions caused by COVID-19,
    • they will use the funds to retain workers and maintain payroll, lease and utility payments and.
    • they are not receiving duplicative funds for the same uses under another SBA program.
  • Borrowers must maintain an average monthly number of full-time equivalent employees during the covered period that is not less than the average monthly number during a specified period prior to the COVID-19 pandemic.
  • Payments will be deferred for at least six months and up to 12 months.

Loan Forgiveness:

  • Borrowers will be eligible for loan forgiveness equal to the amount they spend during the eight-week period after the loan origination date on payroll costs, interest payments or mortgages incurred prior to February 15, 2020, payment of rent on any lease in force prior to February 15, 2020 and payment on any utility for services that began prior to February 15, 2020.
  • Restrictions: the amount forgiven may not exceed the loan principal amount;
  • Payroll costs for compensation above $100,000 in wages are not eligible for loan forgiveness.
  • Reductions: The amount forgiven will be reduced proportionally by any reduction in employees retained compared to the prior year and reduced by the reduction in pay of any employee beyond 25% of their prior year compensation.
  • To encourage rehiring, this forgiveness reduction will not apply if the borrower eliminates any reduction in employee number and employee salaries/wages by June 30, 2020.
  • Federal tax effect: Forgiven loan amounts (cancelled indebtedness) are excluded from gross income for tax purposes.
  • Any loan, or portion of a loan, that is not forgiven will have a maturity of 10 years or less, and a maximum interest rate of 4%. There will be no prepayment fees.
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