UPDATE: As of April 24, 2020, the federal government approved replenishment funding for the PPP by way of the Paycheck Protection Program and Health Care Enhancement Act. Learn more.

The recently passed Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, has earmarked nearly $350 billion in a relief program through the Small Business Administration (SBA) to help employers ensure coverage of their payrolls in the wake of the COVID-19 pandemic. This program, the Paycheck Protection Program (PPP), consists of loans that are subject to full forgiveness when certain criteria are met, and is open to practically all small businesses in the U.S., including independent contractors, nonprofits, sole proprietorships, and self-employed individuals affected by COVID-19. The government and lenders will also not impose fees on these loans. The U.S. Treasury is urging all small businesses interested in applying for the PPP to do so as soon as possible as the program only runs through June 30, 2020, and loan availability is on a first-come, first-served basis.

How do I know if my small business is an eligible borrower?

The Paycheck Protection Program is open to organizations with less than 500 employees on payroll. “Employee” can be defined as any status of worker, including full-time and part-time.

Accommodations and food services-related businesses are held to the same 500-employee threshold, but on an individual physical location basis. If your business receives financial assistance from an SBA-licensed Small Business Investment company or certain franchises, then the regular SBA affiliation rules do not apply.

What are the Paycheck Protection Program loan requirements?

Typical requirements for SBA loans are waived under the PPP, so businesses do not need to provide personal guarantees or collateral, or exhibit a lack of ability to obtain a portion or total of the loan amount from other sources. Borrowers must instead guarantee good faith in the following criteria:

  • Operational as a business on February 15, 2020, with paid employee salaries, payroll taxes, or paid independent contractors (Form 1099-MISC);
  • The loan is necessary for ongoing and continuing business operations in light of the current economic uncertainty;
  • Loan funds must be used to preserve workforce and maintain payroll, or to pay mortgage interest, rent, and/or utility payments for eight weeks (75% of loan proceeds are required to be used for payroll costs);
  • The business does not have, and will not receive, another loan under the PPP, and
  • The number of full-time equivalent employees on payroll and the dollar amounts of payroll costs, and covered mortgage interest, rental, and utility payments.

Independent contractors, self-employed individuals, and sole proprietorships are required to furnish additional documentation, such as Form 1099s, payroll tax filings, and payroll processor records. Sole proprietors must provide proof of income and expenses.

Initially, before the opening of the application process, certain banks voiced unease that the lack of guidance issued could potentially end in a substantial delay in dispensing loans. If you just applied, or are thinking about applying, then please note that lags in funding could occur due to the U.S. Treasury not releasing its interim final rules until the night before the PPP began accepting applications.

What are the loan amounts and terms under the PPP?

  • Eligible organizations can attain loans for 2.5 months of their average monthly payroll costs, plus the outstanding amount of an Economic Injury Disaster Loan (EIDL) issued between January 31, 2020, and April 3, 2020 (less the amount of any advance under an EIDL-COVID-19 loan, which does require repayment). New and seasonal businesses must use different applicable time periods for the calculation.
  • Paycheck Protection Program loans are subject to a $10 million limit, and payroll costs are limited to $100,000 annualized per employee—amounts over $100,000 will be excluded from the calculation. Independent contractors who can apply for a PPP loan on their own cannot be included for the borrower’s payroll purposes.
  • Cash tips, compensation, employee benefits (including leave), state and local taxes on compensation, and severance are all included in payroll costs. Payroll for independent contractors, self-employed individuals, and sole proprietors includes commissions, income, wages, and net earnings from self-employment.
  • Payroll and income taxes and compensation paid to workers who do not live in the U.S. are excluded from payroll. Qualified sick and/or family leave wages paid under the recent Families First Coronavirus Response Act are also not recognized as payroll.
  • PPP loans carry a low fixed interest rate of only 1% and will run for two years. Payments are all deferred for six months, with accrued interest. Borrowers are allowed to pre-pay without fees or penalties.

So, what about loan forgiveness?

And now for the part everyone is really curious about—the loan forgiveness provision! Businesses can qualify for loan forgiveness on amounts used for payroll costs, mortgage interest, and rent and utility payments for eight weeks after receiving the loan. The final guidance issued specifies that no more than 25% of the loan earnings can be used for these costs and benefit from forgiveness.

Borrowers must also sustain their staff and payroll to meet the requirements for total forgiveness. Loan forgiveness is reduced if salaries and wages are decreased by more than 25% for any employee making less than $100,000 annually in 2019. Businesses will have until June 30, 2020, to reestablish full-time employment status and salaries from reductions made between February 15, 2020, and April 26, 2020.

When requesting forgiveness from lenders, organizations must include documentation verifying the number of full-time equivalent employees and pay rates, in addition to the payments on any eligible mortgage, lease, and utility obligations. Lenders are required to make final forgiveness decisions within 60 days of receiving a request.

Time is of the essence.

The application start date for eligible small businesses and sole proprietors began April 3, 2020, and independent contractors and self-employed persons can start their application process on April 10, 2020. The process may be expedited if a business seeks a loan from a financial institution in which they already have an existing relationship or line of credit.

We understand that navigating all of the rules and variances in this legislation can be daunting and confusing. Your CRI professionals stand ready to support you through this uncertain time. Please reach out to your advisor if you have questions or are ready to begin the application process.