Key takeaways:

• The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed in to law in March 2020 as individuals and businesses started to suffer the economic impact of the coronavirus pandemic.
• Programs to assist business owners continue to evolve as the pandemic has stretched on.  On June 5th the Paycheck Protection Program (PPP) Flexibility Act of 2020 was signed in to law, amending one of the key components of the CARES Act.
• In addition to the Paycheck Protection Program, two other lending programs are available:  the Main Street Lending Program and the Economic Injury Disaster Loans.

What this may mean for you:

• Loan options for business owners are still evolving as needs become more apparent.  Work with your advisors and tax professionals to keep up to date on these options.

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The coronavirus pandemic has overturned our health, our personal lives, and our economy.  To provide relief, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act signed into law on March 27th, 2020 attempts to ease the significant economic suffering which accompanied the virus.  Included in the law were several loan programs designed to assist businesses as they wait for the easing of restrictions and a return to more normal business operations.

Paycheck Protection Program

One such program is the Paycheck Protection Program (“PPP”).  The purpose behind the PPP was to provide small businesses with loans, eligible for forgiveness, to cover payroll costs, mortgage interest, leases, and utilities during the pandemic and mandatory shut-down periods.  The intent was to provide businesses an incentive to keep employees on their payroll instead of significant layoffs requiring substantially more resources directed to unemployment insurance.  The program was scheduled to begin just seven days after the bill was signed.  However, implementing a $349 billion loan program in one week’s time led to a great deal of challenges.  Guidance was issued and frequently updated from April 3rd to the present.  

As the program quickly utilized the first $349 billion, Congress near unanimously passed, and the President signed, the Paycheck Protection Program and Health Care Enhancement Act on April 21st authorizing an additional $320 billion in funding for the program.  But significant changes were still to come.  On June 5th, the President signed the Paycheck Protection Program Flexibility Act of 2020 which further amended the program.  The one constant with the program is that it has continuously evolved over the last two and a half months.

With all of these legislative changes, the following are some of the updated rules surrounding the Paycheck Protection Program:

• In order for a business’ PPP loan to qualify for full forgiveness, 60% of loan proceeds must be used for payroll costs, down from 75% originally mandated by the CARES Act.  There had been concern that if the entity did not reach 60% it would be entirely ineligible for forgiveness.  However, a joint statement by Small Business Administration (“SBA”) Administrator Jovita Carranza and Treasury Secretary Steven Mnuchin clarified that partial loan forgiveness would still be allowed if less than 60% of proceeds were used for payroll costs.  In addition to payroll costs, the loan may also be used for other prescribed business expenses, such as utilities, rent, or mortgage interest.
• The period for which expenses may be incurred and receive loan forgiveness increased to 24 weeks (from 8 weeks) from the date the proceeds were received or December 31, 2020, whichever comes first.
• Two exceptions have been added for borrowers to qualify for full forgiveness even if they are unable to achieve previous employment rates.  Now, borrowers can adjust the calculation for forgiveness if they cannot find qualified employees or are unable to restore business to pre-February 15, 2020, levels because of the coronavirus operating restrictions.
• Participants who receive loan forgiveness are now also eligible for the payroll tax deferral provided by the CARES Act.
• The deadline to rehire employees and qualify for loan forgiveness is now December 31, 2020, extended from the original date of June 30, 2020.
• For any amount of the PPP loan which is determined to be unforgivable, loans issued prior to June 5th have a repayment term of 2 years (per the original law); those issued on or after June 5th have a repayment terms of five years. The interest rate on these loans remains 1%, and as provided in the June 5 legislation, the repayment period begins once the SBA remits payment of the forgivable portion of the loan to the lender. 

In addition, the Small Business Administration recently updated Form 3245-0407, Paycheck Protection Program Loan Forgiveness Application.  A new EZ PPP Loan Forgiveness Application was also created. This EZ application can be used by borrowers that either:

1. Are self-employed and have no employees;  
2. Did not reduce employee wages by 25% and did not reduce the number or hours of their employees;
3. Experienced reductions in business activities due to coronavirus restrictions and did not reduce employee wages by more than 25%.  

The application process requires a great deal of information about payroll costs and other business costs.  We recommend that business owners begin reviewing the form now and working with their accounting team to begin compiling the information to qualify for the greatest amount of forgiveness.

Main Street Lending Program

Another program arising from the CARES Act is the Main Street Lending Program (“MSLP”).  This program created $600 billion in financing backed by the Federal Reserve.  The program targets U.S. businesses with less than 15,000 employees (the majority of which are located in the U.S.) or 2019 annual revenues less than $5 billion.  Under the program, the Federal Reserve will purchase 95% of the originated loans to provide solid backing to these loans.  The program is made up of three separate lending programs – the Main Street New Loan Facility, the Main Street Priority Loan Facility, and the Main Street Expanded Loan Facility.  While each program has similarities including loan terms, interest rates, and some deferral terms, there are differences surrounding maximum loan size, repayment terms and transaction fees.

The PPP Compared to the MSLP

Although the PPP and the MSLP both are CARES Act programs, there are some stark differences between the two. Those differences include:

• The PPP loans can potentially be eligible for forgiveness while the MSLP must be repaid in full.
• Business owners using a MSLP loan must adhere to restrictions on executive compensation, shareholder actions, and distributions.
• Borrowers will have quarterly and annual reporting requirements and the Federal Reserve will disclose the amount of the loan, pricing, and the borrower’s name.
• Principal amortization is as follows:
  • 15% at the end of year 3
  • 15% at the end of year 4
  • 70% at maturity at the end of year 5

However, similar to the PPP, the program has evolved over time.  Some of the more notable changes include:

• Reducing the minimum loan size to $250,000 from $500,000.
• Increasing the loan term to five years from four.
• Not requiring principal payments for the first two years of the loan (but allowing prepayment without penalty).  However, there remains only a one year deferral for interest payments.

Economic Injury Disaster Loans

For those who choose not to use the PPP or MSLP facilities, another option exists.  Due to the coronavirus being declared a disaster, the SBA has made Economic Injury Disaster Loans (“EIDL”) and Economic Injury Disaster Grants available.  These loans, provided directly by the SBA, allow recipients to obtain a working capital loan to pay fixed debts, payroll, accounts payable, and other bills that could have been paid had the disaster not occurred.  Approved entities can receive up to $2,000,000 in proceeds with an interest rate of 3.75% (2.75% for non-profits) for a period up to 30 years.  

Some of the basic criteria to receive this loan include an SBA acceptable credit history, determination that the loan can be repaid, and that the business has suffered directly from the disaster, not a non-disaster related downturn in the economy.  While the loan is being considered, applicants can receive a grant of up to $10,000 that does not need to be repaid, even if the loan request is denied.  It’s important to note that any Economic Injury Disaster Loan (EIDL) grant received may impact PPP loan forgiveness. Many of these provisions were made available thanks to the CARES Act.

The coronavirus pandemic has impacted our lives and the economy in ways many never thought imaginable.  As such, the responses through the loan programs are complex and benefit each potential borrower differently.  As you review your options, we strongly encourage you to discuss your options with your banking, accounting, and legal teams to determine the best course of action for your business.

Author: Michael J. Frost, Senior Wealth Planning Strategist, Wells Fargo Private Bank