What is the Paycheck Protection Program?
The Coronavirus Aid, Relief, and Economic Security Act (CARES or The Act) has many provisions intended to buoy the economy during this difficult time. Part of the Act is the Paycheck Protection Program (the “PPP”) — a roughly $350-billion fund designed to help out small businesses by providing eight weeks of cash-flow assistance through a 100 percent federally guaranteed loan that is in some ways the best loan ever commercially offered to businesses. Small businesses and other eligible entities (including non-profits) will be able to apply if they were harmed by the COVID-19 pandemic between February 15, 2020 and June 30, 2020. This program has retroactive effects to February 15, 2020, in order to help bring workers who may have already been laid off back onto companies’ payrolls. This guidance is made April 4, 2020 and is based upon a preliminary review of the Act as we are awaiting further clarification and guidance from the IRS and the SBA. What we know so far:
What Are The Key Points of the PPP?
- There is no security nor collateral requirement
- There are no fees, points or other costs to apply
- Business owners are not required to execute a personal guaranty for the loan
- It is a non-recourse loan (if the loan proceeds are used for approved purposes)
- It’s intended to help retain workers, meet your payroll obligations, and cover expenses like rent and utilities
- Interest is capped at 1% (although the Act clearly sets a maximum interest amount of 4%. See Section 1102(a)(2) (L) which provides “INTEREST RATE REQUIREMENTS.—A covered loan shall bear an interest rate not to exceed 4 percent.”)
- The loan is designed to cover these expenses for eight weeks after the loan is funded
- Under some circumstances, the loan may be forgivable (meaning it will never have to be paid back) and become essentially a grant of tax free money
Can I Apply For A PPP Loan and A SBA Disaster Loan?
Yes, you can. However, you can’t apply for an SBA disaster loan for the same purpose as the Paycheck Protection Program. The SBA disaster assistance loan also permits you to request a $10,000 emergency grant, interest-free as part of that process. If approved, the SBA will provide the grant within three days. If you are interested in applying for a disaster assistance loan you can do so with the SBA directly.
Who Qualifies for the PPP?
In addition to S and C corporations, LLCs and partnerships, all small businesses, including sole proprietorships and independent contractors can qualify for a PPP loan. As can be expected, the documentation requirements for each of those different types of businesses will differ depending on how each is organized and operated. Generally, as part of your application you should be prepared to provide to the bank copies of the typical tax forms including 1099s, W2s and K1s for the past year, as well as personal and corporate tax returns, and employment tax returns (such as IRS forms 940 and 941) and if you use a payroll service such as Paychex or ADP, you should be prepared to provide payroll reports that those services typically provide to business owners.
How Much Can I Borrow?
The maximum amount you can borrow is calculated bases upon your average monthly payroll cost for the past year which includes expenses like salaries and wages, health insurance premiums, retirement benefits, and state and local taxes on wages. According to the recently published guidelines from the Department of Treasury, you may not include any sums you have paid to independent contractors (e.g. those workers whose pay you report on a 1099). That average payroll cost is then multiplied by 2.5 to get the maximum loan amount with a cap of $10 million.
If your business did not exist before June 30, 2019, then you may use these types of costs incurred in January and February 2020 to calculate the maximum loan amount for which you may apply.
What Will I Need To Show In Order To Apply?
During the loan application process, you’ll be asked to verify, among other things, the following as part of your application:
- That the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient;
- That funds will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments;
- That the business does not have a SBA loan pending for the same purpose and duplicative of amounts applied for or received under a covered loan;
- During the period beginning on February 15, 2020 and ending on December 31, 2020, the business has not received amounts under the Paycheck Protection Program for the same purpose or duplicative amounts applied for or received under a covered loan.
How Do I Have This Loan Forgiven?
If approached correctly, the entire loan amount may be forgiven which essentially makes the loan a grant of tax-free money. As part of the application process, you must agree that the funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments. Importantly, if you use the loan for other purposes the loan not be eligible for forgiveness. You should be prepared to apply for loan forgiveness after you have used the loan proceeds for approved purposes during the 8 week period following the loan. Once that application for forgiveness is made, the lender will have 60 days to make a determination.
In order to have the loan forgiven, the loan funds must be used for:
- Payroll costs including salaries, wages and commissions
- Group health care benefits/insurance premiums
- Mortgage interest payments if your company owns its building
- Rent and lease payments for your office space
- Utilities payments
- Interest on any other debt obligations that were incurred before February 15, 2020
What Are The Limitations On Forgiveness?
The maximum forgiveness amount will be reduced if you reduce the number of Full-Time Equivalents (FTEs) and/or reduce wage or salary compensation, as follows:
- Number of Employees — The purpose of the PPP is to retain employees. So, it makes sense that the amount to be forgiven will be reduced proportionally by the number of employees that have been let go. The program will measure any decrease in FTEs during the eight-week period following the loan as measured against your monthly average FTEs from EITHER: (1) February 15, 2019 – June 30, 2019; or (2) January 1, 2020 – February 29, 2020. The Act permits you to choose either one of those time period when calculating the number of FTEs.
- Salary and Wages — The maximum forgiveness amount will also be reduced dollar-for-dollar for any wage reduction of more than 25% of any an employee. This change will be measured against that employee’s wages during the most recent full quarter prior to loan origination. However, employees paid more than $100,000 in 2019 are not subject to the 25% limitation on salary decreases described above.
- Rehires and Salary Increases — You may be able to avoid either of the above reductions, if you subsequently increase either the number of employees and/or the relevant wages.
What Documentation Will I Need To Support Forgiveness?
You will need to provide to your bank documentation verifying the number of employees and what they were paid during the 8-week period after your loan funds. As always, you should keep detailed employment and pay records and be prepared to provide those to the bank, including documents, payroll reports, and tax filings showing the number of employees and what they were paid. You should also have copies of leases, utility bills, and loan documents (if you used the loan proceeds for any of those purposes). Finally, the business owner (or officer if a corporation or LLC) will be required to certify under oath that the loan was used to retain employees, applied to rent, utility payments and/or for interest payments on pre-existing debt.
Other Important Things To Keep In Mind
The maximum amount of forgiveness will be capped at the total loan principal amount. In other words, any unpaid interest on the loan will not be included in the forgiveness calculation. The SBA is currently reporting that they may require that 75% of the loan proceeds be used for payroll expenses in order to have the loan forgiven. We can expect the SBA to craft rules that further restrict or place requirements on this program, including future changes to how much of the loan must be applied to payroll costs and/or employee retention. For more details, you can download a copy of the Department of Treasury’s Interim Final Rule on the program that it promulgated on April 2, 2020 here.
Where Do I Apply For The Loan?
The SBA itself doesn’t lend you the money, they just guarantee the loan that the lender provides. You can apply for a Paycheck Protection Program loan through any SBA-approved lender. If you need to find a participating lender, you can use the Lender Match tool to find a one.