The CARES ACT: What you need to know about the Paycheck Protection Program

By Taylor W. Beckham

The Paycheck Protection Program (PPP) is one of the federal government’s responses to the impact the novel coronavirus (COVID-19) has had on the national and global economy. With small businesses bearing the brunt of the economic impact, the federal government, as a part of its $2 trillion-dollar stimulus, has earmarked $349 billion to fund the PPP to help qualifying small businesses stay afloat during the COVID-19 crisis. This is an ever-developing topic so we will be providing updates as they become available.

Starting Friday, April 3, participating SBA lenders, banks and credit unions began accepting loan applications, with some providing same day approval. Independent contractors are able to apply beginning April 10. PPP loans will be offered through June 30, 2020, although there is some expectation that in view of demand, this deadline may be extended. For instance, as of the morning of April 6, about 10% of the $349 billion was already committed.  

Although SBA lenders, banks, and credit unions are actively processing applications, the SBA is permitted to expand lending authority to include FDIC insured depository institutions once that institution files a notice with the SBA.

The PPP program provides for special allowances for entrepreneurs, and women and minority owned businesses. Local Small Business Development Centers (SBDCs), Women’s Business Centers, or SCORE mentorship chapters will receive additional funds to expand their reach and support for small businesses affected by COVID-19. Minority Business Development Centers (MBDCs) will also receive funding to hire staff and provide programming to help clients respond to COVID-19. Listed below is a link to find the nearest MBDC near you.

Who qualifies for PPP loans?

For-profit businesses with a place of business in the United States and fewer than 500 workers (including sole proprietorships, independent contractors, and self-employed workers) are eligible to receive funding through the PPP.  Larger hotels and restaurant chains may be eligible for relief as long as each location has fewer than 500 employees. Additionally, businesses that meet certain SBA size standards may qualify even if they have more than 500 employees. See below for SBA size standards. Private non-profit organizations (501(c)(3)) and 501(c)(19) veterans’ organizations are also eligible.

The SBA is waiving affiliation rules for businesses that operate as a franchise that have (i) an assigned franchise identifier code, and (ii) funding through a Small Business Investment Company. Please see the below link for further information on the affiliation rules set by the SBA to determine whether a business’ affiliations affect its consideration as a “small” business.

What type of relief is provided?

The PPP loans are for up to $10M or 2.5 times the average monthly payroll costs. Payroll costs are considered to include: (1) salaries, wages, commissions or tips up to $100,000 per employee; (2) payment of state and local taxes assessed on compensation; (3) employee benefits including vacation, parental, family, medical, or sick leave costs; (4) allowance for separation or dismissal; (5) payments required for the provision of group health care benefits including insurance premiums; and (6) payment of retirement benefits.

Sole proprietors or independent contractors are also eligible for wages, commissions, income, and net earnings from self-employment up to $100,000.

The loan term is 24 months with 1% interest; however, loan payments and interest are deferred for six months, followed by 18 months of payments of principal and interest.

There are no personal guarantees, collateral requirements, or fees required from the borrower. Additionally, there are no prepayment penalties and no requirement that businesses show they cannot obtain credit elsewhere.

Will the loans be forgiven?

The borrower must apply for loan forgiveness, but it is available. The application for loan forgiveness should include documentation verifying the number of full-time employees and their pay rates as well as payments on eligible mortgage, lease, and utility payments.

PPP loans will be forgiven if the loan is used to keep employees on the payroll for the eight week “covered period,” at least the 75% of the loaned money is used for payroll costs (listed above), and other loan proceeds are used for either rent, mortgage interest, or utilities payments. Portions of the loans can be forgiven without resulting in taxable cancellation of indebtedness income.

The amount of loan forgiveness will be reduced if there has been a reduction in the number of full-time employees (FTEs)  or a reduction in the amount of pay received by FTEs. If a business reduces the number of FTEs, then the loan forgiveness reduction amount will be determined by multiplying the amount of loan proceeds sought to be forgiven by a fraction. The numerator is the average number of FTEs during the covered period and the denominator is either (i) the average number of the borrower’s FTE’s between 2/15/2019 and 6/20/2019 or (ii) the average number of the borrower’s FTEs between 1/1/2020 and 2/29/2020.

Reductions in full time employment or salary that occur between February 15, 2020, and April 26, 2020 can be disregarded for purposes of reduction of loan forgiveness if, by June 30, 2020, the borrower rehires the laid off employees (or hires other equivalent FTEs) or restores the salary or wage levels.

If the amount of pay received by FTEs is reduced by greater than 25% due to COVID-19, the amount of loan forgiveness is reduced by the amount in excess of the 25%. This calculation is multiplied by the number of employees with a reduced salary. A salary reduction combined with an employee reduction results in a reduction of loan forgiveness for the borrower and may be compounded if there is both an employee and salary reduction.  

How do I apply?

SBA lenders, banks and credit unions are actively processing applications. Applicants are advised to approach a lender with which they have an existing relationship.  Businesses applying for PPP loans must certify that the current economic uncertainty makes the loan necessary to support its operations and that it will use the funds loaned for allowable purposes.

Have ready to include with your application:

  • Four IRS quarterly pay roll tax reports (i.e. 2019 IRS Quarterly 940, 941, or 944 payroll reports)
  • Last 12 months of payroll reports and documentation of health insurance premiums and retirement plan funding
  • Provide ownership information including tax identification number and ownership breakdown
  • 1099s for 2019 independent contractors that would otherwise be an employee
  • Documentation of the sum of all retirement plan funding paid by the Company Owner

Resources

Taylor W. Beckham is an associate attorney at Gorman & Williams. Her practice consists principally of advice to businesses, civil commercial and tort ligation in federal and state courts, and matters related to intellectual property. She can be reached for questions at tbeckham@gw-law.com.

Image Source: Congressman Brian Mast, House.gov