This article has been updated. See footnote (1)
A much-anticipated piece of the CARES Act signed into law by the President on Friday, March 27, 2020 is the Paycheck Protection Program (PPP). The intent of the PPP is to provide a short-term lending vehicle for employers to help keep their employees in place, so that the nation can avoid widespread long-term unemployment with the government providing funding through existing mechanisms. If loans received from the PPP are used for qualifying expenses for the qualified time period, the loan will be forgiven.
In our conversations with colleagues at lending institutions, we understand that it is early in the process and they are trying to figure out how to effectively and accurately administer the program. This summary reflects our current understanding of the intent and facts of the PPP program and is not intended to be all-inclusive. A full description of the program is 70 pages long and requires significantly more time and discussion to sort out all the details. We will update this information as needed.
Please note that the PPP is not part of, nor associated with the SBA Disaster Loan program.
Paycheck Protection Program
The SBA will oversee the PPP program, which will distribute $350 billion to small businesses and nonprofits with 500 or fewer employees, with full or partial forgiveness available if the borrower meets certain requirements. Loans will be administered by 800 existing SBA-certified lenders, including banks, credit unions, and other financial institutions and will carry interest rates of less than 4%.
The loan can be 2 ½ times the qualifying payroll costs, capped at $10 million. For details on who qualifies and more, keep reading.
- Government will participate 100% in the guarantee of the loan amount through 12/31/2020.
- Covered period for loans is February 15, 2020 until June 30, 2020
- No guarantee by borrower
- No collateral needed
- No fee to the borrower
- Any amount of loan proceeds not forgiven are payable over 10 years starting with the date of the application for loan forgiveness
- Interest payments are completely deferred for one year
- Interest rates will be less than 4%
PPP covers a wide list of businesses including for-profit, private nonprofit and public nonprofits in size from single entrepreneurs up to 500 employees.
- For-profit businesses, including self-employed
- Private nonprofit
- Public nonprofit
- Greater of
- 500 employees or fewer including full-time, part-time or other basis
- Employee count does not exceed the standard size of a company in such industry
- For restaurant and hospitality industry:
- 500 or fewer employees per location and
- Assigned an NAICS code beginning with number 72 – Accommodation and Food Services, i.e.,
- Restaurants and other eating facilities
- Drinking places
- Special food services
- Traveler accommodations (hotels, motels, etc.)
- Borrower must make a good faith certification as follows:
- The uncertainty of current economic conditions caused by COVID-19 makes it necessary for the loan request to support ongoing operations.
- Must acknowledge that the funds will be used for permitted purpose only.
- Must confirm that they are not receiving funds from another SBA program for the same uses.
Businesses may use the loans for the following expenses:
- Payroll costs defined as follows:
- Employee salaries, commissions and tips. These amounts may not exceed $100,000 on an annual basis per employee. (1)
- Paid sick leave
- Medical leave
- Family leave
- Continued group health care benefits including premiums
- Retirement payments
- Vacation pay
- Dismissal and separation pay
- Interest payment on any mortgage incurred before 2/15/2020
- Rent on any lease in force before 2/15/2020*
- Utilities for which service began before 2/15/2020
- Interest on other debt obligations that were incurred before 2/15/2020
*exercise caution on renegotiation or modification of existing leases after 2/15/2020. There is uncertainty on whether those modified leases would still qualify as a covered expense.
How Much Can You Qualify For?
- Formula based on average total monthly payments for payroll costs (1) incurred during the 1-year period before the date on which the loan is made multiplied by 2.5.
- Maximum loan is $10,000,000
- Special rules apply to seasonal employers
We expect many of our clients will take advantage of these loans. It is important to understand that most businesses will treat these as short-term loans (over 8 weeks) followed by an application for loan forgiveness. To the extent not all of a loan is forgiven, the remaining balance can be amortized over a 10-year period.
The borrower is eligible for loan forgiveness equal to the amount spent by the borrower on covered expenses during an 8-week period (between February 15, 2020 and June 30, 2020).
There are two separate limitations concerning the amounts forgiven:
- Percentage of workforce retained and /or rehired post-crisis subject to specific measurements. The portion not retained or rehired would not be forgiven.
- Then to the extent an employee’s compensation is reduced by more than 25% from pre-crisis level, that reduction would reduce the amount that can be forgiven.
Borrowers will verify through documentation to lenders their payments during the period. Lenders that receive the required documentation will not be subject to an enforcement action or penalties by the Administrator relating to loan forgiveness for eligible uses.
Amounts forgiven may not exceed the principal amount of the loan. Amounts forgiven are considered forgiveness of debt but are not taxable under special exception provided in the Bill
Recordkeeping for loan forgiveness
Borrowers will need to maintain detailed accounting and recordkeeping on all elements that affect the ability to be granted loan forgiveness. Employers do not need to track covered expenses against the loan but will need to have detailed documentation available. Documentation required as part of application for loan forgiveness:
- Payroll tax filings reported to the IRS
- State income, payroll, and unemployment insurance filings
- Documentation verifying the payment of the mortgage interest, rent and utilities
Decision on forgiveness must be made by the lender within 60 days of receipt of the application for forgiveness.
This and other programs being offered to address the economic situation caused by the COVID-19 pandemic will vary in requirements and benefit to the recipients. We encourage you to discuss specifics and approach with your professional advisors prior to taking any action. Smith & Howard stands ready to help our clients as they move forward. Please contact your Smith & Howard professional for more information. We will provide updates as details emerge.
(1) Note: There is ambiguity on how to treat compensation of employees who make over $100,000 for purposes of “payroll costs” and loan funding amounts, as to whether employers are required to exclude 100% of the salary or exclude the amount of salary above $100,000. We are awaiting clarification and will update this article once received.