A PPP Primer.

At long last Congress passed the “Coronavirus Aid, Relief and Economic Security Act” (or “CARES” Act). The CARES Act Section 1102 includes the Payroll Protection Program (“PPP”) which authorizes up to $349,000,000,000 in loans to “small” businesses and organizations. A portion of these loans is eligible for loan forgiveness. Here is what you need to know:

Who Qualifies?

Q: How is small business defined? 

A: Small means 500 employees or fewer, including affiliated entities (more about that below).

Q: How do I count part-time employees?

A: The 500 number includes full-time and part-time employees.

Q: What about a business that has not more than 500 employees per physical location?

A: Only businesses with a NAICS beginning with 72 are eligible in this circumstance – accommodations and food service.

Q: What other organizations are eligible for the PPP?

A: Non-profit organizations, Veterans organizations and Tribal business concerns.

Q: Anyone else?

A: Yes. Sole proprietorships, independent contractors and eligible self-employed individuals, if you can substantiate your business through payroll tax filings or 1099-MISC forms.

Q: What if a business is affiliated with another (e.g., a holding company owns two companies, or two companies with the same owner or a parent entity that owns a subsidiary) – is the business still eligible to receive a PPP loan?

A: It depends. The Act says any business concern (i) with fewer than 500 employees with AICS Code beginning with 72 (accommodation and food service); or (ii) that is operating as a franchise; or (iii) that receives financial assistance from a company licensed under the Small Business Investment Act can disregard its affiliates’ employee count and revenue in determining eligibility. 

Q: Can I apply for a PPP loan and a disaster relief loan under the CARES Act?

A: Yes, provided the disaster relief loan is for a purpose other than payroll.

What Loan Amount Can I Receive?

Q: What loan amount can I seek?

A: The maximum loan amount is 2.5 times the average monthly payroll costs incurred for the year prior to loan application, up to $10 million. Payroll costs are defined in the law and described below regarding costs eligible for loan forgiveness.

Q: What if I have seasonal employees?

A: Then in determining the maximum loan amount, rather than using the average monthly payroll costs based on annual payroll costs, you can derive your average monthly payroll cost over a shorter 12-week period that reflects your higher payroll costs.

Use of Loan Proceeds:  What are the Rules for Loan Forgiveness?

Q: What can I use the loan proceeds for?

A: In addition to normal business expenses for which you could use any SBA loan, if you use PPP loan proceeds for certain qualified expenses during the covered period (see below), the loan will be forgiven up to that amount.

Q: What’s the “covered period?”

A: The eight weeks commencing when the loan is made.

Q: What are the eligible expenses for loan forgiveness?

A: Eight weeks of the following expenses:  

  1. payroll expenses
  2. payroll costs as defined in the Act:
    1. employee salaries, commissions (not to exceed $100,000 annually prorated for covered period) paid to persons living in the United States
    2. payment for vacation, parental, family, medical or sick leave
    3. allowance for dismissal or separation
    4. payment for group health care benefits, including insurance premiums
    5. payment of retirement benefits
    6. payment of state or local tax assessed for compensation of employees
    7. sum of payments of compensation or income to sole proprietor or independent contractor living in the United States that is not wage, commission, income up to $100,000 annually prorated for covered period 
  3. interest payments on mortgage obligations (excluding prepayments or payments of principal)
  4. rent
  5. utilities.

Q: Are there exceptions on loan forgiveness?

A: Yes. The purpose of the loan forgiveness is to encourage businesses to keep workers employed. Therefore, in seeking loan forgiveness, the loan recipient’s eligibility for forgiveness could be reduced in two ways:

  1. If you reduce the number of employees earning less than $100,000. A formula will be used to determine this reduction based on the number of employees on payroll compared to the average full-time employees in 2019 or during the period January 1-February 29, 2020; for a seasonal employer the comparison period is February 15, 2019 and ending June 30, 2019;
  2. If you impose pay-cuts of more than 25% for employees making less than $100,000. If an employer reduces the compensation of an employee during the 8-week covered period in excess of 25% as compared to the most recent full fiscal quarter the employee was employed, then the loan forgiveness is reduced dollar for dollar.

However, if the employer laid off employees or reduced compensation as described above during the period February 15, 2020-April 27, 2020 and rehires and eliminates salary reductions prior to June 30, 2020, then these loan forgiveness reductions will not apply.

Q: What happens if I use loan proceeds for other business related expenses or for “eligible” expenses in excess of eight weeks?

A: Those loan proceeds will be paid back at an interest rate not to exceed 4 percent; however, no interest will accrue, and no loan payment will be due for a minimum of six months.

Q: What documentation should I be gathering for loan forgiveness purposes?

A: The CARES Act will require the following documentation from borrowers:

  1. payroll tax filings
  2. state income, payroll and unemployment insurance filings
  3. documentation to support payments that are eligible for loan forgiveness.

The Application Process

Q: Where do I apply?

A: With banks and credit unions authorized to administer PPP loans– contact your bank or credit union.

Q: Do I need to show business impact or loss due to COVID-19?

A: If you were in operation on February 15, 2020 and had employees for whom you paid salaries or payroll taxes or paid independent contractors reported on FORM 1099-MISC, your business is presumed to be adversely impacted by the pandemic. Borrowers will be required to certify:

  1. uncertainty in economics make the loans necessary to support ongoing operations
  2. the funds will be used to retain workers, payroll or make mortgage, lease and utility payments
  3. loan recipient does not have duplicate application pending and has not received loans during the covered period.

Q: Do I need to show I cannot access funds elsewhere?

A: No. This SBA requirement has been waived.

Q: Is there an application fee?

A: No.

Q: Must I personally guaranty the loan or provide collateral?

A: No.

Q: When will loan applications be available at my bank or credit union?

A: Lenders are in a holding pattern until the SBA issues guidance, hopefully later this week.