One of the most significant changes that the CARES Act introduced was the addition of the Paycheck Protection Program (PPP) to the SBA’s existing 7(a) loan program. The Paycheck Protection Program gives small businesses the ability to receive cash in the form of a loan, which can ultimately be forgiven if certain requirements are met. Since this program is available to all small businesses, we want to make sure owners are familiar with all the terms and conditions. Here are some Questions and Answers to help navigate this new program.
NOTE: Guidance for this program is changing rapidly. The information below is for reference only and should be verified with your lender. It has been updated to reflect the changes enacted by the Paycheck Protection Program Flexibility Act of 2020.
What is the Paycheck Protection Program?
- The program provides loans to small businesses that can be 100% forgivable if certain conditions are met. No collateral or personal guarantees are required to obtain the loans. The original CARES Act allocated approximately $350 billion towards this program, and an additional $320 billion in funding was later added to the program.
Who qualifies for the program?
- Businesses with less than 500 employees, including sole proprietors, contractors, and self-employed individuals. The SBA typically has more stringent qualifications to define a “small business” under the 7(a) loan program, which are being temporarily waived.
How do I apply?
- You apply for the loan through your bank. Small businesses and sole proprietors can apply beginning April 3rd. Contractor and self-employed individuals can begin applying April 10th. A sample application can be obtained HERE. Your bank will process and facilitate the loan and adjust the balance for any amount that is forgiven as described below.
How much can I borrow?
- The lesser of 2.5 times of your average monthly payroll expenses over the previous year or $10 million. Payroll expenses include salary, paid time off, group health benefits, retirement benefits, and state or local taxes. However, this number is capped at $100,000 per employee.
How do I calculate the maximum amount I am able to borrow?
- Starting from the anticipated date of the loan, look back 12 months to determine your total payroll costs, which include all the items listed above. For any employee whose payroll cost (which include salary, healthcare, retirement, etc.) exceeds $100,000, their number is capped at $100,000. Divide that number by 12, then multiply the result by 2.5.
Example – A firm has 10 employees including 8 who make $50,000 per year and 2 employee-owner salaries of $120,000 per year. Healthcare costs were $35,000, $15,000 of which were for the employee-owners, and employer retirement plan contributions were $20,000 over the last year, all made to the employee accounts.
Example is for reference only – consult your cpa for your specific situation
What are the terms?
- Businesses can obtain one loan under the program that must be used towards payroll, rent, utilities, or interest on other outstanding debt. The portion of the loan that is not forgiven will be paid back on a term of 5 years at 1.00% interest. Payments will be deferred until loan forgiveness is applied for, but not more than 10 months after December 31, 2020.
How much of the loan can be forgiven?
- Up to 100% of the amount used for payroll, rent, or utilities in the 24-week period after the loan is taken out. Up to 40% of the loan can be used for rent or utilities. The loan forgiveness is reduced if the business lays off any workers or if wages are reduced over that covered period. However, if employers can document in good faith that they tried to rehire employees but were unable to, then forgiveness can still apply.
What will I have to do to obtain forgiveness?
- You will be required to provide verified documentation to your bank with the number of employees and their salaries over the covered time period, including IRS payroll tax filings, state income, payroll, and unemployment filings, and documentation of payments on covered rent and utility payments.
As mentioned above, this program is available to all businesses meeting the requirements of a small business. Therefore, all businesses should independently determine whether participation in the program would make sense for their situation and evaluate the other options available through the Cares Act (some preclude your participation in this program). You can read our summary of other relief options available to businesses in our article Summary & Guidelines of CARES Act Benefits for Businesses. If you have any questions or need assistance evaluating your options, feel free to contact our firm.