[ updated April 9, 2020 | 8:35am ]
As a reminder, funds from this program:
- Can be used for employee salaries under $100,000, paid sick or medical leave, insurance premiums, and mortgage, rent and utility payments;
- Are 100% forgivable if used for the above purposes; and
- Are available to businesses or 501(c)(3) nonprofits with less than 500 employees, including sole-proprietors, independent contractors, and other self-employed individuals.
While the application and documentation requirements are simple, make sure you review all the documents before submitting along with the application. Additionally, consider your intentions with other Small Business Administration loan programs and the impact on funding possibilities.
FAQ Posted by Treasury and SBA
On April 6th, 2020, the Treasury Department and the Small Business Administration posted an 18-point FAQ that addresses many key questions.
A few key points:
- The Gross Payroll approach should be used for both loan application and forgiveness. The guidance also clarifies that employer FICA should not be included.
- The $100,000 salary limitation does not include healthcare, retirement benefits, and state and local taxes.
- Applicants who use Professional Employer Organizations (PEOs) can provide payroll reports since they cannot produce individual entity payroll tax documents.
- Borrowers can calculate their aggregate payroll costs using data either from calendar year 2019 or from the previous 12 months. The FAQs also provide information for businesses that have been in operation less than 12 months.
The SBA clarifications are positive steps forward and will have a significant impact on the total eligible funding amount available to small businesses.
There are other outstanding issues, and we will continue to monitor the program and update as we know more.
Updates On PPP Loans
On April 2, 2020, the SBA made significant changes from its original plan. Summarized below are three of the major changes:
- Increased Interest Rate
- The SBA raised the fixed interest rate on loans made under the program from 0.5% to 1%.
- A change for the loan forgiveness calculation
- In order to qualify for forgiveness wages that are paid during the 8 week period following the receipt of the loan must be no less than 75% of the loan forgiveness.
- Independent Contractor payments are not included in the loan calculation
- Since independent contractors can apply for a PPP loan on their own, businesses cannot use them in their calculation of payroll costs for any loan calculations.
The new guidance issued by the SBA is drastically different than the CARES Act. Businesses who have already included independent contractors in their payroll calculations to apply for a PPP loan should update the calculation. For any who have not filed, be sure to remove the contractor pay from your calculations. For any that have filed we recommend you retract your application and update the application according to the new guidance. It is important to not submit duplicate applications or you will likely delay processing.
How to Apply
Interested applicants can apply through any existing SBA 7(a) lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. According to the SBA, other regulated lenders will be available to make these loans once they are approved and enrolled in the program.
We encourage you to consult with your local lender as soon as possible. Lenders can start processing loan applications as soon as April 3, 2020.
The Paycheck Protection Program is a win for Main Street. We will continue to analyze information coming from the Treasury Department and SBA, and we will continue to provide you with updates as we receive new information.
The Small Business Administration launches the Paycheck Protection Program
The Coronavirus Aid, Relief and Economic Security Act (CARES Act) allocates nearly $350 billion to a new lending program through the Small Business Administration (SBA), aimed at helping employers cover their payrolls during the coronavirus (COVID-19) pandemic. The loans under the Paycheck Protection Program (PPP) are subject to 100% forgiveness if certain criteria are satisfied, and neither the government nor lenders will impose fees.
The program is open to virtually every U.S. small business — including sole proprietors, self-employed individuals, independent contractors and nonprofits — affected by COVID-19. It’s available through June 30, 2020, but on a “first-come, first-served” basis. The U.S. Treasury Department is urging businesses to apply promptly.
The PPP generally is available to small organizations with fewer than 500 employees. The term “employees” includes full-time, part-time and any other status workers.
For businesses in the accommodation and food services sector, the 500-employee threshold is applied on a per physical location basis. The SBA’s normal affiliation rules also don’t apply to companies that receive financial assistance from an SBA-licensed Small Business Investment Company or certain franchises.
The SBA is waiving its usual requirements for loans. Businesses need not provide personal guarantees or collateral — or demonstrate the inability to obtain some or all of the loan funds from other sources (also known as the Credit Elsewhere requirement).
Instead, borrowers must certify in good faith all of the following:
- They were operating on February 15, 2020, and had employees for whom they paid salaries and payroll taxes or paid independent contractors, as reported on Form 1099-MISC,
- Current economic uncertainty makes the loan necessary to continue ongoing operations,
- The funds will be used to retain workers and maintain payroll, or to make mortgage interest, rent and utility payments for eight weeks (75% of loan proceeds must be used for payroll costs),
- They don’t have, and won’t receive, another loan under the PPP, and
- The number of full-time equivalent employees on payroll and the dollar amounts of payroll costs, covered mortgage interest payments and covered rent payments and utilities.
Independent contractors, sole proprietors and self-employed individuals must provide additional documentation, such as payroll processor records, payroll tax filings, Form 1099s and, for sole proprietors, income and expenses.
Note that, in the days leading up to the opening of the application process, some banks expressed concern that a lack of guidance could result in significant delays in issuing loans. The Treasury Department didn’t release its interim final rule until the evening before the program began accepting applications, so lags in funding may occur.
Loan amounts and terms
Eligible businesses can obtain loans for 2 1/2 months of their average monthly payroll costs plus the outstanding amount of an Economic Injury Disaster Loan (EIDL) made between January 31, 2020, and April 3, 2020 (less the amount of any advance under an EIDL COVID-19 loan, which doesn’t have to be repaid). Seasonal or new businesses will use different applicable time periods for the calculation.
Loans are subject to a $10 million cap. Payroll costs are limited to $100,000 annualized for each employee; amounts above that must be excluded from the calculation. Independent contractors who have the ability to apply for a PPP loan on their own don’t count for purposes of a borrower’s payroll.
Payroll costs include compensation, cash tips, severance, employee benefits (including leave), and state and local taxes on compensation. For sole proprietors, independent contractors and self-employed individuals, payroll includes wages, commissions, income and net earnings from self-employment.
Payroll excludes payroll and income taxes and compensation paid to employees who don’t live in the United States. It also doesn’t include qualified sick or family leave wages paid under the recent Families First Coronavirus Response Act.
The loans carry a fixed interest rate of only 1% and, although the CARES Act provided for terms of up to 10 years, will run for two years. All payments are deferred for six months, but interest will continue to accrue. Borrowers can pre-pay without penalties or fees.
Businesses can qualify for loan forgiveness for amounts used for payroll costs, mortgage interest, and rent and utility payments over the eight weeks after receiving the loan. While the CARES Act provides that a borrower can spend up to 50% of loan proceeds on nonpayroll costs and still qualify for forgiveness, the final regulations indicate that no more than 25% of the loan proceeds can be used for such costs and benefit from forgiveness.
Borrowers also must maintain staff and payroll to qualify for full forgiveness. Loan forgiveness will be reduced if salaries and wages are reduced by more than 25% for any employee who made less than $100,000 annualized in 2019. Businesses will have until June 30, 2020, to restore full-time employment and salary levels from reductions made between February 15, 2020, and April 26, 2020.
Businesses can submit a request for forgiveness to their lenders. Requests must include documents verifying the number of full-time equivalent employees and pay rates, as well as the payments on eligible mortgage, lease and utility obligations. Lenders must make forgiveness decisions within 60 days.
The application process for eligible small businesses and sole proprietors began April 3, 2020, and independent contractors and self-employed individuals can begin to apply on April 10, 2020. Businesses might be able to expedite the process by seeking loans from financial institutions where they have existing lending relationships. Contact us for additional information.