Paycheck Protection Loan Program
On Friday, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The Act is the largest economic relief package in history and addresses the economic impacts of and responds to the COVID-19 outbreak. The $2 trillion 880-page bill authorizes emergency loans to distressed businesses. Title I of the CARES Act (the Paycheck Protection Loan Provisions - PPP) creates a new paycheck protection loan program - designed to provide a direct incentive for small businesses to keep their workers on payroll by providing each small business a loan up to $10 million for payroll and certain other expenses. If all employees are kept on payroll for eight weeks, SBA will forgive the portion of the loans used for payroll, rent, mortgage interest or utilities. Up to 100% of the loan is forgivable, and the forgiven loan is not included in taxable income.
Eligibility
All small businesses are eligible to receive an SBA loan authorized by the CARES Act (a “covered loan”). This includes non-profits, veterans’ organizations, Tribal concerns, sole proprietorships, self-employed individuals and independent contractors described in the Small Business Act - with 500 or fewer employees may apply.
The business must have been in operation on February 15, 2020. The PPP covers the period beginning February 15, 2020, and ending on June 30, 2020 (the Covered Period).
Maximum Loan Amount
The maximum loan is the lesser of:
- 2.5 times the average monthly payroll costs during the 1-year period before the date of the loan.
Example: During the period March 31, 2019, and April 1, 2020, your average monthly payroll costs were $10,000. Multiply this amount by 2.5 = $25,000.
Note: If you were not in business during the period beginning on February 15, 2019, and ending on June 30, 2019, you may use the period beginning January 1, 2020, and ending on February 29, 2020.
- $10 million
What is considered “Payroll Costs”?
The following are included in the “payroll costs” calculation:
- Salary or wage
- Cash tip or equivalent
- Vacation, parental, family, medical or sick leave
- Group healthcare benefits, including insurance premiums
- Retirement benefits
- State or local tax assessed on the compensation of employees (e.g. In Virginia, the amounts paid to the Virginia Employment Commission for unemployment insurance)
Note: The bill references including rent and utilities incurred during the 1-year period before the date on which the loan is made.
What is not considered “Payroll Costs”?
The following are not included in the “payroll costs” calculation:
- Compensation of an individual employee in excess of an annual salary of $100,000 (prorated for the covered period)
- Taxes imposed or withheld under chapters 21 (FICA Employee (EE) and Employer (ER), 22 (Railroad Retirement Act) or 24 (Federal Withholdings) of the Internal Revenue Code of 1986 during the covered period
- Compensation of an employee whose principal place of residence is outside the United States.
Allowable Uses of Covered Loans
You can use the covered loan proceeds for the following:
- Payroll costs (see above)
- Costs related to the continuation of group health care benefits during periods of paid sick, medical or family leave and insurance premiums
- Employee salaries, commissions or similar compensations
- Payments of interest on any mortgage obligation.
- Rent (including rent under a lease agreement)
- Utilities
- Interest on existing debt
Borrower Certification
An eligible recipient applying for a covered loan must certify that:
- The uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient; and
- Funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments
- Does not have an application pending for, and has not and will not receive between February 15, 2020, and December 31, 2020, a duplicative COVID-19 Paycheck Protection Loan.
Loan Terms, interest rate, fees and collateral
The maximum term is 10 years.
The interest rate applicable to PPP loans may not exceed 4 percent per annum. Payment of interest is required to be deferred for at least 6-months and not more than 1-year. The CARES Act authorizes the SBA to issue further guidance on loan deferrals within 15 days after enactment.
There are no loan fees and there is no prepayment fee.
No collateral or personal guarantees are required.
Amount of Forgiveness
The major benefit of a PPP loan is the potential for having all or a portion of the loan forgiven. The amount eligible for forgiveness is the sum of the following costs incurred during the covered 8-week period after the loan is made:
- Payroll costs, subtracting the pro-rated amounts for individuals with compensation greater than $100,000.
- Mortgage interest
- Rent obligations
- Utility payments
Forgiveness Reductions
The purpose of the PPP is to protect employees’ paychecks. The amount of the loan forgiven cannot exceed the principal amount of the loan and is reduced:
- If there is a reduction in the average number of employees employed by the borrower during an 8-week measurement period (compare the current year 8-week period after the loan origination to the period between February 15, 2019, and June 30, 2019. If no employees during that period, use the period between January 1, 2020, and February 29, 2020.)
- If the amount of any reduction in total employee salary or wages during the covered period is in excess of 25-percent of the total salary or wages
- Payroll documentation and documentation of expenses will be required to document that forgiveness was used to retain employees and pay expenses.
- If the borrower rehires laid-off workers by June 30, they will not be penalized for having a smaller workforce at the beginning of the period.
Note: Don’t reduce headcount or compensation amount for 8-weeks following loan origination.
Forgiveness Process
The borrower seeking loan forgiveness will submit to the lender that originated the covered loan an application that includes:
- Documentation verifying the number of full-time equivalent employees on payroll and pay rates for the periods covered. This includes:
- Payroll tax filings reported to the IRS and
- State income, payroll and unemployment insurance filings
- Documentation, including canceled checks, payment receipts, transcripts of accounts, or other documents verifying payments on covered mortgage obligations, payments on covered lease obligations and covered utility payments
- The borrower will certify that:
- The documentation presented is true and correct, and
- The amount for which forgiveness is requested was used to retain employees, make interest payments on covered mortgage obligations, make payments on a covered rent obligation or make covered utility payments.
What about amounts not forgiven?
The amount not forgiven is carried forward as an ongoing loan with a maximum 10-year loan term (same max 4% interest rate mentioned earlier). Principal and interest are deferred for a total of 6-months to a year after disbursement of the loan proceeds (lender discretion).
What lenders qualify
The PPP loan program is a partnership between private lenders, which issue the loans, and the SBA, which guarantees them. You apply through banks, credit unions and other lenders approved by the SBA to issue 7(a) loans. The Department of Treasury is also charged with authorizing new lenders, including non-bank lenders, to help meet the increased demand for PPP loans.