Skip to Content
Treasury Issues Additional Guidance and New Application Form for Paycheck Protection Program Loans
4/6/2020 | Articles & Alerts, General, News & Resources
On April 2, 2020, the United States Treasury and the Small Business Administration (SBA) issued additional implementation guidelines and requirements for its Paycheck Protection Program (PPP)—a key component of the CARES Act stimulus package intended to incentivize small businesses and sole proprietorships to maintain payroll during the COVID-19 crisis by providing them with access to forgivable loans for payroll and overhead through existing SBA lenders (“PPP Loans”). In the new guidelines, the SBA clarifies certain provisions of the CARES Act, provides fixed terms for the PPP Loans, and includes certain other significant changes from the CARES Act and previous guidance. The changes and additional guidelines are summarized below.
Application Window
For small businesses and sole proprietorships, the application period for the program began today, Friday, April 3, 2020. Independent contractors and self-employed individuals can apply for the loans starting on April 10, 2020. Applications and required documentation must be submitted to an approved SBA lender before the window closes on June 30, 2020.
Since the loans are being issued on a first come, first served basis, and because there is a funding cap and lenders need time to process applications, we are encouraging our clients to discuss with their professional advisors whether applying for the loan is the best option for their business and to move quickly in submitting their application if they choose to do so.
Interest Rate Change and Loan Maturity Date Change:
In its final interim rule, the SBA has raised the fixed interest rates on loans made under the program from 0.5% to 1%. All payments can be deferred for the first 6 months after the loan proceeds are received. However, interest will continue to accrue during this deferment period.
While the CARES Act stated the loan maturity date for the PPP Loans could extend up to 10 years, the SBA now specifies that the loan maturity date for all PPP Loans (to the extent not forgiven) will be 2 years. There are no prepayment penalties or fees.
Application Forms, Supporting Documents, and Certifications:
The applicant must submit the application form (SBA Form 2483) with the required supporting documentation to its lender. This documentation may include IRS Forms 940 and 941, payroll summary reports with corresponding bank statements, summaries of payroll benefits (vacation and sick leave, allowance for dismissal, group health benefits, retirement benefits, etc.) and 1099’s, recent mortgage or rent statements, and recent invoices for utility services.
An authorized representative of the applicant must comply with the certification requirements which are included here PPP Loan Application Certification.
No collateral or personal guarantees are required.
A Link to the SBA PPP Loan Application can be found here: https://www.sba.gov/sites/default/files/2020-03/Borrower%20Paycheck%20Protection%20Program%20Application_0.pdf
Note that the SBA Form 2483 PPP Loan Application published last night has been modified from the prior versions. It is important that applicants submit this modified version of the Loan Application when they apply.
Who is Eligible to Apply?
The SBA will allow lending institutions to rely on certifications from the borrower in order to determine the eligibility of the borrower and use of loan proceeds and to rely on specified documents, outlined below, provided by the borrower to determine qualifying loan amount and eligibility for loan forgiveness.
You are eligible for a PPP Loan if:
- You have 500 or fewer employees whose principal place of residence is in the United States;
- Your business was in operation as of February 15, 2020; and
- You either:
- Had employees for whom you paid salaries and payroll taxes, or
- paid independent contractors, as reported on a Form 1099-MISC.
Sole proprietors, independent contractors and eligible self-employed individuals who operated their businesses as of February 15, 2020 are also eligible for a PPP Loan.
Documents required to establish eligibility are outlined below.
The applicant must also certify that current economic uncertainty makes this loan request necessary to support the ongoing operations of the business.
Interestingly, these rules do not address whether the compensation taken by owners of partnerships and limited liability companies having more than one owner, count in the calculation of payroll costs. Accordingly, there is still some confusion among borrowers who are taxed as partnerships.
Calculating Loan Amounts: How Much Can I Borrow?
Under the PPP, the maximum loan amount is the lesser of $10 million or an amount determined using a payroll-based formula as explained below.
The following methodology, which is one of the methodologies contained in the Act, will be most useful for many applicants:
- Aggregate payroll costs (defined in detail below) from the last 12 months;
- Subtract any compensation paid to an employee in excess of $100,000 and/or amounts paid to an independent contractor or sole proprietor in excess of $100,000 per year;
- Calculate average monthly payroll costs and divide the amount by 12;
- Multiply the average monthly payroll costs (from step 3) by 2.5;
- If applicable, add the outstanding amount of an Economic Injury Disaster Loan (EIDL) made between January 31, 2020 and April 3, 2020
= Total PPP Loan
The following examples illustrate this methodology. Please note that these examples were generated by Kaplin Stewart for illustrative purposes only.
- Example 1 – No employees make more than $100,000.
- Annual Payroll: $1,200,000
- Average Monthly Payroll: $100,000
- Multiply by 2.5 = $250,000
- Maximum Loan Amount = $250,000
- Example 2 – Three Employees make $200,000 all others make under $100,000.
- Annual Payroll: $1,500,000
- Subtract compensation amounts in excess of an annual salary of $100,000:
- 3 Salaries of $200,000 are each reduced by $100,000
- Net reduction to Annual Payroll: $300,000
- Adjusted Annual Payroll: $1,200,000
- Average Monthly Qualifying Payroll: $100,000
- Multiply by 2.5 = $250,000
- Maximum Loan Amount = $250,000
- Example 3 – Three Employees make $200,000, all others make under $100,000, outstanding EIDL of $10,000
- Annual Payroll: $1,500,000
- Subtract compensation amounts in excess of and annual salary of $100,000:
- 3 Salaries of $200,000 are each reduced by $100,000
- Net reduction to Annual Payroll: $300,000
- Adjusted Annual Payroll: $1,200,000
- Average Monthly Qualifying Payroll: $100,000
- Multiply by 2.5 = $250,000
- Add Outstanding Balance of EIDL ($10,000) to above amount = $260,000
- Maximum Loan Amount: $260,000
What Can PPP Loan Proceeds Be Used For?
- The following payroll costs:
- Compensation to employees (whose principal place of residence is the United States) in the form of salary, wages, commissions, or similar compensation;
- Cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips);
- Payment for vacation, parental, family, medical or sick leave;
- Allowance for separation or dismissal;
- Payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, and retirement; and
- Payment of state and local taxes assessed on compensation of employees;
- For independent contractors or sole proprietorships this includes wages, commissions, income or net earnings for self-employed or similar compensation
- The following overhead expenses:
- Mortgage interest payments (but not mortgage prepayments or principal payments);
- Rent payments if the lease agreement was in effect before February 15, 2020;
- Utility payments for services which were being provided as of February 15, 2020;
- Interest payments on any other debt obligations that were incurred before February 15, 2020; and/or
- Refinancing an SBA EIDL from January 31, 2020 through April 3, 2020.
Importantly, the interim final rules now specify that at least 75% of the PPP Loan proceeds must be used for payroll costs and only a maximum of 25% can be used for the borrower’s other overhead expenses such as mortgage interest, utilities and rent. For purposes of determining the percentage of use of proceeds for payroll costs, the amount of any EIDL refinanced will be included.
Loan Forgiveness: Can My PPP Loan be Forgiven in Whole or in Part?
The PPP Loan may be forgiven up to the full principal amount and any accrued interest if the proceeds are used for permitted payroll costs and overhead expenses and the borrower maintains pre-February 15, 2020 employee and compensation levels.
Borrower will have to document the proceeds used for payroll costs in order to determine the amount of forgiveness. For this reason, we are recommending that our clients establish a separate account that will receive the loan proceeds. Each time a transfer is made from this account for a qualified payroll cost or overhead expense, the recipient of the funds and the expense should be documented.
If the proceeds are used for anything other than permitted payroll costs (at least 75% of the proceeds must be used for this) and overhead expenses over the 8 weeks period following the date of the PPP Loan, the amount forgiven will be reduced. If this is done inadvertently, it will need be repaid. If funds are knowingly used for unauthorized purposes, the borrower may be subject to additional liability such as charges for fraud.
The amount forgiven will also be reduced if the borrower fails to maintain pre-February 15, 2020 employee and compensation levels. The SBA stated that small businesses have until June 30, 2020 to restore their full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020.
Independent contractors do not count as employees for purposes of PPP Loan forgiveness since independent contractors have the ability to apply for a PPP Loan on their own.
How Can I Request Loan Forgiveness?
You must submit a request for loan forgiveness to the lender servicing the loan. This request must include documentation verifying the number of full-time employees and pay rates and substantiating payments for permitted payroll costs and overhead expenses. You must certify that the documents are true and that you used the forgiveness amount to keep employees and make pay for permitted overhead expenses. The lender must make a decision on the forgiveness within 60 days.
Other Considerations:
A business or individual as described above cannot apply for more than one PPP Loan.
Electronic signatures are permitted.
A link to the 100 most active SBA 7(a) lenders can be found here: https://www.sba.gov/article/2020/mar/02/100-most-active-sba-7a-lenders