Updated as of 6/12/20
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On June 5, 2020, the President signed into law the Paycheck Protection Program Flexibility Act of 2020 (“PPPFA” or “Flexibility Act”), which amends certain provisions of the Paycheck Protection Program (“PPP”) that were proving problematic for small businesses in need of aid as a result of COVID-19.
Specifically, the Flexibility Act loosens restrictions placed on the loan forgiveness aspect of the PPP and allows loan forgiveness recipients to defer their payroll taxes. Certain portions of the PPPFA, however, only apply to loans issued after its enactment, so it’s important to pay attention to the applicability of each amendment.
To read more about the new the Paycheck Protection Program Flexibility Act, click here.
Enacted on March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provides emergency, short-term financial relief to small businesses, including law firms, impacted by the current COVID-19 pandemic.
In particular, Title I of the CARES Act (also known as the Paycheck Protection Program) contains a $349 million commitment to help an unprecedented number of businesses, including those previously deemed ineligible for the Small Business Administration (SBA) general business loan program (7(a) Loans).
The Paycheck Protection Program ran out of funding after the SBA approved more than 1.6 million loan applications in a two week period; however, on April 23, 2020, Congress passed a $484 billion relief bill that increased amounts authorized and appropriated for commitments to the Paycheck Protection Program by $320 billion. This interim funding measure includes a $30 billion carve-out for banks and credit unions with $10 billion to $50 billion in assets, and another $30 billion for smaller institutions that have less than $10 billion in assets.
Loans covered by the Act (“covered loans” or “PPP loans”) are non-recourse, don’t require collateral or personal guarantees, have no fees, may be forgiven if used for particular purposes and are 100% federally guaranteed.
On April 29, 2020 additional eligibility considerations were addressed in terms of available liquidity for a company applying for a PPP loan. Specifically, it was called into question whether some companies did not face imminent “significantly detrimental” financial harm when certifying the need for funding. Updated guidance states that “[b]orrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.” Special attention to this certification is said to be placed upon loans over $2 million.
The updated guidance also states “[a]ny borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith” if the certification made on the initial loan documents does not also comply with the updated guidance.
While details with respect to the Paycheck Protection Program continue to develop, here’s a quick guide to the current law, which incorporates information published by the U.S. Department of the Treasury and SBA.
1. Covered Period
February 15, 2020 to June 30, 2020; however, the SBA encourages eligible businesses to apply as soon as possible since there’s a funding cap.
2. Eligibility
Your law firm may be eligible for a PPP loan—even if you operate as a sole proprietorship, independent contractor, or are self-employed—if you:
- have 500 or fewer employees whose principal place of residence is in the U.S (full-time, part-time, or other basis); or
- maintain a business that operates in a certain industry and meet the applicable SBA employee-based size standards for that industry (click here for more information)
and, you are:
- a small business concern (defined here) and subject to SBA’s affiliation rules (set forth here), unless specifically waived in the Act; or
- an Internal Revenue Code (“IRC”) § 501(c)(3) tax-exempt nonprofit organization, an IRC § 501(c)(19) tax-exempt veterans’ organization, Tribal business concern (described in § 31(b)(2)(C) of the Small Business Act);
- or any other business;
and, you:
- were in operation on February 15, 2020; and
- either had employees for whom you paid salaries and payroll taxes or paid independent contractors as reported on a Form 1099-MISC.
Even if you meet all of the foregoing criteria, however, you will be ineligible if, for example:
- you engage in illegal activity;
- you are a household employer (i.e. someone who employs nannies, housekeepers, etc.);
- an owner of 20% of your firm’s equity is incarcerated, on probation, on parole; presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction; or has been convicted of a felony within the last five years;
- you, or any business owned or controlled by you or any of your owners, has ever obtained a direct or guaranteed loan from SBA or any other Federal agency that is currently delinquent or has defaulted within the last seven years and caused a loss to the government; or
- your firm is considered a business that’s identified here (with the exception of nonprofit organized authorized under the CARES Act).
The SBA issued additional guidance regarding the application of certain affiliate rules to PPP loans. You should consult this guidance if other entities may be considered affiliates of your firm based on factors including stock ownership, overlapping management, and identity of interest, since your eligibility will be considered together.
Note: during the covered period, the traditional 7(a) loan requirement that your firm must be unable to obtain credit elsewhere, won’t apply.
3. Applying for a Loan
To apply, you (and at least 20% of your firm’s owners) will need to fill out the Paycheck Protection Program loan application (SBA Form 2484), plus provide your lender with payroll documentation. You can use e-signature or e-consents regardless of the number of firm owners.
You can apply through any existing SBA lender, lender permitted to make covered loans once approved and enrolled in the Program, or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. Find a current list of eligible SBA lenders here.
4. Lending Considerations
Approved providers of covered loans (found here) must consider whether your law firm was in operation on February 15, 2020 and:
- had employees for whom the firm paid salaries and payroll taxes;
- paid independent contractors, as reported on a Form 1099-MISC;
- have documentation as is necessary to establish eligibility, such as payroll processor records, payroll tax filings, or Form 1099-MISC, or income and expenses from a sole proprietorship. If you don’t have any such documentation, you must provide other supporting documentation, such as bank records, sufficient to demonstrate the qualifying payroll amount.
Further, lenders, among other things, must confirm the following:
- receipt of your certifications contained in the PPP Application;
- receipt of information demonstrating that you had employees for whom you paid salaries and payroll taxes on or around February 15, 2020; and
- dollar amount of average monthly payroll costs for the preceding calendar year by reviewing the payroll documentation submitted with the borrower’s application.
Note: lenders aren’t required under the Payment Protection Program to comply with the SBA’s 7(a) loan lending criteria set forth in 13 CFR § 120.150.
5. Borrower Requirements
To qualify for a covered loan, you must deliver to the SBA-approved lender a good faith certification that:
- your firm was in operation on February 15, 2020 and had salaried employees and payroll taxes or you paid independent contractors, as reported on a Form 1099-MISC;
- the uncertainty of current economic conditions makes the loan request necessary to support ongoing operations;
- funds will be used to retain workers and maintain payroll or make mortgage, lease and utility payments;
- you understand that if the funds are knowingly used for unauthorized purposes, the federal government may hold you legally liable, such as charges for fraud;
- no more than 25% of loan proceeds may be used for non-payroll costs;
- you will provide your lender with documentation verifying the number of full-time equivalent employees on payroll, as well as the dollar amounts of payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities for the eight-week period following loan origination;
- loan forgiveness will be provided form documented payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities, but no more than 25% of the forgiven amount may be for non-payroll costs;
- you don’t have any pending applications for a covered loan with the same purpose and amounts you’re applying for here;
- from February 15, 2020 to December 31, 2020, you haven’t received amounts for a covered loan with the same purpose and amounts you’re applying for here;
- the information you’ve provided to the lender and supporting documents are true and accurate in all material respects;
- you understand that knowingly making a false statement to obtain a guaranteed loan from SBA is punishable under the law, including under 18 USC 1001 and 3571 by imprisonment of not more than five years and/or a fine of up to $250,000; under 15 USC 645 by imprisonment of not more than two years and/or a fine of not more than $5,000; and, if submitted to a federally insured institution, under 18 USC 1014, by imprisonment of not more than thirty years and/or a fine of not more than $1,000,000; and
- the tax documents you've provided to the lender are identical to those which you’ve submitted to the IRS, and you understand, acknowledge and agree that the Lender can share the tax information with SBA’s authorized representatives, including authorized representatives of the SBA Office of Inspector General, for the purpose of compliance with SBA Loan Program Requirements and all SBA reviews.
Note: SBA will allow lenders to rely on certifications of the Borrower to determine eligibility and use of loan proceeds. According to a guidance published on April 23, 2020, however, the Borrower must make the certification in good faith and take into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business in making their certification. Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith.
6. Interest Rate
If approved, your covered loan will bear interest at a fixed rate of 1.0% per annum.
7. Maximum Loan Amount
The maximum amount your firm can receive as a covered loan is the lesser of:
- 2.5 multiplied by the average monthly payments made by your law firm for payroll costs (defined below) during the one-year period prior to the date on which the loan is made; and
- $10,000,000.
Note: the foregoing differs for newer and seasonal businesses.
8. Payroll Costs Calculation
To calculate your average payroll costs, the Interim Final Rule provides that the following will be useful for most applicants:
Step 1: Take the sum of all payments you’ve made from the following types of employee compensation (limited to those with a principal residence in the U.S.):
- salary, wage, commission or similar compensation;
- cash tips or equivalent (based upon employer records of past tips or a reasonable, good faith estimate);
- vacation, parental, family, medical or sick leave;
- allowance for separation or dismissal;
- employee group healthcare benefits, including insurance premiums;
- retirement benefits; or
- state or local tax assessments on employee compensation;
If you’re a sole proprietor or independent contractor, the lesser of: (i) sum of compensation to you; or (ii) income up to $100,000, in a one-year period (prorated for the covered period) that represents:
- wages;
- commissions;
- net earnings from self-employment; or
- similar to any of the foregoing.
Step 2: subtract any compensation paid to an employee, independent contractor or sole proprietor in excess of an annual salary of $100,000 or $100,000 per year.
Step 3: divide the amount you calculated after application of Step 2 by 12 to calculate average monthly payroll costs.
Step 4: multiply the average monthly payroll costs calculated in Step 3 by 2.5.
Step 5: add any Economic Injury Disaster Loan (“EIDL”) made between January 31, 2020 and April 3, 2020, minus the amount of any advance under an EIDL loan (because it doesn’t have to be repaid).
Note: for all applicants, the following are excluded from the definition of payroll costs:
- Individual employee compensation that’s in excess of an annual salary of $100,000 (as prorated for the covered period) (i.e. payroll costs will be capped at $100,000 annualized for each employee);
- Taxes imposed or withheld under Internal Revenue Code of 1986 chapters 21, 22, or 24 during the covered period;
- Compensation to employees who have a principal residence outside of the U.S.
- Qualified sick leave wages if a credit is allowed under § 7001 of the Families of First Coronavirus Response Act (Public Law 116-127); or
- Qualified family leave wages if a credit is allowed under § 7003 of the Families of First Coronavirus Response Act (Public Law 116-127).
9. Use of Proceeds
Your firm may only use proceeds of a covered loan for:
- payroll costs;
- costs related to the continuation of group health benefits during periods of paid sick, medical, or family leave, and insurance premiums;
- employee salaries, commissions, or similar compensation;
- payments of interest on mortgage obligations (exclusive of prepayments or any payments of principal);
- rent under lease agreements;
- utilities;
- interest payments on any other debt obligations that were incurred before February 15, 2020; and/or
- refinancing an SBA EIDL loan made between January 31, 2020 and April 3, 2020.
Note: 75% of PPP loan proceeds must be used for payroll costs. If you use any covered loan proceeds for unauthorized purpose, then you must repay those amounts. If such unauthorized use was intentional, then you (or your shareholders, members or partners) could be subject to additional liability, such as charges for fraud.
10. Payments
You don’t have to make payments on your PPP loan for six months following the date of disbursement of the loan, however interest will continue to accrue during the six-month deferment.
11. Maturity Date
PPP loans will have a two-year term despite the Act providing that a covered loan will have a maximum maturity of up to ten years from the date a borrower applies for loan forgiveness (described below).
12. Limited Liability
Along with waiving the conventional personal guarantee or collateral 7(a) loan requirements, the Act explicitly states loans made under the Paycheck Protection Program are without recourse to any individual shareholder, member, or partner of an eligible recipient for nonpayment, except to the extent such person uses the covered loan proceeds for an unauthorized purpose.
13. Loan Forgiveness
All borrowers are eligible for forgiveness of indebtedness up to the full principal amount of the covered loan, plus any accrued interest.
The actual amount of loan forgiveness, however, will depend, in part, on the total amount of proceeds utilized to pay the following items (Forgiveness Eligible Payments) during the 8-week period beginning on the date of origination of a covered loan:
- payroll costs (defined above);
- interest payments for any mortgage obligation incurred in the ordinary course of business prior to February 15, 2020 (exclusive of prepayments or any payment of principal);
- rent payments under a lease dated before February 15, 2020; and
- utility payments under service agreements dated before February 15, 2020.
However, not more than 25% of the Forgiveness Eligible Payments may be for non-payroll costs in order for the full amount of the loan to be forgiven.
The amount of loan forgiveness may be reduced if you decrease the number of full-time employees at your firm.
14. Tax Treatment
Any loan forgiveness will be treated as cancelled indebtedness, but excluded from your gross income.
PPP loans are first-come, first-serve.
While the Paycheck Protection Program’s $349 million initial commitment is exhausted, there’s new legislation infusing an additional $320 billion in funds into the Program.
Start the process of preparing your firm for financial relief now if you haven’t already. Fill out an application, review the Act, and the U.S. Department of the Treasury website. Also, consult your bank and other eligible lenders or advisors to obtain this historic financing. In addition, you can direct any questions concerning PPP loans to the Lender Relations Specialist in the local SBA Field Office.
You can also stay informed about the Paycheck Protection Program by routinely checking this site and the SBA’s dedicated page.
Neither Counsel Financial nor any of its employees provide tax, legal or financial advice. You should consult with your personal tax, legal or financial advisor regarding your individual circumstances.
Government emergency assistance to businesses, such as law firms, as a result of the coronavirus crisis is still evolving, so be sure to follow its developments closely with the help of your legal and accounting professionals.
Keep in mind that the CARES Act is a short-term solution to your firm’s financial needs. The long-term impact of the COVID-19 on the U.S. legal system is largely unknown, but will likely be far reaching. As such, it is imperative that you and your firm have a long-term strategy in place, including access to a stable source of capital.
Counsel Financial can help guide you through this difficult time and offer your firm a lasting, reliable financial solution for your individual needs. With credit lines from $500,000 to $50 million+, your firm can access stable cashflow to help navigate the litigation delays in the courts system and maintain firm operations during this time. The impact of these delays may be significant and lasting, so preparing now is imperative.
To discuss your firm’s situation, how the stimulus bill may be of benefit and to explore longer-term solutions contact us at (800) 820-4430 or info@counselfinancial.com.
