April 2, 2020

With many businesses struggling during the COVID-19 pandemic, we wanted to highlight one of the major components of the CARES Act recently passed by the federal government. Namely, the Paycheck Protection Program.

Found in Title I, Keeping American Workers Paid & Employed Act. It is essentially a revenue replacement program for businesses facilitated through forgivable loans. This program, administered by the Small Business Administration (SBA) under its 7(a) lending program, is open until June 30, 2020. You can read more on the SBA website.

The Goals of The Paycheck Protection Program

  1. Help small businesses pay for their near-term operating expenses during the worst of the crises.
  2. Provide an incentive for employers to keep their employees on the payroll.

The PPP allows small businesses, nonprofits, Tribal businesses, veteran’s organizations with 500 employees or less, sole proprietors, self-employed individuals, or independent contractors in business on February 15, 2020, to take loans for up to $10 million. They can then use these to defer the costs of keeping employees, adding employees, and paying certain other expenses.

Congress earmarked $350 billion for the PPP. The loans under the PPP are federally insured. SBA-preferred lenders begin taking applications beginning April 3, 2020. Funds are dispersed within a three-week period. Importantly, businesses may qualify to get up to 100% of the loan forgiven. Subject to certain qualifications, requirements, and limitations which we address below.

A. Covered Expenses
  • Salary or wages and payments of cash tips
    • For a sole proprietor or independent contractor, this means:
      • Wages
      • Commissions
      • Income
      • Net earnings from self-employment capped at $100,000 on an annualized basis for each employee
  • Health benefits
  • Retirement benefits
  • State and local taxes
  • Vacation, family, medical, and sick leave
  • Rent, under lease agreements in force before February 15, 2020
  • Utilities, for which service began before February 15, 2020
  • Mortgage interest obligations, incurred before February 15, 2020
  • Interest on other debt obligations incurred previous to February 15, 2020
B. Stipulations to the PPP
  • Eligible payroll costs cannot include annual compensation in excess of $100,000 for an individual employee.
  • The Loan amount may only be the lesser of the total average monthly payroll costs for the preceding 12 months (March 2019 – February 2020) multiplied by 2.5, or $10 million (the maximum loan amount).
  • Most businesses may borrow up to roughly 10 weeks’ worth of payroll expenses.
  • You need to certify that the loan supports ongoing operations, retains workers, maintains payroll, makes mortgage, lease, and utility payments.
C. Loan & Repayment Terms
  • No collateral or personal guarantee required
  • Payment Deferral for not less than six months nor more than one year
  • Borrower and Lender Fees waived
  • Prepayment Fees waived
  • Maximum of 10-year maturity after application for loan forgiveness with SBA indicating a two-year maturity
  • The interest rate not to exceed 4% during the covered period with the SBA announcing the program’s 0.5% fixed interest rate.
  • 100% federally guaranteed through December 31, 2020
  • SBA requirement waived for a business unable to obtain credit elsewhere
D. Forgiveness of PPP Loans

To have the PPP loan forgiven, you must follow certain rules:

  • Eligibility for loan forgiveness will be for an eight week period following the loans origination date in an amount equivalent to the sum spent on the following covered expenses during that eight (8) week period:[1]
    • Payroll costs
    • Compensation above $100,000 for any individual employee excluded
    • Interest on mortgage obligations
    • Rent obligations
    • Utility payments
  • The amount forgiven cannot exceed the amount borrowed
  • The loan forgiveness will be reduced under the following circumstances:
    • If the average number of employees reduces during the covered period when compared to the same period in 2019.

Note that because many businesses already laid off or furlough employees, there is a clause that allows those businesses to still qualify for loan forgiveness if they re-hire workers who they laid off between February 15, 2020, and April 26, 2020, due to COVID-19 by June 30, 2020.

You will not be penalized for having a smaller workforce at the beginning of the period assuming you rehire laid-off workers. For example, if a business lays off 25 employees on March 31, 2020. Then, rehires them all before June 30, 2020, those 25 employees are deemed to have been employed for purposes of calculating the average number of full-time employees during the eight-week period. [1]

The formula follows:

Amount of forgivable payroll and other costs described above, multiplied by the quotient of (A) the average number of full-time employees (FTEs) per month employed during the eight-week period beginning on the date of the origination of the loan by (B) at the election the borrower.

(1) The average number of FTEs per month employed during the period beginning on February 15, 2019, and ending June 30, 2019. (2) The average number of FTEs employed during the period beginning January 1, 2020, and ending Feb. 29, 2020.

The loan forgiveness proportionally reduced by the amount of any reduction in total employee pay during the covered period in excess of 25% of the total payment as of the last quarter.

For any employee who made less than $100,000 annualized in 2019:

  • It is anticipated by the SBA that not more than 25% of the forgiven amount may be for non-payroll costs due to the likely high subscription.
  • To apply for loan forgiveness, you must submit payroll documentation and documentation of expenses during the covered period to your lender and you will receive a decision within 60 days.

You must certify that:

  • The Loan is necessary because of the economic uncertainty caused by COVID-19.
  • It will be applied to maintain payroll and make required payments.
  • You are not receiving this assistance and duplicative funds for the same uses from another SBA program.

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