Updated: May 3, 2020

The financial vitality of many Denver businesses has come into question since the implementation of COVID-19 prevention orders. Many have been forced to change their business model or completely shut down to maintain compliance. While beneficial for public health, it has created dire conditions for those who abruptly lost the ability to generate income. This has left many business owners looking for new sources of working capital to cover essential expenses such as payroll, benefits, and even rent. The recently enacted Coronavirus Aid, Relief and Economic Security (CARES) Act offers new Small Business Administration loan program designed to help businesses in this situation. The most popular is the Paycheck Protection Program, a forgivable loan designed to boost working capital to struggling companies. To help clients, prospects, and others, Hanson & Co has provided a summary of key program details below.

The program continues to evolve. Since the CARES Act was signed into law on March 27, 2020, The US Treasury has issued guidance four times in the last 18 days, for the Paycheck Protection Program and continues to issue additional guidance daily. On April 14, 2020, the Small Business Administration reported $242 billion had been approved for over 1 million businesses. Disbursement of funds is required to be no more than 10 days after the loan is approved.

Program Essentials

The Paycheck Protection Program is a new SBA-administered loan and forgiveness program that provides loans for eligible sole proprietors, independent contractors, self-employed, small businesses with 500 or fewer employees, hospitality industry businesses with more than 500 employees, but with not more than 500 employees in each physical location,  small businesses that otherwise meet the SBA size standard by NAICS code, and to certain businesses with more than 500 employees if net worth is below $15 million and average net income is below $5 million for the prior two years. 501(c)(3) nonprofit organizations, 501(c)(19) veterans’ organizations, and some tribal businesses are eligible. An eligible business for purposes of the loan was in operation before February 15, 2020, and had employees that were paid salary or wages and payroll taxes.

Loan Requirements

Loan funds need to be used to cover payroll costs, including benefits, mortgage, rent, and utilities. This specifically includes partner’s guaranteed payments, salaries, wages, commissions or tips (limited to $100,000 on an annualized basis for each employee), benefits such as vacation time, family, medical or sick leave benefits (except certain sick & medical leave benefits covered under the Families First Coronavirus Response Act), group health insurance premiums, and retirement benefits.

Loan Amount

A loan for the lesser of $10 million or 2½ times the average monthly payroll payments for 2019, is available through the program. For businesses that were not in operation during the period from February 15, 2019 – June 30, 2019, average monthly payroll payments from January 1, 2020 – February 29, 2020, are used instead of the full year. A seasonal business may use the average monthly payroll for 2019, or that between February 15 – June 30, 2019. The outstanding amount of any Emergency Injury Disaster Loan (EIDL) made from January 1, 2020, to April 3, 2020 (less the EIDL advance), is added to payroll payments to determine the maximum loan amount not to exceed $10 million. SBA recently clarified that payments to independent contractors are not included in the average monthly payroll calculation and that the loan amount is not reduced by employee withholding.

Loan Terms

Interest on the loan is 1% and repayment is 2 years. Payments can be deferred for 6 months. Interest will continue to accrue during the deferral period. SBA guarantees the loan 100% and pays all loan fees directly to the bank. Personal guarantees or collateral are not required. The loan is forgiven, and not includable in income, so long as the loan is used for payroll, mortgage interest, rent, or utility payments within eight weeks of the loan disbursement date. The IRS has determined that expenses related to the amount forgiven will be disallowed.

Loan Qualification

To determine eligibility and the maximum amount of loan, businesses should plan to assemble monthly payroll reports, W2s, Forms 940 & 941, and Forms 1099-MISC for 2019. Additional payroll payment records,  bank account information, and payroll summary calculations may be requested by your bank. Sole proprietors, independent contractors and the self-employed should also plan to assemble tax returns, including Schedule C, and business records.

Loan Forgiveness

The loan is forgiven if the proceeds are used within eight weeks for payroll costs, mortgage interest, lease or utility payments FTE employee count is not reduced below the average monthly FTE employee count for 2019, or the first two months of 2020 (for an established business or a new business, respectively), and compensation is not reduced more than 25% for any employee.

The amount forgiven is reduced proportionately by average monthly full-time equivalent employee reductions during the eight weeks after disbursement. The business may compare average monthly FTE employees during the period to average monthly FTE employees from February 15, 2019, to June 30, 2019, or from January 1, 2020, to February 29, 2020, to assess reductions. The amount forgiven is also generally reduced dollar-for-dollar for each employee, earning less than $100,000 annually, whose wages are reduced by more than 25% when compared to the most recent calendar quarter. The amount forgiven is also reduced by any EIDL grant received through the SBA’s Emergency Injury Disaster Loan program.

It’s important to note that loan forgiveness is not affected when an employee is laid off, offered to be re-hired, but the employee declined. According to the interim final rule, there is an exception granted to borrowers experiencing this situation. In order to qualify, a borrower must have made a good faith written offer of rehire and the rejection response must also be documented. Finally, employees who reject offers of re-employment may forfeit eligibility for continued unemployment compensation.

Contact Us

The opportunity offered by the Paycheck Protection Program is one that many Denver businesses can not afford to miss. While there are rules on how loan funds need to be spent it’s a welcome release valve. If you have questions about the information outlined above or need assistance with another COVID-19 issue, Hanson & Co can help. For additional information call us at 303-388-1010 or click here to contact us.