Frequently Asked Questions about the Paycheck Protection Program (PPP) Loans Under the CARES Act
What is the PPP Loan Program?
This is an expansion of the SBA Section 7(a) loan program to incentivize employers to retain and pay its employees using loan proceeds of up to $10 million which can be paid back over up to 10 years at a maximum interest rate of 4%. These PPP loans may also qualify for tax-free loan forgiveness of up to 8 weeks of the employer’s operating costs.
Who qualifies as an Eligible Employer?
Any business that does not employ more than 500 employees and is in operation as of February 15, 2020. This includes 501(c)(3) and certain other non-profit organizations, sole proprietorships, independent contractors and certain self-employed taxpayers. If the business employs 500 or less employees per location and has a NAICS code beginning with 72 (Accommodation and Food Services), then each location can qualify without including employees of its affiliated companies.
How much can the employer borrow?
Most businesses will calculate their maximum loan (always subject to a cap of $10 million) as 250% of the business’ average monthly Payroll Costs during the 1 year period prior to when the loan is made. If you were not in business during that period, use 250% of the average payroll costs between January 1, 2020 and February 29, 2020. However, while it is not clear, it appears that you will not be able to include the compensation of owners of partnerships and limited liability companies, who do not receive W-2 income (rather, they report their income on Form K-1), in computing the loan amount those entities can borrow nor in the amount that can be forgiven as addressed below.
What are considered “Payroll Costs”?
The following are considered payroll costs for this calculation:
- Compensation (such as salary, wages and commissions) and payments of cash tips or equivalent
- Payments for PTO, family, medical or sick leave
- Dismissal or separation allowance
- Payments for group health care benefits including insurance premiums
- Payment of any retirement benefit
- State or local tax assessed on employee compensation
- Compensation or income of a sole proprietor or independent contractor of not more than $100,000 in 1 year, prorated for the period of February 15, 2020-June 30, 2020 (i.e., $37,500)
For many small businesses, the items that will be included are the wages, PTO, health insurance premiums paid by the employer, and employer matching contributions to a profit-sharing plan. The following are not considered payroll costs:
- Compensation of an employee in excess of a $100,000.00 annual salary, prorated for the period between February 15, 2020, and June 30, 2020 (i.e., $37,500)
- FICA and railroad employee taxes imposed on the employer and employee
- Employment taxes withheld
- Employees who reside outside of the U.S.
- Qualified sick and family leave for which a credit has been taken by the employer under the Families First Coronavirus Response Act (which requires certain employers to provide employees with paid sick leave or expanded family and medical leave for specified reasons related to COVID-19)
What expenses can I use my PPP Loan proceeds to pay?
The employer/borrower can use the PPP Loan proceeds to pay for the following costs:
- Payroll Costs including wages (see above)
- Cost of continuing group health care insurance of employees out during periods of paid sick, medical, or family leave, and insurance premiums
- Payment of interest (not principal) on any mortgage and interest on other debt pre-existing debt obligations
What are the principal terms of the PPP Loan?
The maximum interest rate for any amounts not forgiven (see below) is 4% and the maximum term is 10 years. Payment of debt service on the amount not forgiven will be deferred for a total of 6 months to 1 year after the loan was funded. The PPP loans are non-recourse so no personal guarantees or other collateral (such as liens on the business assets) is required.
How much of the PPP Loan principal is forgiven?
The employer will be forgiven up to all of the principal amount borrowed if the proceeds are spent on the above listed qualifying expenditures (payroll, rent, interest, etc.) during the 8 week period following the loan funding date. The amount of the principal which will be forgiven is the sum of the covered expenses during the 8 week period, which include the bulk of a typical business’ main operating expenses: payroll costs (limited to the pro-rata portion of $100,000 of wages for this 8 week period, i.e., $15,384.62); interest payment on any mortgage existing prior to February 15, 2020; payment of rent on any lease in force prior to February 15, 2020; and payment on any utilities for which service began before February 15, 2020.
The forgivable amount under a PPP loan will be subject to reduction under two scenarios:
(1) if the borrower has reduced its number of full-time equivalent (FTE) employees during the period of February 15, 2020 through June 30, 2020. The amount of this reduction is computed by dividing the average number of FTE employees per month during this period by either (at the borrower’s option) (i) the average number of FTE employees per month employed during the period of February 15, 2019 through June 30, 2019, or (ii) the average number of FTE employees per month employed by the borrower during the period of January 1, 2020 through February 29, 2020. For this calculation, the average number of FTE employees is determined by calculating the average number of FTE employees for each pay period falling within a calendar month.
(2) the forgivable PPP loan amount is subject to reduction by the amount of any reduction in total wages of certain employees during the period of February 15, 2020 through June 30, 2020, but only if the reduction of wages exceeds 25% of the employee’s wages during the most recent full calendar quarter before the reduction in wages was imposed. For this purpose, employees with annualized wages of more than $100,000 in 2019, are not taken into account. Since many businesses have already been forced to make staffing reductions, businesses will still be able to qualify for loan forgiveness if the company re-hires back to pre-February 15, 2020 levels by June 30, 2020.
Congress wants to make these loans available as quickly as possible without the overwhelming paperwork and underwriting typically associated with typical SBA financing. As such, borrowers do not need to demonstrate actual economic harm in order to qualify and instead will be required merely to make a series of good faith certifications, principally that current economic conditions necessitate the loan to support ongoing business operations, and that the funds will be used to maintain payroll and other covered expenses.
What documentation should I expect to need for my PPP Loan Application and Forgiveness:
Borrowers will need to make a good faith certification to the lender: (i) that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operation of the borrower; (ii) acknowledging that funds will be used to retain workers and maintain payroll or make mortgage, lease and utility payments, (iii) that the borrower does not have an application pending for a loan under the PPP Loan Program for the same purpose and duplicative of amounts applied for or received under a covered loan; and (iv) during the period beginning February 15, 2020, the borrower has not received amounts under the PPP Loan Program for the same purpose and duplicative of amounts applied for or received under a covered loan.
Businesses seeking to take advantage of the loan forgiveness provisions of the PPP will have to make an application to their lender and should ensure that they have at least verification of employees and pay rates by way of payroll tax filings reported to the IRS and state income and payroll filings, unemployment insurance filings, and other documentation, and evidence of mortgage interest, lease and utility payments.
The appropriate business representative will also be required to certify that this documentation is true and correct and that the amount sought to be forgiven was used for the outlined purposes.
The lender is required to issue its decision on a borrower’s request for loan forgiveness within 60 days after lender receives the request and application from the borrower.
Has Pennsylvania or New Jersey established their own emergency loan programs?
Pennsylvania has established the Small Business First Fund and funded it with $61 million. This fund will be administered by the Pennsylvania Industrial Development Authority (PIDA). Funds through this emergency response fund will be used for working capital loans of up to $100,000 directly to small businesses and potentially nonprofits (those that employ 100 or fewer persons). The interest rate is currently 3% but the PIDA board can adjust the interest rates to as low as 0%.
New Jersey authorized the New Jersey Economic Development Authority (NJEDA) to make grants during a state of emergency or a public health emergency declared by the Governor (A3845). The EDA will also be authorized to grant certain business documentation submission deadline extensions.