By Christopher J. Graham and Joseph P. Kelly

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act became law, including the Keeping American Workers Paid and Employed Act which included the SBA’s paycheck protection program. The SBA thereafter issued three Interim Final Rules to implement the new law, with the most recent one being issued on April 14. The SBA also issued multiple “Answers” to “Frequently Asked Questions” (“FAQs”), providing guidance. And more rules and FAQs are expected. There have been some inconsistencies in what’s been coming from the SBA and some issues, in our view, could be clarified.

But, if you received a loan or are about to, you need to act now to assure that you are using the proceeds for a permissible purpose and to maximize loan forgiveness. Based on the new law and the SBA’s interim final rules and “Frequently Asked Questions” (“FAQs”) issued so far (and which may change), here are some things to keep in mind.

Use loan proceeds only for a permissible purpose and according to your “good faith”:

“During the covered period [from February 15, 2020 to June 30, 2020], an eligible recipient may, in addition to the allowable uses of such a loan made under this subsection [(Section 7(a) of the Small Business Act)], use the proceeds of the covered loan for—

(I) payroll costs; (II) costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums; (III) employee salaries, commissions, or similar compensations; (IV) payments of interest on any mortgage obligation (which shall not include any prepayment of or payment of principal on a mortgage obligation); (V) rent (including rent under a lease agreement); (VI) utilities; and (VII) interest on any other debt obligations that were incurred before the covered period.”

(CARES Act, Sec. 1102(a) (2)(F)).

If you received an economic injury disaster loan from the SBA, between January 31 and April 3, 2020, you also may use the proceeds to refinance that loan and must refinance the loan if it was used for payroll costs. (Sec. 1102((a)(2)(F)(iv); SBA Initial Interim Final Rule, at 15-16).

When you applied for the paycheck protection loan, you also were required to “make a good faith certification … acknowledging that the funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments ….” (Sec. 1102(a)(2)(G)).

Using loan proceeds other than for a permitted purpose and according to your certification is not something you want to do! There are severe consequences, including potential charges of crimes under Federal statutes. According to the SBA’s Initial Interim Final Rule:

• If you use PPP funds for unauthorized purposes, SBA will direct you to repay those amounts.
• If you knowingly use the funds for unauthorized purposes, you will be subject to additional liability such as charges for fraud.
• If one of your shareholders, members, or partners uses PPP funds for unauthorized purposes, SBA will have recourse against the shareholder, member, or partner for the unauthorized use.

Use the proceeds for the following costs incurred and payments made during the 8-week period following the initial loan disbursement:

• Payroll costs
• Any payment of interest on any covered mortgage obligation (which shall not include any prepayment of or payment of principal on a mortgage obligation).
• Any payment on any covered rent obligation.
• Any covered utility payments. (Sec. 1106 (b)).

Subject to some exceptions, “payroll costs” … means …

(aa) the sum of payments of any compensation with respect to employees that is a—

(AA) salary, wages, commissions, or similar compensations; (BB) payment of cash tip or equivalent; (CC) payment for vacation, parental, family, medical, or sick leave; (DD) allowance for dismissal or separation; (EE) payment required for the provisions of group health care benefits, including insurance premiums; (FF) payment of any retirement benefit; (GG) payment of State or local tax assessed on the compensations of employees; and

(bb) the sum of payments of any compensation to or income of a sole proprietor or independent contractors that is a wage, commission, income, net earnings from self-employment, or similar compensation and that is in an amount not more than $100,000 in 1 year, as prorated for the covered period [February 15, 2020 to June 30, 2020] ….” (Sec. 1102(a)(a)(A)(viii)).

The SBA clarified that qualified individuals with self-employment income, such as independent contractors and sole proprietors, may use loan proceeds for owner compensation replacement; and that owner compensation replacement—limited to eight weeks’ worth (8/52) of 2019 net profit as reported on their 2019 IRS Form 1040 Schedule C line 31, subject to a $100,000 cap—qualifies for loan forgiveness. (SBA Interim Final Rule dated April 14, 2020). Owner compensation replacement also appears to qualify as “payroll costs.”

The SBA also clarified that “self-employment income of general active partners [of a partnership] may be reported as payroll cost, up to $100,000 annualized, on a PPP loan application filed by a partnership.” (Id.). And, although the SBA has not said so explicitly, it appears that using loan proceeds over the 8-week period to pay a pro rata amount of up to $100,000 in partner self-employment income (8/52 of $100,000 = $15,385) likewise is permissible and qualifies as “payroll costs” and for loan forgiveness. (Id.). A similar rule appears to apply to members of a limited liability company actively involved in managing the company. (Id.) Perhaps the SBA will issue more guidance on these issues.

You could even use the proceeds to cover wages and salaries of additional employees you may hire.

The loan will not be forgiven to the extent you use loan proceeds for any other purpose.

Use at least 75% of the proceeds for costs incurred and payments made for payroll during the 8-week period:

“Not more than 25 percent of the loan forgiveness amount may be attributable to nonpayroll costs.” (SBA Initial Interim Final Rule). If you spend less than 75% on “payroll costs,” your loan obligation will be reduced dollar for dollar. To maximize loan forgiveness, you therefore should spend at least 75% on “payroll costs.”

Use the remaining proceeds only for paying interest on a covered mortgage obligation, rent on a covered lease obligation, or a covered utility payment:

“‘Covered mortgage obligation’ means any indebtedness or debt instrument incurred in the ordinary course of business that—(A) is a liability of the borrower; (B) is a mortgage on real or personal property; (C) was incurred before [February 15, 2020]”; ‘Covered rent obligation’ means rent obligated under a leasing agreement in force before [February 15, 2020]”; “‘Covered utility payment’ means payment for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before [February 15, 2020].” (Emphasis added) (Secs. 1106(a)(2) (4), and (5)). Using loan proceeds for those payments reduces the debt dollar for dollar. Be sure to keep invoices relating to those payments, together with proof payment.

Don’t use proceeds to pay interest for a mortgage debt incurred on or after February 15, 2020, rent on a lease agreement that was not in force before February 15, 2020, or any “utility” bill (electricity, gas, water, transportation, telephone, or internet access) for which service began on or after February 15, 2020.

Although permissible under the CARES Act, using proceeds any of those purposes reduces loan forgiveness. (Secs. 1102 (a) (2)(F)); 1106 (a)(2), (4) and (5); 1106 (b)).

Use no more than $15,385 of proceeds for cash compensation of any one employee over the 8-week period following the initial loan disbursement; non-cash employee benefits may exceed that amount:

Although “payroll costs” are a permissible use and the loan is forgivable to the extent used for that purpose, “payroll costs” don’t include “compensation of an individual employee in excess of an annual salary of $100,000, as prorated for the covered period.” $100,000 prorated over 8 weeks is $15,385 (($100,000/52) x 8)). (Sec. 1102(a)(2)(A)(viii)).

The SBA clarified that the “exclusion of compensation in excess of $100,000 annually applies only to cash compensation, not to non-cash benefits, including: • employer contributions to defined-benefit or defined-contribution retirement plans; • payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums; and • payment of state and local taxes assessed on compensation of employees.” (Emphasis added) (SBA FAQ #7). You therefore should pay cash compensation of an employee exceeding $15,385 during the 8-week period from a source other than the loan proceeds. Paying the excess cash compensation from loan proceeds reduces loan forgiveness dollar for dollar. Doing so is also impermissible under the new law. But using loan proceeds to pay non-cash employee benefits for those “highly-compensated employees”—employer contributions to defined-benefit or defined-contribution retirement plans; payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums; and payment of state and local taxes assessed on compensation of employees—is permissible use of loan and results in loan forgiveness.

Use no more than $15,385 of proceeds over the 8-week period following the initial loan disbursement for compensation of any active self-employed individual or partner or limited liability company member:

There’s a $15,385 cap for payments to self-employed individuals and apparently also for partners and limited liability company members actively involved in running a business. There’s nothing in the Act or any SBA rule or FAQ issued so far that permits additional payments, to cover retirement, health insurance, or other benefit payments made for them. In its April 14, 2020 Interim Final Rule addressing self-employed individuals, the SBA states that the loan is forgivable to the extent proceeds are used to pay covered benefits for an employee regardless of their other cash compensation, but that the same is not true for an “owner.” It would help though, if the SBA issued further guidance.

Don’t use proceeds to pay employer-side Federal payroll taxes:

According to the new law, “‘payroll costs’ shall not include … taxes imposed or withheld under chapters 21, 22, or 24 of the Internal Revenue Code of 1986 [(regarding withholding for Federal income taxes and FICA and employer share of FICA)] during the covered period ….” (Sec. 1102(a)(a)(A)(viii)). But the “SBA interprets this statutory exclusion to mean that payroll costs are calculated on a gross basis, without subtracting federal taxes that are imposed on the employee or withheld from employee wages.” (SBA FAQ # 16, footnote 3). As the SBA explains, “Unlike employer-side payroll taxes, such employee-side taxes are ordinarily expressed as a reduction in employee take-home pay; their exclusion from the definition of payroll costs means [that] payroll costs should not be reduced based on taxes imposed on the employee or withheld from employee wages.” (Id.).

The SBA explains further:

[P]ayroll costs are not reduced by taxes imposed on an employee and required to be withheld by the employer, but payroll costs do not include the employer’s share of payroll tax. For example, an employee who earned $4,000 per month in gross wages, from which $500 in federal taxes was withheld, would count as $4,000 in payroll costs. The employee would receive $3,500, and $500 would be paid to the federal government. However, the employer-side federal payroll taxes imposed on the $4,000 in wages are excluded from payroll costs under the statute. (SBA FAQ # 16).

Using loan proceeds for employer-side Federal payroll tax payments is impermissible and will at least reduce loan forgiveness.

Don’t use proceeds to pay “qualified sick leave wages” or “qualified family and medical leave wages,” as defined under, and for which a credit is allowed under the Families First Coronavirus Response Act.

You instead should pay those wages from a source other than the loan proceeds because they are excluded from “payroll costs” as defined under the new law. Using proceeds for that purpose is impermissible and will reduce loan forgiveness. (Sec. 1102(a)(a)(A)(viii)). Those “qualified” “wages” are excluded from “payroll costs” because, if documented properly, you will receive a tax credit against your employer share of social security taxes or an advance to cover them. Even a self-employed person will be entitled to a tax offset.

Don’t use proceeds for compensation of an employee whose principal place of residence is outside of the United States.

That type of payment is an exclusion from “payroll costs” and, therefore, is not a permissible use of loan proceeds, let alone a use that will result in loan forgiveness. (Sec. 1102(a)(a)(A)(viii)).

Spend all proceeds either for qualifying costs incurred or payments made within the 8-week period following the initial loan disbursement:

Forgiveness applies only to qualifying “costs incurred and payments made during the covered period.” (Sec. 1106 (a)(3) and (b)). “Covered period,” according to the Act, means “the 8-week period beginning on the date of the origination of a covered loan.” (Sec. 1102(a)(2)(A)(iii)). But the SBA clarified that the “eight-week period begins on the date the lender makes the first disbursement of the PPP loan to the borrower”—which must be “no later than ten calendar days from the date of loan approval.” (SBA FAQ # 20). Any costs incurred or payments made after the 8-week period will be ineligible for forgiveness. If you don’t use any loan proceeds up by the end of the 8-week period, you must repay them.

Don’t reduce your “average number of full-time equivalent employees per month” during the 8-week period beginning from the initial loan disbursement, as compared to your base period:

If you reduce your monthly average number of full-time equivalent employees during the 8-week period beginning from the initial loan disbursement—when compared to that monthly average for your base period, loan forgiveness is reduced proportionately. (Sec. 1106(d)(1)). Monitor changes in the number of your full-time equivalent employees and, as explained below, consider rehiring employees or hiring new employees to avoid a reduction in loan forgiveness. Unfortunately, the SBA has not issued guidance defining the phrase, “full-time equivalent employees.” But it’s safe to assume that anyone working at least 40 hours per week qualifies.

Choose the most beneficial base period for determining your “average number of full-time equivalent employees per month”:

Unless your employees are seasonal, you have a choice of which base period to use, for determining whether you’ve reduced your monthly average number of full-time employees, thereby reducing loan forgiveness. (Sec. 1106(d)(1)). You may choose a base period of from February 15, 2019 to June 30, 2019 or from January 1, 2020 to February 29, 2020. So, you will want to pick the base period during which your monthly average was the lowest. If your employees are seasonal, your base period will be from February 15, 2019 to June 30, 2019.

Don’t reduce the “total salary and wages” of any protected employee during the 8-week period following the initial loan disbursement, by more than 25%:

If you reduce the “total salary and wages” of any protected employee during that 8-week period by more than 25% compared to “the most recent full quarter during which the employee was employed before [then],” loan forgiveness is reduced proportionately. (Sec. 1106(d)(2)). A protected employee is an “employee who did not receive, during any single pay period during 2019, wages or salary at an annualized rate of pay in an amount more than $100,000.” So, reductions for “highly-compensated” employees are irrelevant for this purpose. To show that you have not reduced salary and wages over 25% from the “most recent full quarter,” you must determine the total base salary or wages of each employee for the last full quarter before the date you receive your loan and maintain corresponding records to submit with your application for loan forgiveness.

Rehire full-time equivalent employees or hire new full-time equivalent employees:

A proportionate reduction in loan forgiveness will not apply if you reduced the number of full-time equivalent employees during the period from February 15, 2020 until April 26, 2020 (30 days after the Act was signed into law) as compared to February 15, 2020, but then by June 30, 2020, eliminate the reduction. (Sec. 1106 (d)(5)). It therefore may be in your interests to rehire certain employees even if there’s insufficient work.

Restore reduced wages and salary of protected employees:

The proportionate reduction in loan forgiveness will not apply if you reduced wages and salary by more than 25% during the period from February 15, 2020 until April 26, 2020 as compared to February 15, 2020, but then by June 30, 2020, eliminate the reduction. (Sec. 1106 (d)(5)). It therefore may be in your interests to restore wages and salary even if there’s insufficient work.

If you refinanced an economic injury disaster loan with a paycheck protection loan and you received an advance on the economic injury disaster loan (in effect, a grant), “[p]roceeds of the advance up to $10,000 … will be deducted from the loan forgiveness of the PPP loan.” (Initial SBA Interim Final Rule, at 15-16).

Substantiate that, “to the extent feasible,” you “purchase[d] only American-made equipment and products”—consistent with the certification in your loan application.

Track use of loan proceeds, including through a new bank account exclusively for that purpose and maintain and segregate on a contemporaneous basis required back-up documents.

According to the new law:

An eligible recipient seeking loan forgiveness … shall submit to the lender that is servicing the covered loan an application, which shall include—

(1) documentation verifying the number of full-time equivalent employees on payroll and pay rates for the relevant time periods…, including—

(A) payroll tax filings reported to the Internal Revenue Service; and (B) State income, payroll, and unemployment insurance filings;

(2) documentation including cancelled checks, payment receipts, transcripts of accounts, or other documents verifying payments on covered mortgage obligations, payments on covered lease obligations, and covered utility payments;

(3) a certification from a representative of the eligible recipient authorized to make such certification that—

(A) the documentation presented is true and correct; and (B) the amount for which forgiveness is requested was used to retain employees, make interest payments on a covered mortgage obligation, make payments on covered rent obligation, or make covered utility payments; and

(4) any other documentation the [SBA] Administrator determines is necessary.” (Sec.1106(e)).

“No recipient shall receive forgiveness … without submitting to the lender that is servicing the covered loan the documentation required [ as described above].” (Sec. 1106(f)).

The best way to track use of proceeds is through a separate bank account for that purpose. And in that way, you avoid commingling proceeds with other general funds, which may make it much more difficult to track. To facilitate loan forgiveness, you also should keep and segregate on a contemporaneous basis, documents, such as payroll tax and State unemployment insurance filings, 401K and other retirement plan payments, cancelled checks, invoices for rent, mortgage interest, and utility payments (for electricity, gas, water, transportation, telephone, or internet access), and other documents required to verify eligibility for loan forgiveness.

The SBA is expected to release regulations regarding the application for loan forgiveness, perhaps even a required or recommended form.

If part of the loan isn’t forgiven after the 8-week period ends, decide whether to repay the loan right away or over the remaining term of the loan:

Promptly after the 8-week period following disbursement of the loan ends—presumably, in late June or in July 2020—you should apply for loan forgiveness to your lender, providing the application and all supporting documentation. According to the SBA, the “amount of loan forgiveness can be up to the full principal amount of the loan and an accrued interest.” (SBA Initial Interim Final Rule, at 13; but compare to Sec. 1160(d) (The amount of loan forgiveness … shall not exceed the principal amount of the financing made available under the covered loan.”). Your lender will have 60 days to act on the application. (Sec. 1160(g)). If your application and back up fail to show the proceeds were used for a forgivable purpose, you will have to repay the loan. More serious problems will arise if proceeds were used for an impermissible purpose. The term of the loan is 2 years. But no payment of principal or interest will be due on the loan until six months following the date of disbursement. Interest accrues on the loan at 1% during the 6-month deferral period. (SBA Interim Final Rule, 12-13).

By Joseph Kelly

Covid-19 and the response from state and local government in the form of stay-at-home orders have led to closures or slowdowns for many Illinois businesses. Many businesses have been submitting claims to their insurers for lost income and extra expenses under the business interruption insurance component of their property insurance policies. Some have sued their insurers.

What is business interruption insurance?

Business interruption insurance generally may include three types of coverages:

• “Business income” coverage for business income (defined typically as lost profits plus continued normal expenses) and extra expense (defined as expenses that wouldn’t have been normally incurred) resulting from direct physical damage to property on an insured’s premises that leads to an interruption of that insured’s business.
• “Contingent business interruption” coverage for business income and extra expense resulting from direct physical damage to property outside of an insured’s premises – e.g. a key supplier’s plant is destroyed by a tornado.
• “Civil authority” coverage for business income and extra expense when access to a business is prohibited by a local, state, or federal order after damage to property outside of that business’s premises. For example, a hurricane strikes a major U.S. city, resulting in serious damage to the downtown business district. The local government issues an order closing all businesses in a part of the city as a result. Civil authority coverage pays for business income and extra expense of a business where “access” to the business premises is prohibited by the government order. Civil authority coverage, though, is typically limited to four-weeks’ lost income.

Although there are standard industry forms for those coverages, such as from the Insurance Services Office or “ISO,” there can be variation from policy to policy—so it’s important to read the particulars of each insurance contract.

Does business interruption insurance apply to lost income resulting from a Covid-19 stay-at-home order?

The insurance industry contends generally that there’s no coverage under any version of business interruption insurance for any loss relating to Covid-19.

For business income coverage to apply, there must be direct physical damage to property on an insured’s premises. And for contingent business interruption coverage to apply, there must be direct physical damage to property outside an insured’s premises. Policyholders are arguing that the presence of the Covid-19 virus at their premises (for business income coverage) or at their supplier’s premises (for contingent business interruption coverage) satisfies the direct physical damage requirement. Insurers disagree. And proving that Covid-19 virus is physically on-site may be difficult for a policyholder in any event. Plus, many policies have “virus” exclusions that state the insurer won’t pay for loss or damage caused or resulting from any “virus” that induces, or is capable of inducing physical distress, illness, or disease.

There have been Covid-19 coverage lawsuits—in Illinois and nationwide—filed by businesses particularly hard-hit by COVID-19, such as restaurants, bars, dental practices, salons, and theaters—that allege that insurers have wrongfully denied their claims. The policyholders argue generally that that their premises and suppliers’ premises have been damaged by Covid-19 and that “access” to their premises has been prohibited by State or local stay-at-home orders due to damage on their premises and damage to the “public space”—namely, damage from the presence of the Covid-19 virus on surfaces and in the air—outside of their premises. Some stay-at-home orders (but not Illinois’s) even state explicitly that the Covid-19 virus has damaged property. Insurers deny that they are required to provide any coverage whatsoever. Many businesses aren’t entirely closed, moreover, such as the restaurant open for carryout—so another contested issue likely will be whether “access” to a business is prohibited, even when a stay-at-home order is in effect.

We’re unaware of any court decisions regarding business interruption coverage for COVID-19-related losses. But given the stakes, at least some policyholders, as well as the insurance industry will continue to litigate these cases aggressively both at the trial court level and on appeal.

Are there timing and other requirements for submitting a claim and filing a suit?

Early on, brokers and agents reportedly were generally advising policyholders to forgo submitting COVID-19 business interruption claims to insurers. But that changed—even though insurers continued to deny coverage. That change presumably resulted from the fact that there is a fair amount of litigation over coverage and numerous businesses with claims to bring. There are timing and proof requirements for submitting a claim and policies frequently include a shorter contractual limitations period for filing suit; so, to preserve whatever rights they may have, policyholders reportedly are at least providing required notices and other documents to their insurers, whether through their brokers or agents or otherwise.

Will pending legislation render the coverage question moot?

New Jersey, New York, Massachusetts, Ohio, Pennsylvania, and Louisiana have proposed legislation that would mandate business interruption coverage extend to Covid-19-related losses by rendering moot the direct physical damage requirement and “virus” exclusions. To our knowledge, there’s no similar proposed legislation in Illinois. It remains to be seen whether any proposed legislation will become law and, even then, whether they will withstand court challenges by insurers, which will inevitably follow. Last week, there were news reports that certain Senators were advocating that the Trump administration take steps to protect the insurance industry from any such State legislation.

By Joseph Kelly

On the heels of SBA’s various loan programs, Governor Pritzker and the State of Illinois are trying to help certain Illinois small businesses with loans from the Illinois Small Business Emergency Loan Fund.

Here are some highpoints:

• Who’s eligible?

Small businesses located outside of the City of Chicago with fewer than 50 workers and less than $3 million in revenue in 2019 that have suffered at least a 25% drop in revenue because of Covid-19.

• How much can you get?

Up to $50,000 at 3% interest with a five-year repayment period and no payments due for the first six months.

• What can loan funds be used for?

Working capital, and at least 50% of loan proceeds should be applied toward payroll or other eligible compensation up to $100,000 per employee (salaries, wages, tips, paid leave, group healthcare benefits), with a commitment to hire or retain at least 50% of a business workforce for six months.

• Who’s the lender?

If located north of I-74, the lender is Accion Serving Illinois and Indiana and the application is here. If located south of I-74, there is a different lender. Additional lenders may be added in the future.

If interested, the State provides more details here.

By Christopher Graham and Joseph Kelly

As we’ve written about previously here, the Keeping American Workers Paid and Employed Act (“Workers Act”), amends Section 7(a) of the Small Business Act (15 USC 636(a)), by providing for the new paycheck protection (“PPP”) loans. The Workers Act, in addition, amends Section 7(b)(2) regarding economic injury disaster loans of up to $2 million, by expanding the class of eligible recipients, relaxing some requirements for approval, limiting personal guarantees, and providing a $10,000 “emergency” grant to cover certain expenses. But the circumstance in which a business or nonprofit will qualify for these loans is much more limited than for PPP loans.

Here are more details, including some comparisons to PPP loan:

• What sort of businesses and nonprofits are eligible for this loan?

“”[I]n addition to small business concerns [(as defined under the Small Business Act)], private nonprofit organizations, small agricultural cooperatives,” and any “eligible entity,” meaning “(A) a business with not more than 500 employees; (B) any individual who operates under a sole proprietorship, with or without employees, or an independent contractor; (C) a cooperative with not less than 500 employees; (D) an ESOP … with not less than 500 employees; or (E) [certain tribal businesses] …” (Workers Act, Sec. 1110).

• What is a private nonprofit organization?

“An eligible private non-profit organization is a non-governmental agency or entity that currently has: (1) An effective ruling letter from the U.S. Internal Revenue Service, granting tax exemption under sections 510(c), (d), or (e) of the Internal Revenue Code of 1954, or (2) Satisfactory evidence from the State that the non-revenue producing organization or entity is a non-profit one organized or doing business under State law.” 13 CFR 123.300(d). This includes faith-based organizations. (Non-profits eligible for PPP loans, in contrast, are limited to those described in 501(c)(3) of the Internal Revenue Code and exempt form tax under 501(a) of the Code. See Workers Act, 1102(a)(2)(A)(vii)).

• Has there been a “disaster” or “emergency” of a type necessary for a disaster loan?

Yes, wherever you are in the United States. The SBA may “make such loans … as [it] may determine to be necessary or appropriate to any small business concern, private nonprofit organization, or small agricultural cooperative located in an area affected by disaster, … if [it] determines that the concern, the organization, or the cooperative has suffered a substantial economic injury as a result of such disaster” (15 USC 636 (b)(2)). It’s enough that there was a declaration by the President that “such disaster constitutes … an emergency involving Federal primary responsibility determined to exist by the President under the section 501(b) of the [Stafford Act].” (15 USC 636 (b)(2)(D), as amended sec. 1110(f) of Workers Act). (There is no such requirement for a PPP loan).

• How do we determine if we have “suffered a substantial economic injury as a result of such disaster,” as is required for a disaster loan?

According to SBA regulations: “If your business is located in a declared disaster area and suffered substantial economic injury as a direct result of a declared disaster, you are eligible to apply for an economic injury disaster loan. (1) Substantial economic injury is such that a business concern is unable to meet its obligations as they mature or to pay its ordinary and necessary operating expenses. (2) Loss of anticipated profits or a drop in sales is not considered substantial economic injury for this purpose. “ 13 CFR 123.300(a). In addition, “[e]conomic injury disaster loans are available only if … you and your affiliates and principal owners (20% or more ownership interest) have used all reasonably available funds ….” 13 CFR 123.300(b). The circumstances under which disaster loans are available for a business, thus, are much narrower than for PPP loans. For PPP loans, the applicant must merely certify “that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operation of the eligible recipient.”).

• Are these disaster loans available to business start-ups?

Yes. SBA waives through December 31, 2020 the “requirement that an applicant needs to be in business for the 1-year period before the disaster”—provided that the business was in operation on January 31, 2020. (Sec. 1110(c)(2) of Workers Act).

• Is there a credit test for the loan?

Yes. SBA through December 31, 2020 “may—(1) approve an applicant based solely on the credit score of the applicant and shall not require … tax return or a tax return transcript … ; or (2) use alternative appropriate methods to determine applicant’s ability to repay.” (Sec. 1110(d)).

• Does it matter whether we can obtain credit elsewhere?

No. The SBA waives through December 31, 2020 usual condition that “applicant is not able to obtain credit elsewhere.” 15 USC 636 (b)(2), as amended by sec. 1110(c)(3) of Workers Act). The same waiver exists for PPP loans.

• Are there limitations on use?

Yes. Use is limited to “working capital necessary to carry your concern until resumption of normal operations and for expenditures necessary to alleviate the specific economic injury, but not to exceed that to which the business could have provided had the injury not occurred.” 13 CFR 123.303 (a). Also, proceeds can’t be used to refinance debt incurred before the disaster event, pay certain tax penalties or non-tax penalties or fines, make payments on another SBA or other Federal loan, repair physical damage, or pay dividends or disbursements to owners, except reasonable compensation of services for the business. 13 CFR 123.303 (b). Uses for a disaster loan, thus, are broader than for a PPP loan, where at least 75% of proceeds must be use for “payroll costs.”

• Are personal guarantees required?

Only if the loan exceeds $200,000. The SBA waives through December 31, 2020 “any rules related to personal guarantees on advances and loans of not more than $200,000 during the covered period [1/31/20 to 12/31/20].” (Sec. 1110(c)(1) of Workers Act). Generally, no guarantee is required for PPP loans, regardless of amount.

• Is collateral required?

Not for a loan of $25,000 or less; for larger loans, a security interest in business property is required. (13 CFR 123.11 (a) (1) and (b)). PPP loans in contrast generally require no collateral.

• What is the maximum loan amount?*

The “aggregate loan amount outstanding and committed to a borrower … may not exceed $2,000,000.” 15 USC 636 (b)(8)(A); PPP loans are limited to 2.5 times average monthly payroll costs, subject to $10 million limit

• What is the interest rate?

Reportedly 3.75% for business; 2.75% for non-profit – compared to 1% for PPP loans

• What is the maximum loan term?

30 year maximum (15 USC 636 (b)(2); PPP loans have a 2-year term

• What about the $10,000 emergency grant we heard about?

Yes, there exists such a thing, subject to self-certification under penalty of perjury of eligibility. The applicant “may request that the [SBA] provide an advance [of “not more than $10,000”] … within 3 days after receiving an application from such applicant”; so, before loan approval and regardless of whether the loan is approved. (Sec. 1110(c)(2) and (3) of Workers Act). (There is no such 3-day grant under the PPP loan program). “An advance … may be used to address any allowable purpose for a loan under section 7(b)(2) of the Small Business Act …, including—(A) providing paid sick leave to employees unable to work due to the direct effect of the COVID-19; (B) maintaining payroll to retain employees during business disruptions or substantial slowdowns; (C) meeting increased costs to obtain materials unavailable from the applicant’s original source due to interrupted supply chains; (D) making rent or mortgage payments; and (E) repaying obligations that cannot be met due to revenue losses.” (Sec. 1110(c)(4) of Workers Act). “An applicant shall not be required to repay any amounts of an advance … even if subsequently denied a loan ….” (Sec. 1110 (c)(5)).

• Is there loan forgiveness for a disaster loan?

No, except the $10,000 advance will not require repayment; forgiveness for PPP loans is limited to certain amounts paid during 8-week period immediately following loan origination, but only for payments through June 30, 2020 (so possibly less than 8 weeks if the loan closes after May 1) and will be proportionately reduced if there are layoffs or wage and salary reductions during that 8-week period.

• What if we have other loans?

You will need to consider restrictions in other loan documents that affect your ability to obtain an SBA loan and consult with your lender – and legal counsel. If you qualify for a disaster loan, you presumably will be in default under other loans; a business may obtain a disaster loan only if as a direct result of the disaster, it “is unable to meet its obligations as they mature or to pay its ordinary and necessary operating expenses.”

• What about using a disaster loan to refinance another loan?

You cannot use a disaster loan to refinance debt incurred before the disaster event. But note that the SBA is providing debt relief for certain existing SBA loans. The SBA provides more information [here.

• Where and how do we apply for a disaster loan?

Directly to the SBA here.

• How fast will they process our request?

According to reports, there is a backlog and SBA has been swamped with requests.

• Can we also apply for a PPP loan and vice versa?

Yes.

• If we apply for a PPP loan and have a disaster loan, how will things work?

You may obtain a disaster loan after January 31, 2020 and also qualify for a PPP loan, provided that the disaster loan “is for a purpose other than paying for payroll costs and other obligations described in subparagraph (F) …”—namely: “costs related to the continuation group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums”; “employee salaries, commissions, or similar compensations”; “payments of interest on any mortgage obligation (which shall not include any prepayment of or payment of principal on a mortgage obligation)”; “rent (including rent under a lease agreement)”; “utilities”; and “interest on any other debt obligations that were incurred before the covered period.” (Sec.1102(a)(2)(F) (i)) and 1102(a)(2)(Q) of Workers Act). You also may also use a PPP loan to refinance a disaster loan made on or after January 31, 2020. (Sec. 1102 (F)(iv)). Any advance for a disaster loan, that wasn’t repaid, would reduce the amount of any PPP loan forgiveness.

For more information, here’s a link to the SBA EIDL program webpage.

By Joseph P. Kelly

If your company is still open and operating as an “essential business” under a stay-at-home order, it’s critical that you follow all the social distancing practices set forth in such stay-at-home order and otherwise provided by the CDC.

However, those orders tend to be somewhat general. To that end, OSHA has issued a detailed guidance for those employers still open – “Guidance on Preparing Workplaces for COVID-19”.

For essential businesses with traveling employees, note that the OSHA guidelines contain some specific advisories regarding such travel.

Bottom line for essential businesses — do ALL that you can to keep your workplace safe!

By Joseph P. Kelly

Earlier this week we wrote here about emergency paid sick leave (“EPSL”) under the Families First Coronavirus Response Act and expansion of the Family Medical Leave Act (FMLA+).

Unless you have Covid-19-related sick or quarantined employees or employees caring for Covid-19-related sick or quarantined family members, the main way these new laws would affect you is if you have employees who are home and can’t telework because of a Covid-19 related school closure or closure of a child care (paid) provider. But these laws will only apply if a company is still open; if closed because of a stay-at-home order, employees aren’t entitled to paid leave.

The IRS yesterday provided detailed guidance relating to such childcare-related leave.

Of note is the IRS’s position that only one caretaker per household may take leave to care for a child after a school or daycare closure.

The IRS also detailed the documentation an employee must provide in requesting such leave, as well as the documentation an employer must have to claim tax credits under these new laws.

For more information, please consult the IRS’s “COVID-19-Related Tax Credits for Required Paid Leave Provided by Small and Midsize Businesses FAQs.”

By Christopher J. Graham and Joseph P. Kelly

We previously posted here about the new SBA-guaranteed “forgivable” loans available under the Payroll Protection Program portion of the recently-passed CARES Act (the “Act”) and how those loans may be attractive.

This post provides more details.

Limitations on amount:

The new SBA-guaranteed “forgivable” loans for the “covered period” of 2/15/20 – 6/30/20 are limited to 2.5 times average total monthly payments for total payroll costs incurred during the 1-year period before the loan origination date (with a $10 million maximum). There’s also deferral of payments for 6 months; no collateral required; no guarantees; no prepayment penalties; and a 1% interest rate.

Forgiveness:

Subject to documentation requirements, a company (or sole proprietorship) won’t have to repay the loan to the extent loan proceeds are used for costs paid or incurred—during the 8-week period starting with loan origination—for “payroll costs,” interest on “covered mortgage obligations” and payments on any “covered rent obligation” or “covered utility obligation” – as those terms are defined in the Act.

If a covered loan has a balance after “forgiveness” under the Act, the SBA will continue its guarantee and “the covered loan shall have a maximum maturity of 10 years from the date on which the borrower applies for loan forgiveness….(Sec. 1102(a)(2)(K)).

Applications; timing of availability

Secretary Munchin reportedly said that the loan program will be up and running by April 3; we shall see. The Act says that the SBA has up to 15 days from enactment (on March 27) to “issue regulations….” (Sec. 1114). So, that would be by Saturday, April 11.

According to the Treasury Department, if using an existing SBA lender, small businesses and sole proprietorships can apply for loans starting on April 3 and independent contractors and self-employed individuals can apply starting April 10. A list of SBA lenders can be found on www.sba.gov. Other lenders will be available to make these loans once they are approved and enrolled in the loan program.

Here’s a link to the application which includes certification requirements described below.

Certification – need and use:

The Act contains a certification requirement on need and use that will factor into any borrower’s decision:. Here’s what it says:

An eligible recipient applying for a covered loan shall make a good faith certification—

(I) that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operation of the eligible recipient; (II) acknowledging that the funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments; (III) that the eligible recipient does not have an application pending for a loan under this subsection [(Section 7(a) of the Small Business Act)] for the same purpose and duplicative of amounts applied for or received under a covered loan; (IV) during the period beginning on February 15, 2020 and ending on December 31, 2020, that the eligible recipient has not received amounts under this subsection for the same purpose and duplicative of amounts applied for or received under a covered loan. (Sec. 1102(a)(2)(G))

We think the certification wording has gray areas. If a company is one of the “lucky” ones that has an uptick in business and doesn’t really need the money, it can’t meet the certification requirements—we presume.

But if a company’s business is down and given the “uncertainty of current economic conditions,” it may have a “good faith” belief that it will need the funds in the next month to “support” “ongoing operations,” we presume it could provide the required certification.

If instead of the SBA loan, company owners could cover the expected need by injecting capital or loaning funds to the company, we presume that wouldn’t mean that company is ineligible for the loan and could provide the certification. In that regard, another section of the Act provides that, “During the covered period [2/15/20 – 6/30/20], the requirement that a small business concern is unable to obtain credit elsewhere … shall not apply to a covered loan.” (Sec. 1102(a)(2)(I)). So, if a company is not required to try to obtain “credit elsewhere,” why would owners be required to provide additional capital or loan the company the funds themselves?

Part (II), meanwhile, refers to using the funds “to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments.” But that’s a bit different than an earlier part of the Act, regarding use, which provides, subject to a list of exceptions, that:

During the covered period [2/15/20 – 6/30/20], an eligible recipient may, in addition to the allowable uses of such a loan made under this subsection, use the proceeds of the covered loan [meaning a loan made under this new law during the covered period] for—

(I) payroll costs [a defined term]; (II) costs related to the continuation group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums; (III) employee salaries, commissions, or similar compensations; (IV) payments of interest on any mortgage obligation (which shall not include any prepayment of or payment of principal on a mortgage obligation); (V) rent (including rent under a lease agreement); (VI) utilities; and (VII) interest on any other debt obligations that were incurred before the covered period.” (Sec. 1102(a)(2)(F)).

We expect that there will be SBA regulations shedding some light on the certification requirements. Accuracy in providing certifications will be very important – as we are sure there will be consequences if a certification is false.

Affiliation rules for large corporate groups:

In determining eligibility, a company that is part of a larger corporate group will be subject to SBA “affiliation” rules. For determining whether a potential borrower exceeds the maximum number of employees, the SBA’s affiliation rules (13 C.F.R. 121.103) provide that the employees of the borrower and its affiliates will be aggregated. A company with foreign ownership may be subject to additional limitations – but we have not seen anything specific on that issue yet and have reached out to lenders for more information.

Loan recipients not entitled to tax benefits under the Act:

The Act also includes changes to the Internal Revenue Code, including a new refundable payroll tax credit for employee “retention” and for deferral of payment of 2020 payroll taxes into 2021 and 2022. But neither tax benefit will be available to a company that takes on an SBA “forgivable” loan.