LOANS TO SMALL BUSINESSES
On Friday, April 24, 2020, President Trump signed into law the Paycheck Protection Program and Health Care Enhancement Act (“PPP Enhancement Act”) which allows continuation of the Paycheck Protection Program loan program (PPP), administered by the Small Business administration (SBA). The PPP Enhancement Act adds $310 billion to the $350 billion that was previously allocated to this program and quickly spent to fund loans for small businesses. $60 billion of the new funding is set aside for PPP loans from small banks, community financial institutions, and credit unions, with the objective of increasing the number of loans to smaller businesses. Processing of previously filed but not yet funded applications is scheduled to begin on Sunday, April 26 and new Applications on Monday, April 27.
Eligibility. Generally a business is eligible for a PPP loan if it has 500 or fewer employees whose principal residence is in the United States. Also eligible for PPP loans are independently owned franchises, non-profit (501(c)(3) organizations, sole proprietorships, the self-employed and independent contractors, that meet the 500 or fewer employee and U.S. residency requirements. In addition, agricultural producers, farmers and ranchers are eligible for loans if they otherwise meet the eligibility requirements.
Use of Loan Proceeds. The PPP loan guarantees a business eight weeks of payroll and other costs to enable the business to remain viable and to pay wages and benefits to its employees. Therefore, under this Program, at least 75% of the loan proceeds must be used for the following payroll costs:
• Salary, wages, commissions, tips (capped at $100K per employee)
• Employee benefits including costs for vacation, parental, family medical or sick leave
• State and local taxes assessed on compensation (capped at $100K per)
• For Sole Proprietors: wages, commissions, income, or net earnings from self-employment (capped at $100K)
• Seasonal businesses: average monthly Payroll Costs between Feb 15 and Jun 30 (capped at $100K per)
• New Business: average monthly Payroll Costs from Jan 1 to Feb 29 (capped at $100K per)”
Special rules apply in determining the amount of “payroll costs” for independent contractors and sole proprietors. This means that even individuals that own a business, but have no payroll costs, may be eligible for a PPP loan.
In addition to payroll, 25% of the loan amounts may be used for the following:
• Rent and lease costs defined as rent obligations obtained under an agreement in force before February 15, 2020.
• Utility costs defined as payment for service of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020
• Mortgage interest paid on mortgages incurred before February 15, 2020
Size of Loan. Generally, the maximum loan amount is the lesser of (1) $10 million, or (2) 2.5 times the average total monthly payments by the applicant for payroll costs. Borrowers may base aggregate payroll costs and employee counts on either calendar year 2019 or the 12-month period preceding the application.
Loan Forgiveness. A major benefit of the PPP loan is that it may be forgiven if the loan proceeds have been spent on qualifying costs. During the 8-week period following the day the funds are transferred into the borrower’s account, the “loan origination date” (Covered Period), the borrower may have debt forgiven to the extent the amounts are paid or incurred for payroll costs, interest on mortgages, rent, and utilities, as described above. Any debt forgiven will not be taxable to the borrower.
Reduction of Amount Forgiven, The PPP is designed to help businesses maintain employees during this economic downturn. With that as the goal, if the business experiences a reduction of its workforce or a reduction of salaries and wages during the Covered Period, the loan forgiveness is reduced. calculated as follows: the amount of the projected loan forgiveness is multiplied by a fraction the numerator of which is the monthly average full- time equivalent (FTE) employees during the Covered Period and the denominator is the monthly average FTE employees during either the period February 15, 2019 – June 30, 2019, or January 1, 2020 – February 29, 2020; this represents the amount that is not forgiven. For seasonal employers, the measurement period is February 15, 2019 – June 30, 2019.
Example: Springtime Company received a PPP loan. Following the Covered Period, Springtime Company determines its potential loan forgiveness amount is $100,000. The average number of FTEs during the Covered Period (the 8 weeks post-loan origination) is 100. The average number of FTEs from February 15, 2019 – June 30, 2019 is 200. Based on these values, the amount of loan forgiveness is $50,000 calculated as follows: 100 / 200 x $100,000. The remaining balance of the PPP loan will be guaranteed by the SBA and have a maximum 10-year maturity. The current loan maturity term is two years.
In addition to workforce reduction, a salary reduction may also cause a reduction in the loan amount forgiven. The amount of loan forgiveness is reduced by any reduction in the salary of certain employees (only employees that earned less than an annualized rate of $100,000 a year during 2019 are counted) that is in excess of 25% of the total salary of the employee during the most recent full quarter during which the employee was employed.
Example Summer Company receives a PPP loan. After the Covered Period (8-week period following the loan origination date), Summer Company determines that its potential loan forgiveness amount is $100,000. Employee A worked for Summer Company last year. Employee A has a salary of $80,000. During the first quarter of 2020, Employee A’s salary was $20,000. If Summer Company reduces Employee A’s salary by more than $5,000 a quarter (more than 25% based on most recent full quarter salary, calculated), the amount in excess of $5,000 must reduce the loan forgiveness.
Effect of Re-Hiring
If the business is able to re-hire employees and restore salaries by June 30, 2020, the business is not required to reduce the loan forgiveness.
Thus, furloughing or laying off employees prior to the PPP loan does not prohibit a business from applying or receiving a loan but the amount of the forgiveness may be diminished if the employees are not re-hired.
To the extent the PPP loan is not forgiven, it will have:
• A 2-year term (decreased from the maximum maturity of 10 years under the Act),
• An interest rate of 1% (increased from prior Treasury guidance that set the interest rate at 0.5%),
• Principal and interest deferred for 6 months.
Economic Injury Disaster Loan (EIDL) Program
In addition to the PPP loans, the Cares Act also “re”-funds the SBA administered Economic Injury Disaster Loan (EIDL) program, adding $20 billion to it. An EIDL is a loan of up to $2 million designed to help small businesses that experience an economic hardship as the result of a declaration of disaster. Generally the loan may be used to pay fixed debts, payroll, accounts payable Increased costs due to supply chain disruption and other operating expenses that could have been paid had there not been a disaster. However, specific loans depend upon the actual amount of economic injury that a business has suffered; this amount is determined by the SBA on a case-by-case basis after the business applies.
For the period January 31, 2020 – December 31, 2020, businesses eligible for an EIDL include any business with not more than 500 employees, small businesses as otherwise defined under this program, sole proprietorships, independent contractors, non-profits, ESOPs, agricultural enterprises (subject to the SBA’s affiliation rules governing financial assistance programs).
EIDL terms are for 30 years, and interest rates are capped at 3.75% for small businesses (2.75% for non-profits). The first month’s payments are deferred a full year from the date of the promissory note.
In addition, the business may request an advance on its EIDL loan of up to $10,000 (“Grant”) to pay allowable working capital needs which will be disbursed within a short time of applying. This Grant is not required to be repaid, even if an eligible borrower is ultimately denied an EIDL. The amount of the EIDL in excess of the Grant is not eligible for forgiveness.
A business may qualify for both an EIDL and a PPP loan, but the funds must be applied toward different expenses. In addition, if the business receives an EIDL and a PPP loan, the amount of the Grant will be subtracted from the amount forgiven under the PPP loan.
Since SBA loans are made on a first-come, first-served basis, IT’S TIME TO APPLY FOR PPP AND EIDL LOANS, before the funds are depleted.
John W. Davis is a graduate of Hamilton College (B.A., 1979) and Emory University School of Law (J.D., 1982) where he was a member of the Board of Editors for the Emory Law Journal.
Peter W. Shrair has held the position of Managing Principal at Cooley, Shrair P.C. since 2008. A 1983 graduate of Hobart College, Peter graduated with honors from the Boston University School of Law as an Edward F. Hennessey scholar in 1986 and later earned a Masters Degree in Taxation from the 
Leonardo Shrair
Motzart Shrair, a 90-pound Golden Doodle, was born on September 4, 2007, in Missoula, Montana and was appointed mascot of Cooley, Shrair P.C. shortly after relocating to Springfield. Since that time, he has been a fixture in the law firm. Motzart has developed a long list of loyal clients who often come to visit him to scratch him behind his ears or rub his belly. Motzart is especially fond of attending contract negotiations and he is happy to assist with the cleaning of a conference room if food drops during a meeting. He is full of life, love and can help take the edge off of many difficult situations.
David A. Shrair joined the firm of Cooley and Cooley in 1960, after graduating with honors from Boston University School of Law; where among other successful scholastic accomplishments, he was a Senior Editor of the Boston University Law Review. In 1978, David became Managing Principal of the firm, a position he held for the next 30 years. In 1991, the firm transitioned to its current name, Cooley, Shrair P.C.
Robert L. Dambrov is a 1969 graduate of the University of Massachusetts and a 1972 graduate of Boston College Law School.
Dawn D. McDonald, partner with Cooley Shrair, graduated from Westfield State College with a Bachelor of Science in Business Management in 1991. In May of 2000, she received her Juris Doctor from Western New England College School of Law. Attorney McDonald was admitted to the Bar of the Commonwealth of Massachusetts in January 2001; to the Bar of the State of Connecticut in May 2001; to the United States District Court of Massachusetts in February 2001; to the United States District Court of Connecticut in November 2002; and to the First Circuit Court of Appeals, June 2004. She is a member of the Litigation and Employment Law Sections of the Massachusetts Bar Association and a member of the Hampden County Bar Association.
Susan A. McCoy, partner with Cooley Shrair, manages our Estate Planning department. An Agawam native, Susan brings a diverse background of legal experience assisting clients with their personal and business planning.
Rona S. Fingold is a 1973 Boston University graduate and a 1978 graduate of Boston University School of Law. In addition, Rona received a Master of Science in Taxation from the Boston University Graduate School of Tax program in 1983. Rona, formerly a tax partner at Cooley Shrair, is now Of Counsel, providing valuable estate and tax planning advice and consultation for our clients from her home in Florida. Rona’s areas of focus for more than 25 years have been general tax, estate planning and tax exempt organizations.