Overview of the Paycheck Protection Program
The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) temporarily adds a new product, titled the “Paycheck Protection Program,” (PPP) to the U.S. Small Business Administration’s (SBA’s) 7(a) Loan Program.
The PPP allocates $350 billion to help small businesses (under 500 employees) keep their workers employed amid the COVID-19 pandemic and economic downturn. The PPP provides 100% federally guaranteed loans to small businesses, and each loan is forgivable if the borrowing employer meets certain requirements, as explained below.
Who is eligible for a PPP loan?
Generally, small businesses, nonprofits, and other organizations with 500 or fewer U.S. employees are eligible.
Businesses in the accommodations and food services industries with more than one location are eligible if they have 500 or fewer employees per each physical location.
Sole proprietors, independent contractors, and self-employed individuals are also eligible.
The SBA, however, has advised that additional businesses may be ineligible based on the SBA’s existing Standard Operating Procedures for SBA lending (available here).
Potentially ineligible businesses include:
- Businesses principally engaged in lending, such as banks, life insurance companies, investment or finance companies, and bail bond companies.
- Passive businesses, such as developers or landlords that do not actively use their assets and principally generate income by renting space.
- Businesses engaged in legal gambling.
- Businesses engaged in any illegal activity, including marijuana-related businesses.
- Government-owned businesses.
- Religious organizations.
- Businesses with owners with at least 20% equity who are incarcerated, on probation/parole, or under indictment.
- “Adult” businesses.
- Businesses with deficient federal loans.
Are there other requirements to apply for a PPP loan?
Yes. As part of the application, the borrower must certify that:
- The business was in operation as of February 15, 2020 and had employees it paid.
- Current economic conditions make this loan necessary to support the borrower’s ongoing operations.
- The funds will be used to retain workers and maintain payroll, and pay mortgage interest, rent, or utilities.
- The borrower does not have an application already pending for a loan under this subsection.
- The borrower, from February 15, 2020 to December 31, 2020 has not and will not receive another loan under this program.
How much is the PPP loan?
The maximum loan amount is 2.5 times the 12-month average of the borrower’s monthly payroll costs but is capped at $10 million.
A different calculation applies for seasonal businesses. There are also adjustments if the borrower has outstanding SBA loans.
What is the interest rate on a PPP loan?
The interest rate will be 1%.
The CARES Act allowed the interest rates to be as high as 4%, but, as of April 3, 2020, the U.S. Department of the Treasury set the interest rate at 1%. The Treasury Department also mandated that all borrowers will receive the same loan terms.
How can the PPP loan be spent?
From February 15, 2020 to June 30, 2020, the money can be spent on:
- Payroll costs
- Costs related to continuing group health care benefits during paid sick, medical, or family leave
- Insurance premiums
- Mortgage interest
- Interests on debt obligations incurred before February 15, 2020
- Refinancing an SBA EIDL loan made between January 31, 2020 and April 3, 2020
The SBA is requiring that at least 75% of the PPP loan proceeds be used for payroll costs.
The CARES Act states that the PPP loan also can be used for any of the allowable uses of a Section 7(a) SBA loan (such as plant acquisition, construction, conversion, expansion, or the acquisition of land, material, supplies, equipment, and working capital). The SBA, however, is requiring that the PPP funds be used mainly for payroll costs.
What if PPP loans are used for other purposes?
According to the SBA, if a borrower uses PPP funds for unauthorized purposes, SBA will direct the borrower to repay those amounts. If the borrower knowingly used the funds for unauthorized purposes, the borrower (possibly including shareholders, partners, and members) will be subject to additional liability such as charges for fraud.
How much of the PPP loan is forgivable?
Potentially, the entire loan is forgivable.
To calculate the forgivable amount of the loan, add the costs incurred and payments made during the eight-weeks following origination of the loan for:
- Payroll costs
- Mortgage interest
The forgivable amount cannot exceed the principal of the loan.
In addition, the SBA has determined that at least 75 percent of the forgivable amount must be attributable to payroll costs. Because 80% of the maximum loan amount is based on two months’ worth of payroll costs, employers who continue to employ and pay their employees during the eight weeks after the loan is originated are likely to meet the SBA’s 75% requirements. Employers who reduce salary or wages or reduce the number of their employees during that eight-week period may not be able to reach the 75% threshold for payroll costs are part of the forgivable expenditures.
Are the allowable uses of a PPP loan different than how much of a PPP loan is forgivable?
Yes. How the loan is spent from February 15 to June 30, 2020 (the time period for allowable uses) is not necessarily the same as the amount that is forgivable. There are allowable uses of the loan money that are not forgivable, and the time period for using the money (February 15 to June 30, 2020) is different than the time period for calculating the forgivable amount (8 weeks after origination of the loan).
If the eight-week period for calculating the forgiveness amount extends beyond June 30, 2020, and you have not incurred expenses for the maximum forgivable amount by that day, the borrower will need to continue paying forgivable expenses with its own funds and not with the loan in order to maximize the forgivable amount of the loan.
What are payroll costs?
- Salary, wages, or commissions
- Payment for cash tips or equivalent
- Payment for vacation, parental, family, medical, or sick leave
- Allowance for dismissal or separation
- Payment required for the provision of group health care benefits, including insurance premiums
- Payment of retirement benefits
- Payment of state or local employment taxes
BUT payroll costs do not include:
- compensation to an employee in excess of an annual $100,000 salary
- compensation to an employee who resides outside of the U.S.
- compensation paid to independent contractors
Do payroll costs include paid sick leave for COVID-19 or expanded FMLA leave?
No. The CARES Act specifically exempts from payroll costs paid for sick and family leave for which a tax credit is allowed under the Families First Coronavirus Response Act.
Will lenders be paid a fee for making loans?
Yes. The SBA will pay lenders a percentage fee for processing PPP loans.
There is no fee for the borrower to apply for a PPP loan.
What happens if the borrower has, or in the future will, layoff or furlough some or all employees?
If the borrower lays off or furloughs employees prior to the making of the PPP loan, the borrower’s maximum loan amount will decrease because the borrower’s average monthly payroll costs will also have decreased.
In addition, the amount of loan forgiveness (as calculated above) will be decreased proportionally if the borrower’s number of full-time equivalent employees is reduced during the eight weeks after the loan origination compared to the number of employees during the last year.
But, if the reduction in the number of full-time equivalent employees occurs between February 15, 2020 and April 26, 2020 and that reduction is eliminated by June 30, 2020, the forgiveness amount will not be reduced.
The June 30, 2020 re-hire date does not change the requirement that 75% of the forgivable amount of the loan must be for payroll costs, even if the eight-week period for calculating the forgivable amount extends past June 30, 2020.
What happens if the borrower has, or in the future will, reduce compensation for some or all employees?
If the borrower decreases payroll costs prior to the making of its PPP loan, the maximum loan amount will decrease because the borrower’s average monthly payroll costs will also have decreased.
In addition, the forgivable amount of the loan can also be decreased proportionally if, during the eight weeks after the origination of the loan, the salary or wages of employees who made less than an annualized salary of $100,000 in 2019 are decreased by more than 25% (compared to the most recent full quarter in which the employee was employed).
But, if the above-described reduction in salary or wages beyond 25% occurs between February 15, 2020 and April 26, 2020 and is eliminated by June 30, 2020, this proportional reduction in the forgivable amount will not apply.
The June 30, 2020 date does not change the requirement that 75% of the forgivable amount of the loan must be for payroll costs, even if the eight-week period for calculating the forgiveness amount extends past June 30, 2020.
What documentation should a recipient of a PPP loan keep?
The borrower needs to keep documentation to establish that:
- The PPP funds were used for allowable expenses from February 15, 2020 to June 30, 2020; and
- The amount of costs incurred and payments made for forgivable expenses during the eight weeks after the origination of the PPP loan.
One solution to consider is to put loan proceeds in a separate operating account to track its use.
What else should borrowers consider when deciding whether to seek a PPP loan compared to alternative relief such as laying off or furloughing employees?
In making such a decision, you should consult with your accountant and/or financial advisor. If you are considering a Paycheck Protection Program loan, work with a reputable lender preferably with a long-standing relationship with the SBA.
Generally, the PPP makes sense for businesses that are continuing to operate but struggling to make ends meet and that need temporary relief. In order to maximize the amount of the loan, borrowers need to be prepared to expend current assets to keep employees employed (and compensated) while waiting for the loan. In order to maximize the forgiveness amount, borrowers may need to expend additional assets on payroll costs (and other forgivable costs) after June 30, 2020 without using the loan proceeds. At this point, we do not know when loans will be originated by the lenders, which could cause complications in the use and forgiveness of loan amounts.
Characteristics for good candidates for PPP:
- Revenues and collections are still strong.
- You have plenty of reserves to bankroll payroll for the next 60-90 days.
- It would be a competitive advantage to keep employees working, even if revenues are dropping off. For instance, to make internal improvements, retrain, and to keep highly desirable and hard to get people, etc.
- Your business is doing well now, but you believe it will slip off before June 30th.
Those who may want to consider layoff instead of PPP:
- Have sharply declining revenues
- Little or no reserves.
- Low wage or low skill workers who can easily be rehired.
- Lower wage workers would collect more from unemployment benefits.
Some Recent Client Questions We Have Received.
- Can my company reduce hours and headcount as long as we get back to full capacity by June 30?
Yes, the reductions to the forgiveness amount for (1) reduced number of employees and (2) reduced salary and wages do not apply if the reduced hours or headcount occur between February 15 and April 26 and are corrected by June 30. The company can pay employees down to 75% of their previous salary/wages (from the last full quarter) without penalty. But, in order to have the loan forgiven, the company still must have forgivable expenses (payroll, mortgage interest, rent, and utilities) during the eight-weeks after loan origination, of which 75% must be payroll costs. So, you are unlikely to be able to fully employ everyone just at the last minute and still maximize your forgivable amount.
- If we reduce wages/hours from the calculated previous year’s average, is it limited to a maximum 25% reduction? Is that per employee, or overall?
For any employee who made an annualized salary/wages of $100,000 or less during every pay period in 2019, you can reduce their salary/wages up to 25% (from their salary/wages in the most recent quarter) without penalty. Any amount reduced beyond 25% is deducted from the amount of loan forgiveness. This is an employee-by-employee calculation and reduction.
- If we reduce headcount, is there a limit on how many employees we can furlough?
For headcount, there is no limit to how many employees you can furlough to be eligible for a PPP loan. But, the forgiveness amount will be proportionally reduced by the percentage of full-time equivalent employees during the eight weeks after loan origination compared to historical averages of full-time equivalent employees.
- If an employee often earns overtime, is overtime calculated as part of the 75% of wages you have to pay them (to avoid a reduction in the forgivable amount)?
The CARES Act does not specifically mention whether overtime is included in the 75% of wages paid, but it appears to be included. The reduction to the forgiveness amount for reducing wages is based on a reduction in “total salary or wages.” Since overtime is a type of wages, it should be included in total wages.
- If we have to spend 75% of the loan on payroll, do we have to spend that in 2 months or just by June 30?
There are two 75% payroll costs requirements. First, 75% of the loan amount must be spent on payroll costs, and the loan can only be spent on the CARES Act allowable expenses (payroll, group health benefits, leave, insurance premiums, mortgage interest, rent, utilities, interest on debt) through June 30. Second, 75% of the forgivable amount, which is calculated during the eight weeks after loan origination (without respect to the June 30 date) must be for payroll costs. In all likelihood, these two requirements will be the same, but if there is a delay in originating the loan, such that the eight weeks following origination extend past June 30, there will be a difference. We have not seen the SBA address that possibility, and we believe the assumption is that the loans will be originated quickly.
For more information about the Paycheck Protection Program, or about any of the new developments in employment-related laws as a result of the COVID-19 crisis, please refer to the HGRS LLP Coronavirus (COVID-19) Resource Center, at www.hgrslaw.com, or contact our firm at (404) 442-8776.