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The Nuts and Bolts of the CARES Act Economic Disaster and Payroll Protection Loan Programs

The Nuts and Bolts of the CARES Act Economic Disaster and Payroll Protection Loan Programs

By Anthony Diosdi

Recently, President Donald Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The Cares Act provides for special loan programs for businesses impacted by the coronavirus (COVID-19) pandemic. There are two types of relief a business can apply to receive. They are both discussed in detail below.

Economic Injury Disaster Loans

The Small Business Administration (“SBA”) provides low-interest Economic Injury Disaster Loans (EIDLs) that have been available to small businesses following a disaster declaration. EIDLs are authorized by Section 7(a) of the Small Business Act.

EIDLs are typically granted after a natural disaster. Each EIDL provides up to a $2 million loan. These loans may be used to pay fixed debts, pay fixed debts, payroll accounts payable, and other bills. The current interest rate on EIDLs is fixed at 3.75 percent for small businesses and 2.75 percent for non-profits. EIDLs can be repaid over a term of up to 30 years. EIDLs are available to any business in a disaster area. The entire United States has been declared a disaster area as a result of the coronavirus. Due to coronavirus, the SBA is providing advances of up to $10,000 on EIDLs to  businesses. These advances may be available within three days of applying for the EIDL and in certain situations, these advances do not have to be repaid.

Paycheck Protection Program

The new Paycheck Protection Program (“PPP”) is an expansion of the existing 7(a) loan program, authorized by the recently passed CARES Act. A business may apply for the PPP if it has been in operation since February 15, 2020. The business applying for a PPP also must have had either 1) employees for whom it paid wages and payroll taxes or 2) the business paid independent contractors. In more broad terms, to be eligible for the PPP, the business must have employed 500 or fewer employees (including the owners of the business), paid independent contractors, are certain non-profits, veterans’ organizations, tribal business, or are self-employed workers.

How Much Aid is Available

Small businesses can borrow 250 percent of their average monthly payroll expenses during the one-year period before the loan was requested. This amount is capped at $10 million. Please see Illustration 1 below for an example on how the aid is calculated.

Illustration 1.

If a business has a payroll average of $100,000, the business can borrow $250,000 ($100,000 x 250 percent).

The term “payroll costs” is defined extremely broadly. Below please find examples as to how “payroll costs’ are defined:

1. employee salaries, wages, commissions, or “similar compensation,” up to a per-worker ceiling of $100,000 per year;

2. Cash tips or the equivalent;

3. Payments for vacations and parental, family, medical, or sick leave;

4. Allowance for dismissal or separation;

5. Payment for group health benefits, including insurance premiums;

6. Payment of any retirement benefits; or

7. State or local tax assessed on employee compensation.

How Much Loan is Forgiven?

Under the PPP, principal amounts used for payroll, mortgages interest, rent, and utility payments during an eight week period (beginning with the origination date of the loan) between February 15, 2020, and June 30, 2020 will be forgiven. If the full principal is forgiven, the business is not liable for the interest accrued over that eight-week period and the amounts canceled are not considered taxable income.

Because the whole point of the PPP is to help keep workers employed at their current level of pay, the loan forgiveness amount decreases if the business lays employees off or reduces their wages, the benefits of the program are reduced or eliminated. The PPP requires a business to:

1. Keep workers at their current rates of pay.

2. If the business reduces its workforce, the loan forgiveness will be reduced by the percentage decrease in employees.

Assume that this year a business had 20 workers. Next year the business only has sixteen employees. The businesses loan forgiveness will be reduced by 20 percent.

With that said, a business is allowed to compare its average number of full-time equivalent employees employed during the covered period (February 15, 2020 to June 30, 2020) to the number employed during the businesses choice of

1. February 15, 2019 to June 30, 2019 or

2. January 1, 2020 to February 29, 2020.

If the business had reduced by more than 25 percent (as compared to the most recent full quarter before the covered period) the pay of a worker making less than $100,000, the businesses loan forgiveness decreases by the amount in excess of 25 percent

Below please see Illustration 2 for an example as to how the PPP forgiveness is calculated.

Illustration 2.

Last quarter, Steve was earning $75,000 annually. Steve’s salary was reduced to $54,750. Steve’s salary was decreased by 27 percent. Therefore, the amount of the PPP loan forgiven is reduced by the excess of 2 percent.

How to Apply for a PPP

PPP loans can only be done through approved third-party lenders. There is no fee to apply and a business’s documentation burden is low. In addition to the appropriate documentation regarding the business’s finances, there is need only to make a good-faith showing that: 1) the loan is necessary to support the ongoing business operations in the current economic climate; 2) the funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utilities payments; and 3) the business  does not have a duplicate loan already pending or completed.

Do it now

The allocates $349 billion for PPP relief. This money will quickly disappear. There is no guarantee that Congress will allocate additional funds to the PPP. Therefore, any business considering a PPP loan should act as fast as possible.

Anthony Diosdi is a partner and attorney at Diosdi Ching & Liu, LLP, located in San Francisco, California. Diosdi Ching & Liu, LLP also has offices in Pleasanton, California and Fort Lauderdale, Florida. Anthony Diosdi advises clients in tax matters domestically and internationally throughout the United States, Asia, Europe, Australia, Canada, and South America. Anthony Diosdi may be reached at (415) 318-3990 or by email: adiosdi@sftaxcounsel.com

This article is not legal or tax advice. If you are in need of legal or tax advice, you should immediately consult a licensed attorney.