The Coronavirus Aid, Relief and Economic Security Act (CARES Act) introduced several areas of financial assistance for business owners, but one of the more beneficial provisions of the Act is the loan forgiveness outlined under the SBA Paycheck Protection Program (PPP).
Most lenders began accepting applications from companies classified as small businesses or sole proprietors on Friday, April 3, 2020 (independent contractors may begin applying on Friday, April 10, 2020), and has been widely reported recently within a couple of days, some banks had reached their lending capacity under the program. As a result, some lenders are either no longer accepting applications and many are only accepting them from current clients due to the demand.
Businesses seeking financial assistance via the PPP should act now while there are still funds available.
Summary of Key Provisions of the PPP Loan
As an incentive for small businesses to keep their workers on the payroll, the PPP will make loans forgivable if a majority of employees (75%) are kept on the payroll for eight weeks after the loan is originated (monies must be accepted from the lender within ten (10) calendar days of loan funding) and the money must be used for payroll, rent, mortgage interest or utilities. To qualify, an organization must have fewer than 500 employees and be able to certify that they have been affected by COVID-19.
Additionally, the loan has a maturity of two years and an interest rate of 1%. SBA fees will also be waived and there is deferment of payments for six months.
One caveat, if a business accepts a payroll protection loan, employers will not be able to take advantage of the employee retention payroll tax credits and the payroll tax deferral provided in the CARES Act. You should work with a trusted financial advisor, such as your existing accountant or CPA, to discuss the process in more detail and clarify other areas that may impact your ability to obtain the loan.
How to calculate the Loan
The PPP loan amount is calculated as follows:
Average Monthly Payroll costs (from the previous 12 months or calendar year 2019) X 2.5
There is a cap of $10 million. Additionally, there are different time periods that can be used for seasonal or new businesses. Most of the confusion on the application has been surrounding the “payroll costs” definition. Payroll costs include:
|Interim Final Rule||Explanation|
|Salary, wages, commissions or similar compensation||Gross wages|
|Cash tips or the equivalent||Based on past records or a reasonable good faith estimate in the absence of records|
|Payments for vacation, parental, family, medical or sick leave, allowance for separation or dismissal||Amounts typically included in gross wages|
|Payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums and retirement||The employer cost of these benefits|
|Payment of state and local taxes assessed on compensation of employees||Organization’s SUTA payments|
Employers cannot include the following in their payroll costs:
- Federal payroll taxes
- Compensation of an employee whose principal place of residence is outside the United States
- Qualified sick and family leave wages for which a credit is allowed under the Families First Coronavirus Response Act
- Payments to independent contractors (there was some confusion surrounding independent contractor payments by businesses due to early articles written about the CARES Act bill, but the language was written to cover when independent contractors apply for their own PPP and was misinterpreted in many cases)
Employers are also limited to wages of $100,000 per employee in the gross wages determination, but this limitation annually applies only to cash compensation, not to non-cash benefits.
Loan Forgiveness Amount
The amount eligible for forgiveness under the PPP is the sum of covered payments made during the eight weeks from the beginning date the loan is received, not to exceed the loan amount. The covered payments include payroll costs (see definition above), mortgage interest, rent (leases or loans before Feb. 15, 2020) and utility payments under service agreements dated before Feb. 15, 2020. No more than 25% of the forgiveness amount may be attributable to non-payroll costs.
Forgiveness is based on the employer maintaining or quickly rehiring employees and maintaining salary levels, and it will be reduced if full-time headcount declines, or if salaries and wages decrease compared to other periods in 2019 or 2020. According to the CARES Act, the reduction for employee count will be the average number of full-time equivalent employees per month employed by the business during the covered period (the eight weeks) divided by the average number of full-time equivalent employees per month employed by the eligible recipient during the period beginning March 1, 2019, and ending on June 30, 2019 (the calculation is slightly different for a seasonal employer).
The loan forgiveness amount may be reduced if an employer reduces compensation for their employees in excess of 25%. This applies if the reduction was in the most recent full quarter in which the employee was paid compensation during the covered period of any employee who was compensated.
The PPP application process has proven to be a complex situation, and organizations are strongly encouraged to work with their advisors such as your accountant or CPA. If you would like to speak with one of our attorneys regarding the business issues caused by the novel coronavirus pandemic, contact us by clicking here or by calling (603) 883-0797.
Author: John S. Polgrean, Esq.
This blog is intended for informational use only. The information contained herein should not be construed as offering legal advice or a legal opinion.
For helpful links and resources please access or Covid 19 Tab and the following links for additional new information:
PPP Interim Lender rules: https://www.sba.gov/document/policy-guidance–ppp-interim-final-rule
Treasury Department Lender FAQs: https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Frequenty-Asked-Questions.pdf