Title I of the newly enacted Coronavirus Aid, Relief, and Economic Security, or CARES, Act reserves $349 billion of the $2 trillion stimulus package for qualifying small businesses through loans made under a modified Small Business Administration (SBA) 7(a) loan guaranty program called the Paycheck Protection Program (PPP). In addition, Title I of the CARES Act expands eligibility for borrowers applying for a loan under the existing Economic Injury Disaster Loan Program (EIDLP) and introduces a new loan advance benefit for borrowers that need immediate access to funds.
For production companies impacted by the novel coronavirus (COVID-19) pandemic, these loan programs available through the CARES Act may provide meaningful relief to keep production workers employed and cover other production-related expenses. Before we dive into an overview of the PPP and EIDLP, it’s important to note that businesses that obtain a loan under the PPP and, in some cases, the EIDLP, will be ineligible to claim other benefits under the CARES Act, including any employee retention credits. For a summary of available relief in the form of employee retention credits, we encourage clients to review EP’s recently published Legal Alert entitled “CARES Act Provides Employee Retention Credits for Employers Impacted by Coronavirus.” We recommend that production companies impacted by COVID-19 carefully consider each form of available relief under the CARES Act and determine which would provide the greatest benefit based on their unique circumstances.
Production companies applying for a PPP loan that relied on EP for employee payroll needs at any point in time during 2019 or 2020 should contact EP at email@example.com to receive certain payroll documentation that will be requested by their SBA-approved lenders, including the required payroll documentation sufficient to support a determination of their monthly average payroll costs for purposes of the PPP loan application (as described in more detail below).
Paycheck Protection Program
As the name of the program suggests, the PPP was developed to assist small businesses in keeping their workers employed during the COVID-19 pandemic. PPP loans are fee-free, are fully backed by the federal government and require no pledged collateral or personal guarantees, and the entire loan amount may be forgiven if the funds are used to cover payroll costs, rent, utilities and mortgage interest within the first 8 weeks after loan origination. At least 75% of the amount forgiven must be used to cover payroll costs. Payments on any portion of the loan that is not otherwise forgiven will be deferred for 6 months and subject to a 2-year term at an annual interest rate of 1%.
To be eligible for a PPP loan, the applicant must have been in existence before February 15, 2020 and be a small business with fewer than 500 employees or one that otherwise meets the SBA’s size standard. Also eligible are individuals that are self-employed or operate as a sole proprietor or an independent contractor. For purposes of determining eligibility, employees include full-time, part-time and seasonal employees, but not independent contractors because independent contractors are themselves eligible to apply for a PPP loan. In determining the size of the business, the SBA’s affiliation rules described in 13 CFR § 121.103 may impact eligibility although further guidance from the SBA on how the affiliation rules will be interpreted for purposes of PPP eligibility is expected. Production companies will need to conduct a factual analysis to determine whether their employees will be aggregated with those of their affiliates for purposes of determining eligibility for the PPP (and, as described below, the EIDLP).
An eligible borrower under the PPP will be able to obtain a loan of up to two and one-half times the borrower’s average monthly payroll costs, with the loan amount not to exceed $10,000,000. While not an exhaustive list, payroll costs for employers include salary, wages, commissions, and tips (up to $100,000 on an annualized basis for each employee, prorated for the covered period); payments required for the provision of group health care benefits, including insurance premiums (including payments made to EP if you participate in EP Cares); state and local taxes assessed on compensation; payments for vacation, parental, family, medical or sick leave; payments of any retirement benefits; and allowances for dismissals and separations. For sole proprietors, independent contractors and self-employed individuals, payroll costs may include wages, commissions, income or net earnings from self-employment, up to $100,000 on an annualized basis, prorated for the covered period.
Potential borrowers will be asked to complete and submit SBA Form 2483 (Paycheck Protection Program Borrower Application Form) and provide payroll documentation sufficient to support the borrower’s determination of its monthly average payroll costs. Production companies applying for a PPP loan will need to reach out to their internal payroll departments and/or external payroll providers to gather the documentation that will be requested by their lenders.
Production companies applying for a PPP loan that relied on EP for employee payroll needs at any point in time during 2019 or 2020 should contact EP at firstname.lastname@example.org to receive any applicable payroll documentation requested by their SBA-approved lenders.
Economic Injury Disaster Loan Program
The EIDLP is a longstanding loan program available to small business concerns (as determined by the SBA size standards) that suffer substantial economic injury caused by a disaster. As previewed above, the CARES Act expands the EIDLP by relaxing certain eligibility requirements under the program and increasing the funding available through December 31, 2020. In addition to small business concerns, any business with not more than 500 employees, sole proprietors and independent contractors may be eligible to obtain a loan under the EIDLP. An eligible business must have been in existence on January 31, 2020 and must certify that it has suffered substantial economic injury as a direct result of COVID-19. Title I of the Cares Act also waives the following requirements: (i) personal guarantees for loans of $200,000 or less, (ii) that the business be in operation for at least a year prior to the COVID-19 outbreak (as background, EIDLP loans generally require certification that the borrower be in business for at least one year prior to the applicable natural disaster), and (iii) that the business or its affiliates be unable to obtain credit elsewhere. Loans are available for up to $2,000,000, with an interest rate of 3.75% amortized over a loan term of up to 30 years with payments automatically deferred for the first year. The proceeds of a loan under the EIDLP can be used to replace working capital, pay ordinary expenses (e.g., fixed debts, payroll, accounts payable), and pay sick leave to employees unable to work due to COVID-19.
The CARES Act also introduced a new EIDLP benefit in the form of an emergency grant, which allows eligible borrowers to receive up to a $10,000 advance within 3 days of applying for a loan under the EIDLP. Whether or not an applicant is approved for a loan under the EIDLP, it does not have to repay the up-to-$10,000 advance.
The SBA has developed a streamlined online application portal where applicants can apply for both a loan and loan advance under the EIDLP.
Impacted businesses can apply for loans under both the PPP and the EIDLP, provided that the loan proceeds are not used for the same purpose. However, borrowers that initially obtain a loan under the EIDLP can subsequently refinance their EIDLP loan with a PPP loan, assuming they meet the aforementioned eligibility requirements. Any loan advance received under the EIDLP would be subtracted from amounts forgiven under the PPP.
If you are an EP client in the process of applying for a loan under the PPP, we are fully prepared to provide reports and/or letters certifying your wage payments and related expenses necessary to support your application. You can request this documentation by contacting EP at email@example.com.
For any questions about this alert, you may contact:
Ed Pak, Lead Technology and Privacy Counsel
Becky Harshberger, Vice-President, Payroll Tax
Joseph Scudiero, Senior Vice-President & Chief Labor Counsel