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  • Writer's pictureJoe Dye Culik

The Paycheck Protection Program Under the CARES Act and How It Can Help Small Businesses Stay Afloat

On Friday, March 27, 2020, the CARES Act was signed into law, part of which included the Paycheck Protection Program. This emergency legislation helps small businesses stay afloat during the recession caused by the coronavirus pandemic. This post explains how the Paycheck Protection Program, a loan/grant program under the CARES Act, can pay for payroll costs, health insurance, rent or mortgages, and utilities. This post answers some of the main questions business owners have about the Paycheck Protection Program.

Who does the Paycheck Protection Program apply to? It applies to small businesses and nonprofits with fewer than 500 employees. This includes sole proprietors, independent contractors, and some other self-employed people. Financial documentation will be required to verify employment.

How much money can be borrowed? Eligible businesses can borrow money equivalent to 2½ months of payroll.

What can the funds from the Paycheck Protection Program be used for? They can be used to cover many, though not all, ongoing expenses. These include payroll, health benefits and insurance premiums, interest payments toward mortgage or other debts, rent, and utilities.

How exactly is the loan amount calculated? The Paycheck Protection Program loan is calculated using a fairly simple formula. It uses the business’s average monthly payroll costs, and multiplies this number by 2.5. The maximum available is $10 million.

What are the exceptions? There are two main exceptions to the Paycheck Protection Program. First, the program does not cover payroll for employees making more than $100,000 per year. Take note that whether an employee makes more than $100,000 is calculated by annualizing their income for the period from February 15, 2022 to June 30, 2020. This means that if an employee normally made more than $100,000 but had their income reduced, they may be eligible. Second, federal tax withholdings are not included in the calculation of payroll costs so they would not be part of the total loan amount.

What are the loan terms? Fortunately, unlike some SBA loans, there is no personal guarantee required by the business owner. No collateral, such as a house or real estate, is required. The documentation process is supposed to be streamlined to make it easy for small business owners to apply and to be approved. Repayment does not begin for at least six months, or up to a year in some cases.

Does the Paycheck Protection Program loan on have to be repaid? In short, no – as long as the business owner does not terminate their employees. The public policy purpose behind this program is for employers to keep their employees working. If the employer takes out the loan but fires employees, it has to be repaid. If all employees are retained, the money is treated like a grant and is basically free. For employers who fire some employees, a formula will determine how much has to be repaid.

How can you apply for the Paycheck Protection Loan? Under the CARES Act, the government has 15 days to come up with the specific rules so that banks can make the loans. Our office anticipates that small business owners will be able to apply sooner than 15 days. The legal framework is in place, but the details still need to be hammered out by regulators and lenders.

In summary, the Paycheck Protection Program under the newly passed CARES Act may not provide total relief to business owners, but it is a huge step in the right direction that may help some to swim rather than sink.

DYE CULIK PC is a Charlotte, North Carolina business law firm serving the entire state. We help small business owners solve problems, and have already helped a number of clients solve economic problems caused by the coronavirus pandemic. If you have a question about your business, contact us at 980-999-3557 to see how we can help.



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