Paycheck Protection Program

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The Paycheck Protection Program (PPP) enables small businesses to cover certain payroll and other costs. Businesses with fewer than 500 employees are eligible to receive loans of as much as $10 million. Loans are calculated by multiplying an employer's monthly payroll times 2.5. The loans are completely forgiven, tax-free, if the funds are spent on payroll, rent and certain other expenses in the two months following funding of the loan.

This program is incredibly complex, and was developed under significant pressure. Limited funds were available to be allocated, and businesses have been aggressive in pursuing them. The Small Business Administration (SBA) struggled to give banks guidelines in timely fashion, becasuse the CARES Act calls for disbursement more or less immediately. Banks were swamped with applicants, and initially catered to their proven customers to reduce the chances of holding the bag when the loans were forgiven. Underwriting was limited, and rushed. Multiple changes were made in application forms and standards, and deadlines were missed. Relative chaos has ensued.

Full examination of the CARES Act and its implementation is beyond the scope of this guide. Any business serious about this program must contact its accountant and banker, and be extremely proactive to find success in the near future. But here are the basics.

The types of businesses and organizations eligible for a PPP loan include:

• small business and other business concerns, 501(c)(3) nonprofits, 501(c)(3) veterans organization, tribal business concerns with fewer than 500 employees described in section 31(b)(2)(C) of the Small Business Act, or the applicable size standard in number of employees for the North American Industry Classification System (NAICS) as provided by SBA, if higher;
• sole proprietors, independent contractors and eligible self-employed individuals;
• any business concern that employs fewer than 500 employees per physical location and that is assigned an NAICS code beginning with 72, for which the affiliation rules are waived;

Affiliation rules also are waived for any business concern operating as a franchise that is assigned a franchise identifier code by the administration, and any entity that receives funding through a small business investment company. (SBICs are privately owned outfits licensed and regulated by the SBA.) Affiliation rules are important when the SBA is deciding whether a business affiliation precludes it from being deemed “small.” Generally, affiliation exists when one business controls or has the power to control both businesses. Think of a fast food franchise.

Loan proceeds must be used for certain purposes including:

• payroll costs
• costs related to the continuation of group health-care benefits during periods of paid sick, medical or family leave, and insurance premiums
• employee salaries, commissions, or similar compensation
• payments of interest on a mortgage obligation
• rent
• utilities
• interest on any other debt obligations incurred before the covered period

Recipients of PPP loans may not use them to line their pockets. The idea is to keep businesses afloat for a couple of months while they must cease operations. The loan funds explicitly may not be used for:

• employee/owner compensation more than $100,000
• taxes imposed or withheld under Chapters 21, 22 and 24 of the IRS Code
• compensation of employees whose principle place of residence is outside the U.S.
• qualified sick and family leave for which a credit is allowed under the FFCRA

The loan amount is determined in different ways:

• For businesses open between Feb. 15, 2019 – June 30, 2019, the maximum is equal to 250% of the average monthly payroll costs. If the business is a seasonal employer, the maximum loan is equal to 250% of the average monthly payroll costs between Feb. 15, 2019 - June 30, 2019. A business may choose March 1, 2019 as the start date.
• For businesses not open between Feb. 15, 2019 - June 30, 2019, the maximum is equal to 250% of the average monthly payroll costs between Jan. 1, 2020 - February 29, 2020.
• If the business took out an Economic Injury Disaster Loan (EIDL –– reference below) between Feb. 15, 2020 - June 30, 2020, and the business wants to refinance it into a PPP loan, the business would add the outstanding loan amount to the payroll sum.

The SBA requires lenders to provide complete payment deferment relief (including payment of principal, interest and fees) to affected borrowers with covered loans for a period of at least six months, but not more than one year. So no payments need to be made in that initial time period.

Loan recipients are eligible for loan forgiveness in an amount defined in the CARES Act. Basically, in the two months following the receipt of funds, an employer may be forgiven for the complete amount of the loan if it spends the funds on payroll, rent and some smaller expenses. Employers must apply through their lender for forgiveness. That application must include:

• verification of the number of employees on payroll and pay rates, including IRS payroll tax filings and state income, payroll and unemployment insurance filings;
• verification of payments on covered mortgage obligations, lease obligations and utilities;
• certification from a representative of the business or organization authorized to certify that the documentation provided is true and that the amount being forgiven was used in accordance with the program’s guidelines for use.

Loan amounts not forgiven are carried forward as an ongoing loan with a maximum term of 10 years, at a maximum interest rate of 4%. Principal and interest will continue to be deferred for six months to one year after disbursement of the loan.

A business may not apply for more than one PPP loan but may apply for other SBA assistance, including EIDLS, SBA 7(a) loans, SBA 504 loans and microloans, and also receive investment capital from a small business investment company.

A business may not use the PPP loan for the same purpose as its other SBA loan(s). For example, if a business uses its PPP loan to cover payroll for the eight-week covered period, it may not use a different SBA loan product for payroll costs in the same period, although it may be used to meet payroll for a different period or for different workers.

Businesses may apply for loans through all current SBA 7(a) lenders. The U.S. Department of the Treasury will authorize lenders in addition to banks to help meet the needs of small business owners.

For further information please see https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/paycheck-protection-program-ppp.

SEE ALSO

• When Is COVID-19 Work Related?
• State and Local Workplace Safety Orders

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