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BHBM Tax Law Alert | SBA Loan Guidance

Posted on by Baldwin, Haspel, Burke & Mayer


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U.S. Small Business Administration Releases Guidance on Payment Protection Program Loans

On April 2, 2020, the U.S. Small Business Administration (the “SBA”) issued guidance in the form of an interim final rule (the “Guidance”) that provides additional implementation guidelines and requirements for the newly created Paycheck Protection Program (the “Program”). The Program was established as part of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was signed into law on March 27, 2020, and was intended to provide aid to U.S. businesses dealing with the economic downturn resulting from the COVID-19 pandemic. This alert discusses some of the most critical details provided in the Guidance.

Program Loan Eligibility
  • The Guidance provides that small businesses, nonprofits, sole proprietors, and independent contractors with up to 500 employees (with exceptions) are eligible for Program loans.
  • The Guidance further provides that businesses which are identified in 13 CFR 120.110 and described further in the SBA’s Standard Operating Procedure (SOP) 50 10, Subpart B, Chapter 2 (entitled “Eligibility Requirements for All 7(a) Loan Applicants”), are not eligible for Program loans.

Loan Amount
  • The Guidance defines the maximum loan amount as the lesser of:
    • $10,000,000 or
    • 2.5 times average monthly payroll costs for the last 12 months.
  • Payroll costs consist of compensation to employees in the form of salary, wages, commissions, or similar compensation; payment for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, and retirement; and payment of state and local taxes assessed on compensation of employees.
  • The Guidance clarifies that payroll costs do not include compensation paid to an employee in excess of an annual salary of $100,000; compensation paid to independent contractors; compensation of an employee whose principal place of residence is outside of the United States; Federal employment taxes imposed or withheld between February 15, 2020, and June 30, 2020; income taxes required to be withheld from employees; and qualified sick and family leave wages for which a credit is allowed under the Families First Coronavirus Response Act.

Interest Rate
  • The Guidance provides that the interest rate on a Program loan will be 1%.

Term of Loan
  • The Guidance provides that Program loans will have a 2-year loan term.

Loan Payments
  • A business receiving a Program loan will not have to make any payments for 6 months following disbursement of the loan. However, interest will accrue on a Program loan during the 6-month deferment.

Use of Loan Proceeds
  • Businesses may use the proceeds of a Program loan for payroll costs; costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums; mortgage interest payments (but not mortgage prepayments or principal payments); rent payments; utility payments; interest payments on any other debt obligations that were incurred before February 15, 2020; and/or refinancing an SBA EIDL loan made between January 31, 2020 and April 3, 2020.
  • The Guidance expressly provides that 75% of the Program loan proceeds must be used for payroll costs.

Loan Forgiveness
  • The amount of loan forgiveness can be up to the full principal amount of the loan and any accrued interest. In other words, the borrower will not be responsible for any loan payment if the borrower uses all of the loan proceeds for the forgivable purposes of payroll costs, mortgage interest, rent, and utilities.
  • However, the Guidance specifies that not more than 25% of the loan forgiveness amount may be attributable to non-payroll costs.
  • The Guidance indicates that the SBA will issue additional guidance on loan forgiveness.

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