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U.S. SMALL BUSINESS ADMINISTRATION (SBA) FINALLY ISSUES MUCH ANTICIPATED INTERIM FINAL RULE FOR PAYCHECK PROTECTION PROGRAM LOANS

(Last updated April 3, 2020)

On Thursday evening, April 2, 2020, the night before SBA Lenders were supposed to start accepting loan applications under the Paycheck Protection Program (PPP) enacted by the CARES Act signed into law on March 27, 2020 by President Trump, the SBA finally issued its Interim Final Rule providing much-needed guidance to prospective PPP borrowers and lenders (the link to the Interim Final Rule can be found here).

While much of the PPP terms have remained the same, the SBA did make some changes and has made some other interpretations that are a bit different than originally understood.

Notable Changes and Insights:

The interest rate to be charged on PPP loans has increased from the 0.5% per annum previously issued by the U.S. Department of the Treasury to 1.0% per annum. The maturity date for PPP loans will still be 2 years as the considerable economic disruption by the coronavirus is expected to abate well before the two-year maturity date.

The SBA has clarified that businesses may not include independent contractors who work for them in the payroll cost numbers submitted in the loan applications nor in their forgiveness calculations. The SBA states that this is because the independent contractors can submit for their own individual PPP loans.  Please note that this seemingly conflicts with one of the PPP loan application form certifications which states “(t)he applicant was in operation on February 15, 2020 and had employees for whom it paid salaries and payroll taxes or paid independent contractors, as reported on a Form 1099-MISC.”  This discrepancy seems to hint that this may not be the last word on this issue. 

The Interim Final Rule will be effective immediately without regard to the usual advance notice and public comment periods.  Any comments that are received will be considered in connection with any potential revisions to the rule.

PPP lenders will not be required to comply with the SBA lending criteria set forth in 13 CFR 120.150. Instead, lenders are authorized to rely on certifications of the borrower in order to determine eligibility of the borrower and use of loan proceeds and to rely on specified documents provided by the borrower to determine qualifying loan amount and eligibility for loan forgiveness.  The PPP program requirements as set forth in the Interim Final Rule temporarily supersede any conflicting Loan Program Requirement (as defined in 13 CFR 120.10).

Lenders will be held harmless by the SBA for a borrower’s failure to comply with program criteria.

The Interim Final Rule states that the “SBA intends to promptly issue additional guidance with regard to the applicability of affiliation rules at 13 CFR §§ 121.103 and 121.301 to PPP loans.” Stay tuned on this point if your intended borrower has one or more affiliates.

Ineligibility Standards were clarified, namely that you are ineligible for a PPP loan if:

(1) You are engaged in any activity that is illegal under federal, state, or local law;

(2) You are a household employer (individuals who employ household employees such as nannies or housekeepers);

(3) An owner of 20 percent or more of the equity of applicant is incarcerated, on probation, on parole; presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction; or has been convicted of a felony within the last five years; or

(4) You, or any business owned or controlled by you or any of your owners, have ever obtained a direct or guaranteed loan from the SBA or any other Federal agency that is currently delinquent or has defaulted within the last seven years and caused a loss to the government.

The methodology (together with examples) for calculating the maximum amount that can be borrowed is provided in the Interim Final Rule.

The following items are not includable in the definition of “payroll costs”:

(1) Any compensation of an employee whose principal place of business is outside of the United States;

(2) The compensation of any individual employee in excess of an annual salary of $100,000, prorated as necessary;

(3) Federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020, including the employees’ and employer’s share of FICA and income taxes required to be withheld from employees; and

(4) Qualified sick and family leave wages for which a credit is allowed under Sections 7001 and 7003 of the Families First Coronavirus Response Act (Public Law 116-127).

E-signatures and e-consents are permitted.

The Interim Final Rule clarifies that the amount of loan forgiveness can be up to the full principal amount and any accrued interest, meaning that the borrower will not have to pay anything back if the borrower uses all of the loan proceeds for forgivable purposes within the requisite 8 week period (assuming employee and compensation levels are maintained).

No more than 25% of the PPP loan forgiveness amount may be for non-payroll costs.

To apply, an applicant must submit SBA Form 2483 (Paycheck Protection Program Application Form) and required payroll documentation.

What happens if PPP loan funds are misused? The SBA will direct you to repay those amounts.  If the misuse is knowingly done, you will be subject to additional liability such as charges for fraud.  Personal liability against shareholders, members, or partners who misuse funds is possible.

Underwriting requirements for PPP loans are spelled out in the Interim Final Rule as is the process for how agents assisting borrowers are to be paid by the PPP lenders.

PPP Loans may be sold on the secondary market after the loan is fully disbursed.

For a complete understanding of what is set forth in the Interim Final Rule, we recommend that the rule (linked above) be reviewed directly.

NOTE:  As the SBA has confirmed that the PPP loans will be issued on a “first come, first served” basis, we strongly recommend that qualifying applicants submit their applications as soon as possible.

David Heidenreich
dheidenreich@ccsb.com
214.855.3031
THE DEPARTMENT OF TREASURY POSTS APPLICATION FORM FOR PAYCHECK PROTECTION PROGRAM LOAN AS WELL AS MORE SPECIFIC GUIDANCE ON PROGRAM

(Last updated April 1, 2020)

On March 31, 2020, the U.S. Department of the Treasury (Treasury) published the Paycheck Protection Program Application Form together with additional clarifications and guidance on program loans. The application form can be found here and the published Paycheck Protection Program Information Sheet for Borrowers published by Treasury can be found here.

Notably, the referenced information sheet clarifies the following (which, in some cases, is a bit different than the language of the statute and seems to indicate the direction that the SBA’s enabling regulations are headed):

• It is anticipated that no more than 25% of the forgiveness amount may be used for non-payroll purposes.

• Loan payments will be deferred for 6 months (the CARES Act stated that the deferment would be no less than 6 months and up to 12 months – it seems clear that 12-month deferments won’t be an option). Also, while payments are to be deferred for the 6 months, interest will accrue during that deferment period.

• The interest rate will be 0.50% (far more favorable than the 4.00% not to exceed rate referenced in the CARES Act).

• The term of the loan (for any portion not forgiven) will be 2 years (tighter than the “maximum maturity” of 10 years referenced in the CARES Act).

• Small businesses and sole proprietorships can apply by submitting the application to an SBA approved lender beginning Friday, April 3, 2020.

• Independent contractors and self-employed individuals can apply by submitting the application to an SBA approved lender beginning Friday, April 10, 2020.

NOTE: As the loan program is likely to be “first come, first served” and because demand is expected to be extraordinarily high, it is highly recommended that qualifying businesses and individuals apply ASAP.

David Heidenreich
dheidenreich@ccsb.com
214.855.3031
DALLAS PAID SICK LEAVE ORDINANCE UPDATE: FEDERAL JUDGE BLOCKS LAW DAYS BEFORE ENFORCEMENT DATE

(Last updated March 31, 2020)

The Dallas Paid Sick Leave Ordinance was set to take full effect on April 1, 2020. On Monday, March 30, 2020—just two days before the enforcement date—a federal judge in Sherman, Texas, issued a preliminary injunction that stops enforcement of the law. At this point, three Texas cities—Austin, Dallas, and San Antonio—have tried to enact mandatory paid sick leave laws. All three cities’ laws have been blocked by state or federal district courts, but only the Austin challenge has made its way to the Supreme Court of Texas. Ultimately, the pending Austin case in the Supreme Court of Texas will decide whether such ordinances are unconstitutional.

If you have any questions regarding the Dallas Paid Sick Leave Ordinance, please contact:

Mike Birrer, Partner, Carrington Coleman
Mike Birrer Parker Graham
mbirrer@ccsb.com pgraham@ccsb.com
214.855.3113 214.855.3350
TAX SURVIVAL CHECKLIST FOR SMALL BUSINESSES

(Last updated March 30, 2020)

The fiscal preservation plan offers a lifeline for small businesses in this uncertain time. The IRS has weaponized the tax code to combat the financial pain of the pandemic and to provide immediate relief to small businesses on the brink of disaster.

For most small businesses, cash flow and liquidity are top of mind. The recent tax changes provide important tools for small businesses to accomplish these objectives. The tax relief comes in two forms: (1) additional liquidity in the form of refundable tax credits and (2) interest-free bridge loans in the form of deferred tax payments. The cumulative effect creates immediate relief for small businesses during the shutdown.

Below are key points for small businesses to factor into their cash flow plans:

1.  April 15th Tax Payment Deferral
The IRS has delayed many tax payment obligations for small businesses until July 15th. The effect is a 3-month interest-free bridge loan from the IRS to small businesses. If the recession extends beyond 3 months, the IRS may further extend the deadlines

2.  Employee Retention Payroll Tax Credits
The Employee Retention Credits are a valuable source of tax relief for small businesses. The refundable payroll tax credit is limited to $5,000 per employee and provides important additional liquidity for small businesses. To qualify, the business must be forced to close (in whole or part) or suffer a substantial decline in revenues. Available credits depend on workforce size. Employers with more than 100 employees qualify for the credit for wages paid to employees retained, but not currently working. Employers with 100 or less employees qualify for the credit for all employee wages. Wages paid after March 12, 2020 and before January 1, 2021 qualify for the credit.

3.  Employer Payroll Tax Deferral
Businesses may defer the employer’s share of Social Security payroll taxes (6.2%). The deferred tax must be repaid by in equal installments (50% by December 31, 2021 and the remaining 50% by December 31, 2022). This creates an interest-free bridge loan from the IRS to small businesses.

4.  Paid Sick Leave Payroll Tax Credits
Employers who provide paid sick leave under the Families First Coronavirus Response Act (effective April 1, 2020) are eligible for a refundable payroll tax credit equal to 100% of qualified paid sick leave wages. The employer claims the credit as an offset against its quarterly payroll taxes. There are certain limits on the amount of the credit available depending upon the circumstances. This payroll tax subsidy provides additional liquidity for small businesses.

5.  Family and Medical Leave Payroll Tax Credits
Employers who provide paid family and medical leave under the Families First Coronavirus Response Act (effective April 1, 2020) are eligible for a refundable payroll tax credit equal to 100% of qualified family leave wages. The employer claims the credit as an offset against its quarterly payroll taxes. There are certain limits on the amount of the credit available depending upon the circumstances. Payroll tax subsidy provides additional liquidity for small businesses.

6.  Tax Refunds for Tax Loss Carryback
The IRS allows net operating losses (“NOLs”) from 2018, 2019 or 2020 to be carried back for five years. The carryback of the tax losses to tax years with higher tax rates is favorable for taxpayers and will create more financial value. This tax loss monetization relief creates additional liquidity for some small businesses.

7.  Tax Refunds for Accelerated Depreciation
Businesses, including retailers, restaurants and bars, are eligible for accelerated depreciation for their costs of interior improvements. This change, sometimes referred to as the “retail glitch,” applies retroactively. The increased tax write-offs should provide more liquidity for some small businesses.

The cumulative financial impact of these tax incentives can be significant. Small businesses should take full advantage of these tax opportunities by incorporating them into their cash flow plans. If the shutdown persists or the recession lingers, businesses may see more tax relief from the IRS. Our firm will continue to monitor all important tax changes and report them to you as they develop.

Bruce Hendrick Ashley McMillan Hayden Baker
bhendrick@ccsb.com amcmillan@ccsb.com hbaker@ccsb.com
214.855.3033 214.855.3066  214.855.3140
THE FEDERAL GOVERNMENT RUSHES THROUGH LEGISLATION DESIGNED TO HELP AN EXPANDED UNIVERSE OF SMALL BUSINESSES

(Last updated March 27, 2020)

In recent days, culminating with the epic passage of The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) signed into law by President Trump on March 27, 2020, the government of the United States has enacted many programs, to be implemented and managed through the Small Business Administration (SBA), designed to aid small businesses. This client alert provides insight and information into some of the key programs enacted to provide needed cash flow to the hurting members of the small business community.

SBA Express Bridge Loan

If your business is suffering severe economic hardship, and you fear your business needs an immediate cash infusion, you may want to consider an SBA Express Bridge Loan. This loan allows small businesses with existing business relationships with SBA Express Lenders to borrow up to $25,000 in a few days, with much less paperwork than the Economic Injury Disaster Loan discussed below. This bridge-loan may then be paid off, in whole or in part, by an EIDL that should arrive in 2-3 weeks. To see a list of SBA Express Lenders, and to find the application, please visit https://www.sba.gov/page/coronavirus-covid-19-small-business-guidance-loan-resources.

Economic Injury Disaster Loan (EIDL)

If your business needs help, but can afford to wait 2-3 weeks to receive funds, you may want to consider an Economic Injury Disaster Loan (EIDL). This loan provides businesses up to $2M, at 3.75% interest with up to a 30 year term, to cover financial and operational expenses that could have been met had the COVID-19 pandemic and its resulting economic impacts not occurred. Permitted uses for these loan proceeds include the following operational expenses: fixed debts, payroll, accounts payable, and other bills not able to be paid. Disbursement of proceeds also includes a certification that the loan is needed to continue operations as a result of the pandemic and that the applicant does not already have a pending EIDL application under this program. For additional information on the EIDL program, please see the link referenced in the paragraph above. It is highly likely that, once the Paycheck Protection Program described below is implemented by the SBA, the demand for the EIDL program loans decreases, however, the EIDL program is up and running now.

Paycheck Protection Program (PPP) under the CARES Act

A key cornerstone of the CARES Act, is the so-called “Paycheck Protection Program” (PPP) aimed at providing assistance to smaller businesses. The PPP is designed to provide certain small businesses with cash-flow assistance in the form of loan: (i) made by lenders certified by the SBA; and (ii) guaranteed and administered by the SBA, to help deal with the unprecedented economic impact of the COVID-19 pandemic. The “covered period” for the PPP is February 15, 2020 through June 30, 2020.

Applicable Businesses – While the services of the United States Small Business Administration (SBA) are typically targeted at those businesses defined by existing regulations as a “small business concern” (being those businesses beneath either (a) a given average annual revenue limit or (b) a designated employee count, as applicable, as determined by the SBA and classified by North American Industry Classification System (NAICS) code linked here), the PPP generously expands its coverage to all business concerns, nonprofit organizations, veterans organization or Tribal business concerns employing not greater than 500 employees (whether employed on a full-time, part-time or other basis) or the number permitted under the traditional small business concern standards linked above for the given industry. For certain accommodation and foodservice businesses, the PPP adds additional coverage so long as each physical location does not employ more than 500 employees. So, in other words, a restaurant business with 6 locations employing 2000 employees in the aggregate could qualify for the PPP preach location that has not more than 500 employees.

Loan Limits and Details – PPP loans: (i) can be as large as 250% of a qualifying business’s average monthly payroll costs (the average taken over the last 12 months), not to exceed $10 million (and excluding any portion of such payroll costs paid to a given employee(s) over the prorated $100,000 amount discussed in the following section); (ii) have a maximum interest rate of 4%; (iii) to the extent not forgiven (as discussed below), the remaining principal balance will start to mature following the date on which the applicable business applies for loan forgiveness and shall mature not later than 10 years after such date. The PPP waives the standard fees charged by the SBA, and the requirement for a personal guarantee. Furthermore, PPP loans are nonrecourse against individual shareholders, members, or partners except to the extent that such individual used PPP loan proceeds for an unauthorized purpose. Eligible recipients will be required to make a good faith certification that (a) the uncertainty of current economic conditions makes the loan request necessary to support ongoing operations; (b) the funds will be used to retain workers and maintain payroll or make mortgage, lease or utility payments; (c) that the eligible recipient does not have an application pending for a loan under the PPP for the same purpose and duplicative of applied for amounts; and (d) beginning February 15, 2020 through December 31, 2020, the eligible recipient has not received amounts under the PPP for the same purpose and duplicative of applied for amounts. PPP lenders will be required to provide complete payment deferment relief under a PPP loan for a period of not less than 6 months, including payment of principal, interest and fees, and not more than 1 year.

Approved Uses of Loan Funds – Small businesses that receive PPP loans must use loan proceeds for (i) payroll costs, (ii) costs related to group healthcare benefits, (iii) employee commissions and tips, (iv) interest on mortgage obligations, (v) rent, (vi) utilities or (vii) interest on other debt incurred prior to obtaining the PPP loan. There is a salary cap in that the definition of “payroll costs” under the PPP (which plays into how large a PPP loan can be as well as defining approved uses of the funds) expressly excludes the salary of an individual employee to the extent that such salary exceeds $100,000 (as prorated for the covered period).

Loan Forgiveness – An eligible recipient shall be eligible for forgiveness of indebtedness on a covered loan in an amount equal to the sum of the following costs incurred and payments made during the first 8 week period from when the PPP loan is made: (i) covered payroll costs; (ii) payments of interest on any covered mortgage obligation; (iii) payments on any covered rent obligation; and (iv) covered utility payments. Forgiven amounts will be considered to be canceled indebtedness by a lender. Only business who have kept their employees on the payroll or, for those who have laid off employees, who re-hired back to pre-crisis levels by June 30, 2020, will be eligible for payment forgiveness.

Timing for Implementation – It is expected that it may take a few weeks for the PPP to be fully implemented as the SBA has 15 days from the enactment of the CARES Act to prepare the corresponding regulations. Furthermore, the SBA has 30 days after enactment of the CARES Act to provide guidance to program lenders on deferment processes to be implemented under the PPP. One final note on timing, the Senate, in its version of the bill, has requested that the SBA “issue guidance to lenders and agents to ensure that the processing and disbursement of covered loans prioritizes small business concerns and entities in underserved and rural markets, including veterans and members of the military community, small business concerns owned and controlled by socially and economically disadvantaged individuals . . . , women, and businesses in operation for less than 2 years.”

This client alert is not intended to be an exhaustive list of all potential benefits of the recent legislation, but rather is intended to highlight some of the key programs designed to stabilize the cash flow of impacted small businesses.

We will continue to review and publish further client alerts on additional programs as information becomes available. For more questions about the CARES Act, please contact:

David Heidenreich Bonnie Barksdale Ted Harrington
dheidenreich@ccsb.com bbarksdale@ccsb.com tharrington@ccsb.com
214.855.3031 214.855.3119 214.855.3115