The Paycheck Protection Program (PPP) is part of “The Coronavirus Aid, Relief, and Economic Security Act” (CARES Act) that was recently passed. The PPP provides short-term cash flow assistance to small businesses to support their employees during this time of economic distress. The PPP loans are provided by the SBA through their certified lenders guaranteed by the federal government. SBA will be guaranteeing these loans 100%, but due to sheer volume of need at this time, they are allowing banks to write the loans.
We can counsel our clients on two main issues regarding PPP loans:
- If you qualify, calculating the maximum borrowing amount
- If you qualify for forgiveness of the loans, calculating the forgiveness
PPP loans must be made for the period prior to June 30, 2020.
PPP Eligible Businesses Include:
- Businesses with less than 500 employees (full-time or part-time), operations as of February 15, 2020, and was substantially impacted by COVID-19
- A business that otherwise meets the SBA’s size standard
- A 501(c)(3) with fewer than 500 employees (full-time or part-time)
- Sole Proprietors and independent contractors
- A self-employed individual who regularly carries on any trade or business
- A Tribal business concern that meets the SBA size standard
- A 501(c)(19) Veterans Organization that meets the SBA size standard
- Churches and faith-based organizations
Businesses not eligible include:
- Cannabis companies
- Land developers
- Any business involved in an illegal or prurient activity are not eligible per federal law
Affiliation rules of limiting to one entity are waived for this loan in certain industries.
- If you are in the accommodation and food services sector (NAICS 72), the 500-employee rule is applied on a per physical location basis
- If you are operating as a franchise or receive financial assistance from an approved Small Business Investment Company the normal affiliation rules do not apply
PPP Loan Funding
- Loan amounts can be as large as 250% of the business’s average monthly payroll cost over the last 12 months not to exceed $10M
- As well as salaries over $100,000 (annualized for each employee) not counted in this payroll calculation
Use of PPP Loans
The funds received under the PPP loan requirements must be for the following expenses:
- Payroll (salaries, wages, vacation, parental, family, medical, or sick leave, severance, retirement benefits, and state or local taxes)
- PPP funds cannot be used to pay salaries over $100,000
- Costs for related group health care benefits
- Employee commissions and tips
- Interest on mortgage payments (not applicable for principle portion of payments) and on additional debt incurred prior to obtaining the loan
- Rent and utilities
An eligible recipient applying for a covered loan shall make a good faith certification:
- that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient;
- acknowledging that funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments;
- that the eligible recipient does not have an application pending for a loan under this subsection for the same purpose and duplicative of amounts applied for or received under a covered loan; and
- during the period beginning on February 15, 2020 and ending on December 31, 2020, that the eligible recipient has not received amounts under this subsection for the same purpose and duplicative of amounts applied for or received under a covered loan.
The goal of PPP loans is to not reduce workforce and improve economic stability in the midst of the Coronavirus pandemic. Therefore, businesses who are continuing to retain and pay their staff during the pandemic will be eligible for certain levels of loan forgiveness.
It’s also important to note that those who qualify for PPP loan forgiveness will not be forced to report those amounts as income. However, the amount of loan forgiveness cannot exceed the principal amount of the loan
Businesses who may be eligible for payment forgiveness include:
- Businesses who used the PPP loan for payroll costs as described above. Mortgage interest, rent, and utilities as described above must have been in effect as of February 15, 2020. All must be paid during the first 8 weeks from the origination date of the loan.
- Businesses who keep their employees and pay at least 75% of their prior year compensation
The amount of forgiveness will be reduced by the comparison of current year and prior year Full-Time Equivalent (FTEs). Businesses must submit applicable supporting documentation to request the available loan forgiveness
Reductions in employment or wages that occur during the period beginning on February 15, 2020 and ending 30 days after enactment of the CARES Act, (as compared to February 15, 2020) shall not reduce the amount of loan forgiveness IF by June 30, 2020 the borrower eliminates the reduction in employees or reduction in wages.
Due to likely high subscription, at least 75% of the forgiven amount must have been used for payroll.
Payments on PPP loans can be deferred for 6 months up to one year.
PPP Loan Terms
- No collateral or personal guarantee
- Per SBA’s website on April 1, 2020, maturity of 2 years and an interest rate of .5%
How We Can Help
This is a trying and unprecedented time for business owners. Our team is utilizing our nationwide resources to update our clients and friends as these programs are interpreted and regulations are written. The COVID-19 pandemic and the regulatory news surrounding it are constantly evolving. We are closely monitoring these situations and will share timely and important news with you as it is released.
Please reach out to your dedicated Scheffel Boyle team member at any time for assistance. We are always here to help.