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CARES Act - Paycheck Protection Program - April 1, 2020

The Paycheck Protection Program is part of the recent Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and allows small businesses with 500 or fewer employees to apply for federally backed loans to pay for payroll costs, as well as certain costs associated with mortgage interest, rent, and utility payments.


Who is eligible

  • Any business concern, non-profit organization, veterans’ organization, or Tribal business concern employing 500 or fewer employees (or an alternative number set by the SBA Administrator for the entity’s given industry)
  • Individuals who operate sole proprietorships
  • Independent contractors
  • Eligible self-employed individuals

Payroll costs

The program defines what is considered a payroll cost and what is not:

Included as Payroll Costs:

Not Included as Payroll Costs:

  • salary, wages, commissions, or similar compensation
  • payment of cash tips or equivalent
  • payments for vacation, parental, family, medical, or sick leave
  • dismissal/separation allowances
  • health care benefits, including insurance premiums
  • retirement benefits
  • state or local tax assessed on compensation
  • compensation to or income of a sole proprietor or independent contractor for a wage, commission, income, net earnings from self-employment, or similar compensation not more than $100,000 in one year (must prorate for covered period)
  • compensation of an individual employee in excess of $100,000 for an annual salary (must prorate for covered period)
  • taxes imposed or withheld under chapters 21, 22, or 24 of the IRC
  • compensation to an employee whose principal place of residence is outside the U.S.
  • qualified sick leave or qualified family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act


Loan amounts

The amount available for the loan is capped at $10 million but is otherwise equal to 2.5 times the recipient’s average monthly payroll costs. 


To calculate average total monthly payroll costs, most employers will use the monthly average from the one-year period immediately preceding the loan origination date. However, seasonal employers will either use the monthly average from the 12-week period beginning on February 15, 2019, or if they so elect, the monthly average from March 1, 2019 to June 1, 2019. Businesses that were not in operation from February 15, 2019 to June 30, 2019, should instead use the monthly average from January 1, 2020 to February 29, 2020. 


In addition to the average monthly payroll cost calculation, previous recipients of an SBA Disaster Loan originated after January 31, 2020 may also be able to use any remain portion of the $10 million cap on this loan to refinance the outstanding portion of the SBA Disaster Loan and make it part of this loan.


To apply for the loan, businesses must certify in good faith:

  • the loan is necessary to support ongoing operations
  • the funds will be used to retain workers, maintain payroll, and/or make covered mortgage, lease and utility payments
  • there is no duplicate application pending
  • no loan has previously been received under this provision.

Loan forgiveness

Payments of principal, interest, and fees on the loan should be deferred for at least six months, and loan funds qualify for a certain level of loan forgiveness.


The initial loan principal eligible for forgiveness is equal to the payments made for:

  • payroll costs, as defined in the chart above
  • interest paid on covered mortgage obligations incurred before February 15, 2020
  • rent obligations under a leasing agreement in force before February 15, 2020
  • utility payments for electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020

However, the amount of loan forgiveness will be reduced if there is a reduction in number of employees or in salaries during the covered period of the loan, the 8 weeks following loan origination.


1. Reduction in number of employees

The average number of full-time equivalent employees (FTEEs) per month, based on the number of FTEEs each pay period, during the covered period of the loan is divided by the average number of FTEEs per month in one of two periods (either February 15 - June 30, 2019 or January 1 - February 29, 2020. Seasonal employers must use the period of February 15 - June 30, 2019). That number is then multiplied by the original amount eligible for forgiveness.


For example, if you paid $200,000 in payroll costs during the covered period for 4 employees but you had an average of 10 employees during the prior period, your calculation would be (4/10) x $200,000 = $80,000 in forgiveness.


2. Reductions in salary

Loan forgiveness amount will be reduced by an amount equal to any reduction in total salary or wages for any employee that is in excess of 25% of the total salary or wages the employee received during the most recent full quarter of employment prior to the covered loan period. Note, this does not apply to reductions in salary for any employees who make more than $100,000 annually.


For example, if an employee previously earned total salary or wages in the amount of $30,000, a 25% reduction is equal to $7,500. If the employee’s total salary or wages is reduced by $7,501 or more, the amount of the reduction will be subtracted from the amount eligible for forgiveness.


Businesses should also note that there is an exception to the reductions in certain circumstances. A reduction in the number of FTEEs or in the amount of wages paid to an employee that occurs between February 15, 2020 and the 30 day period following enactment of the CARES Act, will not result in either of the above loan forgiveness reductions if the reduction is eliminated no later than June 30, 2020.


In order to obtain forgiveness, you will be required to apply for loan forgiveness to the loan servicer. The application must include the following information:

  1. Documentation verifying your number of FTEEs on the payroll and their pay rates during the relevant time periods mentioned above
  2. Documentation regarding any other expenses for which you are claiming forgiveness (covered mortgage, lease, and utility payments)
  3. A certification from a representative of your company indicating that the documents are true and accurate and that the requested forgiveness amount was used to retain employees and/or make covered payments for mortgage, lease, and utility obligations
  4. Any other documentation the Administrator determines is necessary

The SBA has a streamlined online application process


Davis Brown is available to assist with employer calculation estimates.



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