Under the recently-passed Coronavirus Aid, Relief and Economic Security Act (CARES Act), the Small Business Administration (SBA) received close to $350 billion in assistance that will be dedicated to establishing a new lending program. The program, known as the Paycheck Protection Program (PPP), is designed to give some relief to small business owners who are struggling to meet their payrolls during the COVID-19 crisis. Through the PPP, small business employers can take advantage of loans to help them meet their payroll obligations. Provided certain criteria are met, the loans are subject to 100% forgiveness and both lenders and the government are not permitted to impose fees associated with these loans.
Regardless of whether you are a sole proprietor, a self-employed individual, an independent contractor, a nonprofit, or any other type of small business operating in the U.S. and affected by COVID-19, you are eligible to apply for the Paycheck Protection Program. Though applications can be made through June 30, 2020, loans are granted on a “first-come, first-served” basis so the U.S. Treasury Department recommends that you apply as early as possible to secure your PPP loan.
Qualifying as an Eligible Borrower
The PPP generally is available to small organizations with fewer than 500 employees. The term “employees” includes full-time, part-time and any other status workers.
For businesses in the accommodation and food services sector, the 500-employee threshold is applied on a per physical location basis. The SBA’s normal affiliation rules also don’t apply to companies that receive financial assistance from an SBA-licensed Small Business Investment Company or certain franchises.
Normal Loan Requirements, Waived
The SBA is waiving its usual requirements for PPP loans. Businesses need not provide personal guarantees or collateral — or demonstrate the inability to obtain some or all of the loan funds from other sources (also known as the Credit Elsewhere requirement).
Instead, borrowers must certify in good faith all of the following:
- They were operating on February 15, 2020, and had employees for whom they paid salaries and payroll taxes;
- Current economic uncertainty makes the loan necessary to continue ongoing operations;
- The funds will be used to retain workers and maintain payroll, or to make mortgage interest, rent and utility payments for eight weeks (75% of loan proceeds must be used for payroll costs);
- They don’t have, and won’t receive, another loan under the PPP; and
- The number of full-time equivalent employees on payroll and the dollar amounts of payroll costs, covered mortgage interest payments and covered rent payments and utilities.
Independent contractors, sole proprietors and self-employed individuals must provide additional documentation, such as payroll processor records, payroll tax filings, Form 1099s and, for sole proprietors, income and expenses.
Amounts and Terms of PPP Loans
Eligible businesses can obtain loans for 2 1/2 months of their average monthly payroll costs subject to a $10 million cap. Payroll costs are limited to $100,000 annualized for each employee. Amounts above that must be excluded from the calculation.
Payroll costs include compensation, cash tips, severance, employee benefits (including leave), and state and local taxes on compensation. For sole proprietors, independent contractors and self-employed individuals, payroll includes wages, commissions, income and net earnings from self-employment.
Payroll excludes compensation paid to employees who don’t live in the United States. It also doesn’t include qualified sick or family leave wages paid under the recent Families First Coronavirus Response Act.
The PPP loans carry a fixed interest rate of only 1% and will run for two years. All payments are deferred for six months, but interest will continue to accrue. Borrowers can pre-pay without penalties or fees.
Conditions of Loan Forgiveness
Businesses can qualify for loan forgiveness for amounts used for payroll costs, mortgage interest, and rent and utility payments over the eight weeks after receiving the loan. The final regulations indicate that no more than 25% of the loan proceeds can be used for non-payroll costs to qualify for forgiveness.
Borrowers also must maintain staff and payroll to qualify for full forgiveness. Loan forgiveness will be reduced if salaries and wages are reduced by more than 25% for any employee who made less than $100,000 annualized in 2019. Businesses will have until June 30, 2020, to restore full-time employment and salary levels from reductions made between February 15, 2020, and April 26, 2020.
The SBA’s Paycheck Protection Program application process for eligible small businesses and sole proprietors was opened on April 3, 2020. Independent contractors and those who are self-employed can begin to apply on April 10, 2020. Businesses may be able to expedite the process by seeking loans from financial institutions with which they already have existing lending relationships, though early application is strongly advised.
Businesses can submit a request for forgiveness to their lenders. Requests must include documents verifying the number of full-time equivalent employees and pay rates, as well as the payments on eligible mortgage, lease and utility obligations. Lenders must make forgiveness decisions within 60 days. Borrowers can access the SBA’s PPP Loan Forgiveness Application here.
For answers to commonly asked questions, you can access the Department of the Treasury’s Paycheck Protection Program Loans Frequently Asked Questions document, here.
If you have additional questions about the Paycheck Protection Program for small businesses or your eligibility, please contact your Untracht Early advisor.