The “Coronavirus Aid, Relief, and Economic Security Act” (CARES Act) was enacted by Congress on March 25, 2020 to provide “emergency assistance and health care response for individuals, families and businesses affected by the 2020 coronavirus pandemic.” One key feature is the creation of a $349 billion loan program for small businesses, including 501(c)(3) non-profits and physician practices. These loans can be forgiven through a process that incentivizes companies to retain employees.
- Forgivable Loan, and Emergency Loan, Programs
- Income Tax and Payroll Tax relief
Loan Programs: PPP and EIDL
Paycheck Protection Program or “PPP”
The “Paycheck Protection Program” or “PPP” is a loan, that is forgivable in whole or in part, as explained below. The PPP loans will be made through participating commercial lenders between February 15, 2020, and June 30, 2020 (the covered period), to eligible borrowers (see below). These PPP loans are fully guaranteed by the Small Business Administration (“SBA”). If you are interested in this type of financing, you should check with your bank to determine if it is a lender in this program, or visit www.sba.gov for a list of SBA lenders.
A business is eligible if it meets all the following criteria:
- It employs not more than the greater of 500 employees (see below as to how to calculate this number),
- It has been in operation on February 15, 2020, and
- It can certify that
- The uncertainty of current economic conditions makes the loan request necessary to support the ongoing operations of the applicant;
- Funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments or utility payments;
- The business does not have an application pending for an SBA business loan for the same purpose and duplicative of amounts applied for or received under a covered loan; and
- During the period beginning on February 15, 2020, and ending on December 31, 2020, the applicant has not received another SBA business loan for the same purpose and duplicative of PPP amounts applied for or received.
Please refer to our companion article “Are Foreign-Owned Small Businesses Eligible for “PPP” Subsidies under the CARES Act?” for the eligibility of foreign-owned businesses.
When counting employees, the business will count its own US employees (including anyone employed on a full-time, part-time or other basis) and employees of its “affiliates” (see below), and the applicant is required to certify that the payroll calculation is for only employees with a principal residence in the United States; additionally the calculations exclude independent contractors.
The SBA considers entities to be “affiliates” of one another when one controls or has the power to control the other, or a third party controls or has the power to control both. The SBA’s conceptions of affiliation and control are more expansive than they are in the corporate context, and minority stockholders of a company are routinely deemed to “control” a company for SBA purposes (and, accordingly, each company “controlled” by the same minority stockholder would need to aggregate all employees across each other, even if otherwise unrelated). A majority owner of the company’s voting equity is an affiliate. A minority owner is considered an affiliate if it can either:
- Prevent a quorum of the board of the company’s directors or stockholders, or
- Veto day-to-day operational (as distinguished from extraordinary) decisions of the company, including encumbering or selling assets (short of all or substantially all assets), amending or terminating lease agreements, purchasing equipment, officer or employee compensation decisions, hiring and firing officers and executives, incurring debt, paying distributions or dividends, bringing or defending a lawsuit, approving or changing the budget, changes in strategic direction (aside from entering into a substantially different line of business), or establishing or amending an incentive or employee stock ownership plan.
Consequently, typically the applicant counts all employees of all enterprises of any shareholder who meets a test above.
The access to credit elsewhere” exception has been waived for a PPP loan.
The PPP waives the ordinary requirement that the applicant be unable to obtain credit elsewhere. Customarily the SBA requires that any 20%+ owner inject any liquid assets above a certain threshold into the business in order to reduce the amount of the loan; however, recent SBA guidance indicates that this typical requirement is included in the waived “credit elsewhere” requirement noted above, but the guidance is not yet definitive.
Other favorable terms.
PPP loans require no personal guarantee, and no collateral. The loans are fee-free, and payments of principal and interest are deferred for at least six months and up to a year.
 By Robert MacDonald, Partner, MacDonald Weiss PLLC.