Paycheck Protection Program
* UPDATE - Congress on July 1 passed an extension to the Paycheck Protection Program, giving businesses until Aug. 8, 2020, to apply. *
The CARES Act and subsequent legislation include $659 billion for federally guaranteed loans for small businesses, sole proprietors, self-employed individuals and independent contractors affected by the COVID-19 crisis. These loans can be forgiven if the proceeds are spent on payroll, benefits, mortgage interest, rent and utilities. SBA has issued interim rules for both employer businesses as well as the self-employed that answer many questions on determining eligibility and other components of these programs.
Paycheck Protection Program Flexibility Act
Congress on June 4 passed the Paycheck Protection Program Flexibility Act of 2020, which has meaningful impact on the loan forgiveness aspect of the program.
Key changes to the program include:
- The forgiveness period is now 24 weeks (originally 8 weeks)
- The minimum amount that must be spent on payroll is now 60% (originally 75%). This means that you can spend up to 40% on non-payroll costs, such as rent, utilities and mortgage interest (1% interest on loan amount remaining after forgiveness)
- The loan maturity is now 5 years (originally 2 years) - NOTE: Only for new borrowers who take out a loan after the Act is signed into law.
- The deferral period has been extended so that payments are not required until loan forgiveness has been determined
- Deadline to rehire staff: 12/31/2020
- Reduction in workforce to pre-pandemic levels won’t impact forgiveness if:
- Unable to hire a former employee
- Able to demonstrate an inability to rehire similarly qualified employees
- Demonstrate inability to return to same level of business activity before 2/15/20
- Small employers with 500 employees or fewer
- Other business concerns that meet the current Small Business Administration (SBA) size standards;
- Sole proprietors, self-employed individuals and contractors;
- Certain nonprofits, including 501(c)(3) organizations and 501(c)(19) veteran organizations, and tribal businesses with under 500 employees.
- Businesses in the accommodation and food service industries can apply on a per location basis if they have 500 employees or fewer per location.
Who is making these loans?
The SBA is guaranteeing the loans, but the loans will be made by SBA-approved lenders who participate in SBA’s 7(a) program. You can find local SBA-approved lenders here. You should also contact your current financial institution; many banks and credit unions are approved SBA lenders.
A sample form from the SBA is available here: https://www.sba.gov/sites/default/files/2020-04/PPP%20Borrower%20Applica...
Some banks may have you fill out their version of the form online.
How can I qualify?
Lenders will ask you to certify that:
- You will use the loan to retain workers and maintain payroll or make mortgage, lease, and utility payments
- You do not have a pending loan application that would be used for the same purposes, or that you don’t receive a duplicative loan from Feb. 15, 2020 through Dec. 31, 2020
- The current economic uncertainty makes the loan necessary to sustain operations and pay employees
SBA is waiving some requirements typical for 7(a) loans:
- No personal guarantee or collateral will be required.
- You will not need to certify that you tried and failed to obtain capital elsewhere.
How much can I borrow?
SBA has a breakdown here.
There are a few different calculations, depending on how long you’ve had your business, whether your business is seasonal and a couple of other factors. The maximum loan size regardless is $10 million. The amount is tied to your payroll costs, which are defined in the following two questions:
- If you were in business in 2019: Your maximum loan is equal to 250 percent of your average monthly payroll costs in the past year. For instance, if your average monthly payroll costs in the past 12 months were $100,000, your maximum loan amount is $250,000.
- If your business employs seasonal workers: You can calculate your average monthly payroll from the period of Feb. 15, 2019-June 30, 2019 or March 1, 2019 to June 30, 2019.
- If you were not in business in 2019: Your max loan is equal to 250 percent of your average monthly payroll costs between January 1, 2020 and February 29, 2020.
- For self-employed individuals and contractors: The sum of payments of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment, or similar compensation, and that is in an amount that is not more than $100,000 in one year, as pro-rated for the covered period.
What payroll costs are factored into determining the loan amount?
- Compensation (salary, wage, commission, or similar compensation, payment of cash tip or equivalent)
- Payment for vacation, parental, family, medical, or sick leave
- Allowance for dismissal or separation
- Payment for group health care benefits, including insurance premiums
- Payment for any retirement benefit
- Payment of state or local tax assessed on employees’ compensation
What payroll costs are excluded from determining the loan amount?
- Employee/owner compensation over $100,000 (compensation up to $100,000 will be included in the calculation for high-income earners)
- Taxes imposed or withheld under chapters 21, 22, and 24 of the IRS code
- Compensation of employees whose principal place of residence is outside of the U.S.
- Qualified sick and family leave for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act
Do independent contractors count as employees for purposes of PPP loan calculations?
- According to the latest guidance from the SBA: "No, independent contractors have the ability to apply for a PPP loan on their own so they do not count for purposes of a borrower’s PPP loan calculation."
What can I use the loan for?
- Approved payroll costs (as described above) NOTE: 75% of the loan proceeds must go to these payroll costs to be forgiven
- Payments of interest on any mortgage obligation (not including any prepayment of or payment of principal on a mortgage obligation)
- Rent (including rent under a lease agreement)
- Interest on debt obligations incurred before Feb. 15, 2020
How much of the loan can 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 8 weeks after getting the loan. No more than 25% of the forgiven amount can be used for non-payroll costs. You will also owe money if you do not maintain your staff and payroll. NOTE: The SBA still be issuing further guidance on calculating the forgiveness. Previous guidance has stated:
- 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.
What are the terms of the loan?
For any amounts not forgiven:
- Term: 2 years
- Interest rate: 1 percent
- Zero loan fees
- Zero prepayment fee
- Payments deferred for first six months (interest still accrues)
What do I need to apply?
The SBA has provided a sample application here, but your lender may require additional information. You will, at minimum, need to provide proof of payroll.
What if I am self-employed or an independent contractor?
You will need to submit documents to prove your income, including payroll tax filings,1099 forms, and income and expenses.
Can I apply for an Economic Injury Disaster Loan (EIDL) and a Payroll Protection Program loan?
If your EIDL loan was not used for payroll costs, it does not affect your eligibility for a PPP loan. If your EIDL loan was used for payroll costs, your PPP loan must be used to refinance your EIDL loan. Proceeds from any advance up to $10,000 on the EIDL loan will be deducted from the loan forgiveness amount on the PPP loan.