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Small Business Owners May Want to Consider Applying for the CARES Act Paycheck Protection Program

On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act, known as the CARES Act.  This sweeping law includes assistance to small businesses reeling from the financial consequences of COVID-19 by authorizing a financial package of $349 billion to be provided to small business owners through the newly adopted Paycheck Protection Program (PPP) in the form of loans with liberal loan forgiveness provisions.  On March 31, 2020, the U.S. Department of Treasury posted the PPP loan application form at https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Application-3-30-2020-v3.pdf.

Existing Small Business Administration (SBA) lenders under SBA’s 7(a) program, in which most banks participate, can start accepting PPP loan applications from small businesses and sole proprietorships on Friday, April 3, and from independent contractors and self-employed individuals on Friday, April 10, 2020.  The program is open for applications through June 30, 2020, but we recommend filing your application as soon as possible due to likely oversubscription of the current authorized funding.

Applications may be submitted as of April 3, 2020, and many expect a benefit to being closer to the front of the queue to receive benefits earlier or in case of oversubscription, but it is not yet clear what applicant businesses can expect in terms of response times on loan approvals or release of funds.  Based on initial feedback from the lenders in the banking community, demand for these loans is sky high, so expect some bugs to need to be worked out and capacity challenges worked through before we see efficient operation of this program.  The SBA has been working to create a streamlined loan application process through an electronic portal to facilitate its and the participating lenders’ ability to move applications through the system and disburse the $349 billion as quickly as possible.  The SBA is also working on implementation procedures for the PPP and providing clear guidance to lenders and applicants alike in anticipation of high numbers of applicants. This guidance may well come out in stages.  Some banks may decline to participate, and it is expected that many will establish policies to process only applications from existing clients of the bank, or to process applications from clients of the bank before attending to applications from non-clients.  We recommend that you evaluate your eligibility, bank options, and potential loan amount and make a decision whether to apply as soon as you can.


Below is a summary of the new program’s notable provisions, including eligibility requirements, permitted uses of the loan proceeds, and the loan forgiveness features. The U.S. Department of Treasury’s PPP information sheet also provides a very useful summary. https://home.treasury.gov/system/files/136/PPP%20--%20Overview.pdf

Paycheck Protection Program and Loan Forgiveness: PPP authorizes loans of up to $10,000,000 to small businesses for use towards specified business expenses.  To be eligible, a business generally must employ no more than 500 employees counting all individuals employed on a full-time, part-time, or other basis.  

  • The maximum amount that can be borrowed under a covered loan is determined, in most instances, is equal to 2.5x the average total monthly payments for “Payroll Costs” (as described in more detail below) incurred during the one-year period before the date on which the loan is made.
  • For purposes of the Covered Loans, “Payroll Costs” means the sum of payments of any compensation with respect to employees that is a:
    • salary, wage, commission or similar compensation;
    • payment of cash tip or equivalent;
    • payment for vacation/time off, parental, family, medical or sick leave;
    • allowance for dismissal or separation;
    • payment required for the provisions of group health care benefits, including insurance premiums;
    • payment of any retirement benefit; or
    • payment of state or local tax assessed on the compensation of employees.
  • “Payroll costs” do not include the following:
    • the compensation of an individual employee in excess of an annual salary of $100,000, as prorated for the covered period;
    • taxes imposed or withheld under Chapters 21 (Social Security and Medicare taxes, employee and employer portion), or 24 (withholding obligations from employees) of the Internal Revenue Code of 1986;
    • any compensation of an employee whose principal place of residence is outside of the United States; and
    • qualified sick leave wages and qualified family leave wages, in each case, for which a credit is allowed under the Families First Coronavirus Response Act.
  • Allowable uses of PPP loan proceeds:  PPP loan proceeds may be used towards payroll costs, costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums, employee salaries or commissions, payments of interest on any mortgage obligation, rent, utilities, or interest incurred on any debt incurred before February 15, 2020.
  • In evaluating the eligibility of an applicant for a covered loan, a lender is required to consider whether the applicant:
    • was in operation on February 15, 2020
    • had employees for whom the borrower paid salaries and payroll taxes or paid independent contractors, as reported on a Form 1099-MISC.
    • Specifically, during the covered period, the requirement that an applicant be unable to obtain credit from nonfederal sources on reasonable terms and conditions does not apply to a covered loan.
  • Financial hardship certification requirement: Recipients of PPP loans must make a good faith certification that the uncertainty of the current economic conditions makes the loan request necessary to support the recipient’s ongoing operations; acknowledge that funds will be used to retain workers or make mortgage payments, lease payments, and utility payments; that the applicant does not have an application pending for a duplicative loan; and that during the period beginning February 15, 2020, and ending December 31, 2020, the eligible recipient has not received amounts for the same purpose and duplicative of amounts applied for or received under a covered loan.   
  • PPP loan interest rate, repayment terms, and underwriting requirements.  The maximum interest rate of a PPP loan is 4 percent, the maximum term is 10 years, and lenders are required to provide complete payment deferment relief for at least six months but not more than a year.  No personal guarantee shall be required.  No collateral is required.   PPP loans are non-recourse against individual shareholders, members, or partners of the small business, except to the extent the loan proceeds are used for an unauthorized purpose.  There is no prepayment penalty for any payment made for a PPP loan.
  • Loan Forgiveness: A borrower seeking loan forgiveness with respect to a covered loan is required to submit to the lender servicing the loan an application that provides certain documents and makes certain certifications. A borrower is not permitted to receive forgiveness without submitting to the lender the documentation required. These required documents and certifications include:
    • Documentation verifying the number of full-time equivalent employees on payroll and pay rates for the relevant pay periods, including:
      • payroll tax filings reported to the Internal Revenue Service
      • state income, payroll and unemployment insurance filings.
    • Documentation verifying payments on covered mortgage obligations, payments on covered lease obligations, and covered utility payments, including cancelled checks, payment receipts, transcripts of accounts, or other documents
    • A certification from a representative of the borrower authorized to make such certifications that:
      • the documentation presented is true and correct; and
      • the amount for which forgiveness is requested was used to retain employees, make interest payments on a covered mortgage obligation, make payments on a covered rent obligation, or make covered utility payments.
      • any other documentation SBA determines necessary.
    • The lender is required to issue a decision on the forgiveness application no later than 60 days after the date on which it receives the application.
  • Caveats to Loan Forgiveness:
    • The U.S. Treasury Department’s March 31, 2020 Borrower information sheet notes that “[d]ue to likely high subscription, it is anticipated that not more than 25% of the forgiven amount may be for non-payroll costs.”  
    • The amount of the loan forgiveness can be reduced if the loan recipient reduces the number of employees, or salaries and wages, during the eight-week period following the origination of the loan.  If, however, the recipient restores their workforce count and salaries or wages by June 30, 2020, there is no reduction penalty.  
  • Tax treatment of PPP loan forgiveness: The CARES Act provides that any amounts forgiven will not be treated as income to the loan recipient, for U.S. federal income tax purposes.  PPP is federal law and this treatment presumably only applies for state income tax purposes to the extent the federal law is incorporated into state income tax law.  For California income tax purposes, the income exception may not apply unless and until California adopts this income forgiveness provision.

In addition, The State of California is allocating $50 million to the Small Business Finance Center at California’s IBank to mitigate barriers to capital for those small businesses (1-750 employees) that may not qualify for federal funds via the PPP (including businesses in low-wealth and immigrant communities).  See more information here: https://business.ca.gov/coronavirus-2019/

Finally, be aware that CARES includes key tax provisions for businesses beyond the PPP.  Among them:

  • Employee Retention Credit of Payroll Tax
  • Employer Payroll Tax Deferral
  • Net Operating Loss (NOL) Modification
  • Excess Business Loss Limitation
  • Modification of Limitation on Business Interest
  • Amendments on Qualified Improvement Property (QIP)

Tax provisions from the CARES Act are positioned to have a significant impact on businesses currently struggling due to the COVID-19 pandemic. Business leaders should carefully review all provisions to understand the available opportunities to gain tax relief and increase cash flow during this crisis.  For specific analysis on how the CARES Act tax provisions may impact your business, we recommend you speak with your CPA or tax preparer. 

For some guidance on how to understand the key provisions of the CARES Act and direction toward sources that may help you take full advantage of its provisions, please reach out to your GBB Financial Advisor.

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