Last updated on April 9, 2020 at 11:03 AM
In our previous article "CARES Stimulus 7(a) Loans- A Portion of These Loans Will Be Forgiven", we outlined some of the specific criteria that were in the "CARES" Act. Listed below are the specific parameters that have now been set by the SBA.
The Paycheck Protection Program ("PPP") authorizes up to $349 billion in forgivable loans to
small businesses to pay their employees during the COVID-19 crisis. All loan terms will be the
same for everyone.
The loan amounts will be forgiven as long as:
- The loan proceeds are used to cover payroll costs, and most mortgage interest, rent, and
utility costs over the 8 week period after the loan is made; and - Employee and compensation levels are maintained.
Payroll costs are capped at $100,000 on an annualized basis for each employee. Due to likely
high subscription, it is anticipated that not more than 25% of the forgiven amount may be for
non-payroll costs.
Loan payments will be deferred for 6 months.
Lenders may use their own promissory note or an SBA form of the promissory note.
When can I apply?
- Starting April 3, 2020, small businesses and sole proprietorships can apply for and
receive loans to cover their payroll and other certain expenses through existing SBA
lenders. - Starting April 10, 2020, independent contractors and self-employed individuals can
apply for and receive loans to cover their payroll and other certain expenses through
existing SBA lenders. - Other regulated lenders will be available to make these loans as soon as they are
approved and enrolled in the program.
Where can I apply?
You can apply through any existing SBA lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. Other regulated lenders will be available to make these loans once they are approved and enrolled in the program. You should consult with your local lender as to whether it is participating. Visit www.sba.gov for a list of SBA lenders.
Who can apply?
All businesses including nonprofits, veterans organizations, Tribal business
concerns, sole proprietorships, self-employed individuals, and independent contractors with
500 or fewer employees can apply. Businesses in certain industries can have more than 500
employees if they meet applicable SBA employee-based size standards for those industries.
Businesses must have been operational on February 15, 2020 and paid either salaries and related payroll taxes for employees or paid independent contractors, as reported on Forms 1099-MISC.If a seasonal business, for which volume was minimal on February 15, the lender may consider whether a seasonal borrower was in operation on February 15th or for an 8-week period between February 15th and June 30th
For this program, the SBA's affiliation standards are waived for small businesses (1) in the hotel
and food services industries; or (2) that are franchises in the SBA's Franchise Directory; or (3) that receive financial assistance from small business investment companies licensed by the SBA. Additional guidance may be released as appropriate.
It is the borrower’s responsibility to determine which entities, if any, are its affiliates and determine employee headcount.
Could I be Ineligible Even If I Meet the Eligibility Criteria Above?
Yes. If you are (1) engaged in any illegal activity under federal, state or local law, (2) household employers, (3) an owner of 20 percent or more of the equity of the applicant is incarcerated, on probation, on parole, presently subject to indictment, criminal information, arraignment, or the means by which formal criminal charges are bought in any jurisdiction, or have been convicted of a felony within the last five years and (4) you, or any business owned or controlled by you or any of your owners, has ever obtained a direct or guaranteed loan from SBA or any other Federal agency that is currently delinquent of has defaulted within the last seven years and caused a loss to the government.
What do I need to apply?
You will need to complete the Paycheck Protection Program loan application and submit the application with the required documentation to an approved lender that is available to process your application by June 30, 2020.
What other documents will I need to include in my application?
You will need to provide your lender with payroll documentation.
Keep in mind, the lenders will only be preforming a good faith review of documentation and related calculations, it is the borrower’s responsibility to attest to the accuracy of the payroll calculations.
Do I need to first look for other funds before applying to this program?
No. We are waiving the usual SBA requirement that you try to obtain some or all of the loan funds from other sources (i.e., we are waiving the Credit Elsewhere requirement).
How long will this program last?
Although the program is open until June 30, 2020, we encourage you to apply as quickly as you can because there is a funding cap and lenders need time to process your loan.
How many loans can I take out under this program?
Only one.
What can I use these loans for?
You should use the proceeds from these loans on your:
- Payroll costs, including benefits;
- Interest on mortgage obligations, incurred before February 15, 2020;
- Rent, under lease agreements in force before February 15, 2020; and
- Utilities, for which service began before February 15, 2020.
What counts as payroll costs?
Payroll costs include:
- Salary, wages, commissions, or tips (capped at $100,000 on an annualized basis for each
employee, calculated on a gross basis); - Employee benefits including costs for vacation, parental, family, medical, or sick leave;allowance for separation or dismissal; payments required for the provisions of group
health care benefits including insurance premiums; and payment of any retirement
benefits; - State and local taxes assessed on compensation; and
- For a sole proprietor or independent contractor: wages, commissions, income, or net
earnings from self-employment, capped at $100,000 on an annualized basis for each
employee.
For borrowers that use PEO’s, payroll documentation which shows wages and payroll taxes reported to the IRS by the PEO for the borrower’s employees is considered acceptable PPP loan payroll documentation.
The $100,000 cap per employee applies to only cash compensation, it does not incorporate non-cash benefits such as;
- Employer contributions to defined benefit or defined contribution retirement plans,
- Payment for the provision of employee benefits consisting of group health care coverage, including premiums and
- Payment of state and local taxes assessed on compensation of employees
Payroll costs DO NOT include:
- Compensation of an employee outside the United States
- Compensation of an individual employee in excess of an annual salary of $100,000, prorated as necessary. Those employees in excess of $100,000 would be included in the monthly average at $100,000
- Qualified sick and family leave wages for which a credit is allowed under Section 7001 and 7003 of the Families First Coronavirus Reponses Act
How are Federal taxes accounted for in payroll costs?
Payroll costs are not reduced by taxes imposed on an employee and require to be withheld by the employer, but payroll costs do not include employer share of payroll tax.
For example, an employee who earned $4,000 per month in gross wages, from which $500 in federal taxes was withheld, would count as $4,000 in payroll costs. The employee would receive $3,500, and $500 would be paid to the federal government. However, the employer-side federal payroll taxes imposed on the $4,000 in wages are excluded from payroll costs under the statute.
Do Independent Contractors count as Employees for PPP Purposes?
No, they can apply for the PPP loan on their own, so they do not count on a borrower’s PPP loan calculation
How Do I Calculate the Maximum Amount of the Loan?
- Calculate aggregate payroll costs from the last 12 months
- Subtract: compensation paid to an employee and/or any amounts paid to an independent contractor / sole proprietor in excess of 100K
- Calculate the average monthly payroll by dividing the amount in Step 2 by 12
- Multiply monthly cost calculated in Step 3 by 2.5
- Add: any outstanding amount of an EIDL made between January 31, 2020 and April 3, 2020 less any advance under an EIDL COVID-19 loan
What Time Period Should Borrower’s Use to Determine Payroll Costs?
- Can calculate payroll costs using previous 12 months or from calendar year 2019
- Seasonal businesses, may use average monthly payroll for period between February 15, 2019, or March 1, 2019 and June 30, 2019
- If not in business from February 15, 2019 to June 30, 2019, then use the average monthly payroll costs for January 1, 2020 to February 29, 2020
What Time Period Should Borrower’s Use to Determine Number of Employees?
- Can use the same time periods listed above
- Can use the SBA’s usual calculation
- Average number of employees per pay period in the 12 completed calendar months (or for pay periods the business has been operational, if less than 12 months) prior to the date of the loan application.
Here are a few examples the new literature provides:
Example 1 – No employees make more than $100,000
Annual payroll: $120,000
Average monthly payroll: $10,000
Multiply by 2.5 = $25,000
Maximum loan amount is $25,000
Example 2 – Some employees make more than $100,000
Annual payroll: $1,500,000
Subtract compensation amounts in excess of an annual salary of $100,000: $1,200,000
Average monthly qualifying payroll: $100,000
Multiply by 2.5 = $250,000
Maximum loan amount is $250,000
Example 3 – No employees make more than $100,000, outstanding EIDL loan of $10,000.
Annual payroll: $120,000
Average monthly payroll: $10,000
Multiply by 2.5 = $25,000
Add EIDL loan of $10,000 = $35,000
Maximum loan amount is $35,000
Example 4 – Some employees make more than $100,000, outstanding EIDL loan of $10,000
Annual payroll: $1,500,000
Subtract compensation amounts in excess of an annual salary of $100,000: $1,200,000
Average monthly qualifying payroll: $100,000
Multiply by 2.5 = $250,000
Add EIDL loan of $10,000 = $260,000
Maximum loan amount is $260,000
How large can my loan be?
Loans can be for up to two months of your average monthly payroll costs from the last year plus an additional 25% of that amount. That amount is subject to a $10 million cap. If you are a seasonal or new business, you will use different applicable time periods for your calculation. Payroll costs will be capped at $100,000 annualized for each employee.
How much of my loan will be forgiven?
You will owe money when your loan is due if you use the loan amount for anything other than payroll costs, mortgage interest, rent, and utilities payments over the next 8 weeks. The 8-week period begins on the date the lender makes the first disbursement, which is no later than 10 calendar days from the date of approval. Due to likely high subscription, it is anticipated that not more than 25% of the forgiven amount may be for non-payroll costs.
You will also owe money if you do not maintain your staff and payroll.
- Number of Staff: Your loan forgiveness will be reduced if you decrease your full-time
employee headcount. - Level of Payroll: Your loan forgiveness will also be reduced if you decrease salaries and
wages by more than 25% for any employee that made less than $100,000 annualized in
2019. - Re-Hiring: You have until June 30, 2020 to restore your full-time employment and
salary levels for any changes made between February 15, 2020 and April 26, 2020.
Will the amount of my loan forgiveness be reduced if I lay off an employee, offer to rehire the same employee but the employee declined the offer?
Simply the answer is no. The SBA and Treasury Department intend to issue an interim final rule excluding laid off employees whom the borrower offered to rehire (for the same salary/wages and same number of hours) from the CARES Act loan forgiveness reduction calculation. This interim final rule will specify that to qualify for this exception, the borrower must have made a good faith, written offer of rehire, and the employee’s rejection of that offer must be documented by the borrower Employees and employers should be aware that employees who reject offers of re-employment may forfeit eligibility for continued unemployment compensation.
How can I request loan forgiveness?
You can submit a request to the lender that is servicing the loan. The request will include documents that verify the number of full-time equivalent employees and pay rates, as well as the payments on eligible mortgage, lease, and utility obligations. You must certify that the documents are true and that you used the forgiveness amount to keep employees and make eligible mortgage interest, rent, and utility payments. The lender must make a decision on forgiveness within 60 days.
What is my interest rate?
1% fixed rate.
When do I need to start paying interest on my loan?
All payments are deferred for 6 months; however, interest will continue to accrue over this period.
When is my loan due? In 2 years.
Can I pay my loan earlier than 2 years?
Yes. There are no prepayment penalties or fees.
Do I need to pledge any collateral for these loans?
No. No collateral is required.
Do I need to personally guarantee this loan?
No. There is no personal guarantee requirement.
However, if the proceeds are used for fraudulent purposes, the U.S. government will pursue criminal charges against you.
Sample Application
Additional Information:
- A business will be allowed to borrow from the Paycheck Protection Program as well as the SBA’s Disaster loan program. The stipulation is you have to use the funds for different things. For those business that may have greater funding needs they should apply for the disaster loan program as well. Any dollars received from the Payroll Protection Program will be deducted from the amount granted by the Disaster Loan Program.
- All companies with 500 or fewer employees can apply for this loan. Businesses in certain industries can have more than 500 employees if they meet applicable SBA employee-based size standards for those industries.
- Borrowers are going to have to make sure they are keeping good records to ensure loan forgiveness. The disbursement and application process should be easy and simple; borrowers should be prepared for additional scrutiny when applying for forgiveness of the loan.
