As a result of the Coronavirus (“COVID-19”) pandemic, the federal government has passed several pieces of legislation in an attempt to provide relief to struggling businesses. One of these Acts is the Coronavirus Aid, Relief, and Economic Security Act (also known as the “CARES Act”). However, since this legislation was signed into law, the CARES Act has been subject to various interpretations, pitfalls, and continuously-evolving government guidance.
The CARES Act created and allocated approximately $350 billion to the Paycheck Protection Program (“PPP). However, those funds were almost immediately depleted by millions of businesses seeking assistance and the government thereafter allocated an additional $175 billion to the PPP.
The PPP provides loans to struggling businesses in the amount of two and a half times the small business’s average monthly payroll costs. Thus, if the average monthly payroll is $50,000, the business might be eligible for up to $125,000 in PPP loans. While the PPP is considered a loan program, the funds may be largely (or entirely) forgiven as long as the business uses the funds for approved expenses which are appropriately documented. However, like most aspects of the CARES Act and the PPP, there has been a great deal of uncertainty surrounding the specific requirements for loan forgiveness. The SBA (the United States Small Business Administration) alone has posted supplemental rules and guidance on the matter more than ten times in two months. Thus, as a result, the Paycheck Protection Program Flexibility Act was passed on June 5, 2020 amending the CARES Act. This new law has important ramifications for New Jersey small businesses.
In order for the PPP funds to be forgivable the business must use these funds only for: (1) Payroll Costs and (2) Specifically-Permitted Nonpayroll costs. Under the CARES Act, 75 percent of the funds were required to be used for payroll costs. However, the amendment reduces that requirement to 60 percent. If less than 60 percent of the funds are used to cover payroll, then the PPP funds will remain a loan and will not be forgivable. The CARES Act also previously required the funds to be used within the eight week period following the business’s receipt of the PPP funds. Now, the amendment allows the funds to be used over a 24 week period (with a final cutoff date of December 31, 2020).
Also, previously the amount of PPP funds which were forgivable were reduced if the business reduced its workforce and/or payroll and failed to return its workforce to its original state (based on the status quo on February 15, 2020) by June 30, 2020. The amendment to the CARES Act allows the funds to be forgivable as long as the business returns its workforce to the February 15, 2020 status quo by December 31, 2020.
There were also additional provisions put into place to allow a business to obtain forgiveness even if this December 31, 2020 deadline cannot be met. For example, if the business can prove that it has made good faith efforts to return to the same level of business activity, but has not been able to do so due to certain government requirements or safety standards it may be able to receive whole or partial forgiveness. Also, if the business has tried to bring its workforce back to its prior levels, but the business is unable to do so because the employee is unavailable and the business is unable to hire similarly qualified individuals, the business may still be eligible for loan forgiveness.
PPP funds are not automatically forgiven. Companies must complete and submit a Loan Forgiveness Application with their lender. The lender then has 60 days to issue a decision to the SBA as to what funds should be entitled to forgiveness. If any portion of the PPP funds are determined to not be forgivable, then the business must repay the loan with a 1 percent interest rate. However, the recent PPPF Act has extended the time period for repayment of this loan from two years to five years. Thus far neither the regulations nor the SBA have explained the appeal process.
The business attorneys at McLaughlin & Nardi, LLC are continuously monitoring the ever-evolving and expanding rules and procedures in relation to the CARES Act and are able and available to assist with determining if your business qualifies for the above assistance, and to assist you with navigating through the requirements for PPP forgiveness. We are and will continue to be here for you and your business during these particularly difficult times to assist in navigating these new laws as they develop. To learn more about what we may be able to do to help, please us at (973) 890-0004 or fill out the contact form on this page. We can help.