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 concerns, as well as any business concerns, a 501(c)(3) nonprofit organization, a 501(c)(3) veterans organization, or Tribal business concern described in section 31(b)(2)(C) that has fewer than 500 employees, or the applicable size standard in number of employees for the North American industry Classification System (NAICS) industry as provided by SBA, if higher.
• Individuals who operate a sole proprietorship or as an independent contractor and eligible self employed individuals.
• Any business concern that employs not more than 500 employees per physical location of the business concern and that it is assigned a NAICS code beginning with 72, for which the affiliation rules are waived.
• Affiliation rules are also waived for any business concern operating as a franchise that is assigned a franchise identifier code by the Administration, and company that receives funding through a Small Business Investment Company.

Affiliation rules become important when SBA is deciding whether a business affiliations preclude them from being considered “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 allowable purposes including:

• Payroll costs
• Costs related to the continuation of group health care benefits during period of paid sick, medical or family leave, and insurance premiums
• Employee salaries, commissions, or similar compensation
• Payments of interest on any mortgage obligation
• Rent
• Utilities
• Interest on any other debt obligations incurred before the covered period

Recipients of PPP loans may not use the loans to line their pockets. The idea is to keep business afloat for a couple of months while they have to stop operations. The loan funds explicitly may not be used for any of the following:

• Employee/owner compensation over $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 as follows:

• For businesses open between February 15, 2019 – June 30, 2019 the max loan is equal to 250% of the average monthly payroll costs. If the business is a seasonal employer, the max loan is equal to 250% of the average monthly payroll costs between February 15, 2019 and June 30, 2019. A business can also choose March 1, 2019 as the time period start date.
• For businesses not open between February 15, 2019 and June 30, 2019 the max loan is equal to 250% of the average monthly. Payroll costs between January 1, 2020 and February 29, 2020.
• If the business took out an Economic Injury Loan (EIDL) (discussion below) between February 15, 2020 and June 30, 2020 and the business wants to refinance that loan into a PPP loan, the business would add the outstanding loan amount to the payroll sum.

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

Loan recipients are eligible for loan forgiveness in an amount determined by a particular calculus provided by the Act. Fundamentally, in the two months following the receipt of funds, the employer may be forgiven up to the complete amount of the loan if it spends the funds on payroll, rent, and some smaller expenses. The, the employers must apply through their lender for forgiveness. In the application for forgiveness the employer must include:

• Documentation verifying the number of employees on payroll and pay rates, including IRS payroll tax filings and State income, payroll and unemployment insurance filings;
• Documentation verifying payments on covered mortgage obligations, lease obligations, and utilities;
• Certification from a representative of the business or organization who is authorized to certify that the documentation provided is true and that the amount that is 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 maximum term of 10 years, at a maximum interest rate of 4%. Principal and interest will continue to be deferred for 6 months to a year after disbursement of the loan.

A business cannot apply for more than one PPP loan but may for other SBA assistance, including Economic Injury Disaster Loans (EIDLS), SBA 7(a) loans, SBA 504 loans, and microloans, and also receive investment capital from Small Business Investment Corporation.

A business cannot 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 8 week covered period, the business cannot use a different SBA loan product for payroll for those same costs in the same period, although it can be issued for payroll for a different period or for different workers.

Businesses can apply for loans through all current SBA 7(a) lenders. The Department of the Treasury will authorize additional lenders, including no bank lenders, 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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