payroll protectionWe are fielding large numbers of questions about the so-called “payroll protection loans” recently made available under the CARES Act. What follows are some frequently asked questions and answers.


What is a payroll protection loan?

  • Low interest, partially forgivable loans administered by the U.S. Small Business Administration (“SBA”) and made available to small businesses, sole proprietors, self-employed individuals and independent contractors to provide liquidity for payroll and other permitted expenses.
  • Loans are made by lenders who participate in the SBA’s Section 7(a) program.


Who is eligible?

  • Each business that existed and was paying payroll and associated payroll taxes on or before February 15, 2020, provided that the business had no more than 500 employees (or a different number of employees based on guidelines published by the SBA with respect to the applicable industry).
  • Each applicant is required to certify in good faith (1) that the loan is necessary to support ongoing operations due to the uncertainty of current economic conditions; (2) the loan proceeds will be used to retain workers, pay payroll or make mortgage, lease and/or utility payments; (3) the business does not have a pending application for a similar loan under Section 7(a) of the Small Business Act; and (4) the business has not received a duplicate loan under Section 7(a) of the Small Business Act during the period from February 15, 2020 through December 31, 2020.
  • Given the breadth of the phrase “uncertainty of current economic conditions” and the current economic climate, we anticipate that the vast majority of businesses would be able to make this certification in good faith.
  • The CARES Act provides that in evaluating eligibility of borrowers, lenders “shall consider” whether the borrower (1) was in operation on February 15, 2020, (2) had employees for whom the borrower paid salaries and payroll taxes or paid independent contractors as reported on a Form 1099-MISC. Note that this language does not appear to prohibit lenders from considering other factors, so different lenders are apparently permitted to take into consideration other factors. What additional factors, if any, they will consider remains to be seen.
  • Note that the CARES Act waives, with respect to payroll protection loans, the otherwise applicable requirement for the borrower to certify that it cannot obtain credit elsewhere.


How much can be borrowed under the program?

  • Capped at the sum of (1) 2.5x the historic average monthly payroll costs over the 1 year period prior to the making of the loan, plus (2) the amount of any existing SBA loans), to the extent that sum is up to, but not in excess of, $10M.
  • “Payroll costs” for these purposes include salaries, commissions, wages, payments for vacation, parental, family, medical or sick leave, severance payments, group health benefits payments, group retirement benefits, and payments of compensation related taxes, in addition to interest on debt obligations incurred before February 15, 2020. However, the following are excluded from “payroll costs”: (1) annual compensation of > $100K for any individual employee; (2) Social Security, Medicare and income withholding taxes; and (3) compensation paid to residents of foreign countries.


How are the loans repaid?

  • The principal amount of the loan may be forgiven after application to the lender. The amount capable of being forgiven is limited to the amount paid by the business for (1) payroll costs, and (2) mortgage interest payments, lease payments and utility payments (provided that these costs are payable pursuant to arrangements entered into prior to February 15, 2020), to the extent those amounts are paid during the 8 week period following the making of the loan.
  • The forgiveness is reduced proportionately if, during the 8 week period, the business employs fewer full time employees per month (on average) than it did the prior year during the same period, or reduces salaries or wages by > 25% for any employee earning < $100K (annual) compared to their compensation in the most recent full calendar quarter. However, the foregoing reduction can be eliminated no later than June 30, 2020 without reduction of the associated forgiveness amount.
  • The amount of the loan remaining after application of forgiveness is subject to a maximum maturity of 10 years, with that 10 year period running from the date the borrower applies for forgiveness. The loans bear an interest rate of not to exceed 4% and payment of interest, principal and fees is required by the SBA to be deferred by the lender for at least 6 months but not greater than 1 year.
  • Needless to say, much discretion appears to be left to banks in determining (1) the amount, if any, that will be forgiven; (2) the maturity and repayment terms of the loan, and (3) the amount of the loans they are willing to make. It remains to be seen how banks will interpret and/or implement these guidelines.


Since discharge of indebtedness is generally taxable, will the borrower be taxed on the amount forgiven?

  • The CARES Act expressly provides that for purposes of the Internal Revenue Code of 1986, any amount which would otherwise be includible in the gross income of an eligible borrower by virtue of the forgiveness of a payroll protection loan under this program is excluded from gross income.


What collateral is required to be provided?

  • No personal guarantee is required, nor is any collateral required.


What fees are payable to obtain the loan?

  • SBA fees are waived.


How does one apply for the loan?

***This article is intended to be educational and is provided for your convenience. It does not constitute legal advice and it does not establish an attorney-client relationship between any reader and our law firm.***