Paycheck Protection Program - New SBA Program in CARES Act Response to COVID-19

Monday, March 30, 2020 6:51:00 PM

The Paycheck Protection Program is intended to keep workers on small businesses’ payrolls by offering the business owners forgivable loans. This program is administered though SBA approved lenders (lenders approved to make SBA 7(a) loans).

It is important to understand the PPP is run through SBA approved lenders, not directly from the SBA, which is different than the EIDL program which is directly administered from the SBA. This means those interested in the PPP need to contact a/their SBA approved lender.

Purpose:

The amount provided under the PPP is intended to cover 8-weeks of payroll expenses and some additional amounts for making payments towards specific debt obligations. This 8-week period may be applied to any timeframe between February 15, 2020 and June 30, 2020.

Borrowers choose which 8-weeks they want to count towards their covered period, which can start as early as February 15, 2020.

Eligibility Criteria (note: exact same for the EIDL Grant program):

If you are a business that employs 500 people or fewer, or if your business is in an industry that has an employee-based size standard through SBA that is higher than 500 employees; and
A small business, nonprofit, veterans’ organization, tribal business, or are self-employed, an independent contractor or sole proprietor

Highpoints - What Does PPP Provide?

Allows you to apply for a 100% government backed, low interest SBA 7(a) loan.
Loans up to $10 million.
The loan amount will equal 250% (2.5X) of your average monthly payroll costs.
The period covered for the debt forgiveness is a borrower selected 8-week period falling within February 15, 2020 until June 30, 2020
The 100% government backed loans and fee waivers will be authorized through December 31, 2020.
Allows you to use the loan to cover payroll costs, including salaries, paid sick and medical leave, insurance premiums, mortgage, rent and utility payments.
To encourage you to rehire your laid-off employees, you will not be penalized for having a reduced payroll at the beginning of the period, so long as you rehire employees before June 30, 2020
Ensures that the loan forgiveness amount will not count as taxable income.
Delegates authority to all current 7(a) lenders to determine your eligibility; meaning you need to contact SBA preferred lender (not directly to SBA)
Max 1% interest rate on loans (added via SBA regulations)
2-year term loans (added via SBA regulations)
Only one PPP loan per borrower; if a person has multiple businesses or entities, the person will only receive one PPP loan (not a PPP loan for each entity) so select the best entity to apply for your single PPP (added via SBA regulations)
Contractors (1099's) do not count, and expenses paid to contractors should not be used in a businesses' payroll costs." Contractors and sole-proprietors can individually apply for their own PPP (added via SBA regulations)
New “affiliation rules” to determine when multiple businesses are considered affiliated with each other, or not, when calculating total (including all affiliates) payroll cost
educes the amount of loan forgiveness under the Paycheck Protection Program by the amount of your EIDL grant
You may obtain both an SBA disaster relief loan (EIDL) and PPP, so long as the funds are not used for the same purposes (see below in section: Impact of Receiving Both EIDL related to COVID19 and PPP)

Details of Calculating Maximum Loan Amount:

First, multiply the following:

the average total monthly payments by the applicant for payroll costs incurred during the 1-year period before the date on which the loan is made (other provisions for seasonal companies), by
2.5

Then add this total to any potential outstanding balance of an SBA loan 7(a) loan entered into after January 31, 2020.

What if you are a new business that hasn’t been in existence for over a year?

First, multiply the following

the average total monthly payments by the applicant for payroll costs incurred during the period beginning on January 1, 2020 and ending on February 29, 2020; by
2.5

Then add this total to any potential outstanding balance of an SBA loan 7(a) loan entered into after January 31, 2020.

What is the Maximum Loan Amount?

$10 million.

If your calculations based on the above formula exceeds $10 million, then your loan max ceiling is $10 million.

What all is included in “payroll costs?”

the sum of payments of any compensation with respect to employees that is a—
- salary, wage, commission, or similar compensation;
- payment of cash tip or equivalent;
- payment for vacation, parental, family, medical, or sick leave;
- allowance for dismissal or separation;
- payment required for the provisions of group health care benefits, including insurance premiums;
- payment of any retirement benefit; or
- payment of State or local tax assessed on the compensation of employees; and

the sum of payments of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment, or similar compensation and that is in an amount that is not more than $100,000 in 1 year, as prorated for the covered period (these will be 1099 contractor payments)

“Payroll costs” do NOT include the compensation of an individual employee in excess of an annual salary of $100,000, as prorated for the covered period (as well as other provisions of IRS tax withholdings for payroll or income taxes, employees who live outside of the US, and some qualified family or sick leave credits)

Can Sole Proprietors Obtain a PPP; and What are their Payroll Costs?

Sole proprietors are eligible to apply for the PPP program.

In calculating their maximum possible loan (and potentially later forgiven) loan amount, rather than using employee payroll, which if they don’t have any employees they won’t have, they use their individual income or net earnings to calculate their monthly individual earnings. Then their average monthly income (capped at $100,000 annually) is multiplied by 2.5 to determine their maximum loan.

On page 10, subsection f, of the regulations, they clarifying what, “qualifies as payroll costs?’” The regulations say, “for an independent contractor or sole proprietor, wage, commissions, income, or net earnings from self-employment or similar compensation.” These will still need to be proven and verified, and are also subject to the same $100K ceiling limitation of the eligible payroll costs cap.

Maximum Loan Amount Calculation Examples

Example 1 – No employees make more than $100,000
1. Annual payroll: $120,000
2. Average monthly payroll: $10,000
3. Multiply by 2.5 = $25,000
4. Maximum loan amount is $25,000
Example 2 – Some employees make more than $100,000
1. Annual payroll: $1,500,000
2. Subtract compensation amounts in excess of an annual salary of $100,000: $1,200,000
3. Average monthly qualifying payroll: $100,000
4. Multiply by 2.5 = $250,000
5. Maximum loan amount is $250,000
Example 3 – No employees make more than $100,000, outstanding EIDL loan of $10,000.
1. Annual payroll: $120,000
2. Average monthly payroll: $10,000
3. Multiply by 2.5 = $25,000
4. Add EIDL loan of $10,000 = $35,000
5. Maximum loan amount is $35,000
Example 4 – Some employees make more than $100,000, outstanding EIDL loan of $10,000
1. Annual payroll: $1,500,000
2. Subtract compensation amounts in excess of an annual salary of $100,000: $1,200,000
3. Average monthly qualifying payroll: $100,000
4. Multiply by 2.5 = $250,000
5. Add EIDL loan of $10,000 = $260,000
6. Maximum loan amount is $260,000

Interest on the Loan

If the full principal of the PPP loan is forgiven, the borrower is not responsible for the interest accrued in the 8-week covered period.

The remainder of the loan that is not forgiven will operate according to the loan terms agreed upon by you and the lender.

While some loan terms will vary case-by-case, all of the PPP loans will have a 10-year term and maximum interest rate of 4%.

How Much of the Loan Can Later Be Forgiven?

For specific expenses made during any 8-week period falling between February 15, 2020 until June 30, 2020, the loan can be forgiven which effectively converts the loan to a grant (meaning you will not have to pay that applicable portion of the loan back).

What expenses can you use the loan money to cover that will later be forgiven?

payroll costs;
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 (which shall not include any prepayment of or payment of principal on a mortgage obligation);
rent (including rent under a lease agreement);
utilities (electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020); and
interest on any other debt obligations that were incurred before the covered period.

Specific for manufactured home retailers, item number 7 above is a general “catch-all” provision and appears would include interest on the retailer’s floorplan loans for inventory.

What Reduces Level of Loan Forgiveness?

Using the loan money for other expenses that are not listed as one of the 7 expenses
Proportionate reduction in loan forgiveness to the reduction in number of employees retained compared to last year and reduced by the reduction in pay of any employee greater than 25% compared to last year.
Using the loan for ANY expenses after June 30, 2020

Remember the purpose of the program is to help you retain your employees, at their current base pay, so if you keep all of your employees and maintain their pay, the entirety of the loan will be forgiven.

Basically, if you reduced the number of employees or cut wages to employees by more that 25%, then there is a calculation for the amount of reduction in loan forgiveness.

But if rather than reducing the amount of loan forgiveness you decide instead to re-hire or increase wages back up by June 30, 2020, then the loan forgiveness will not be reduced.

For those interested in the specific formula on loan forgiveness reduction (scroll to the bottom for the law text on this section)

The PPP loan is a Nonrecourse Loan

The law says, “…the Administrator shall have no recourse against any individual shareholder, member, or partner of an eligible recipient of a covered loan for nonpayment of any covered loan, except to the extent that such shareholder, member, or partner uses the covered loan proceeds for a purpose not authorized under clause (i).”

This means that the loan is nonrecourse so long it is used for one of the 7 approved expenses.

What Must the Borrower Promise?

An eligible recipient applying for a covered loan shall make a good faith certification—

“(I) that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient;

“(II) acknowledging that funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments;

“(III) that the eligible recipient does not have an application pending for a loan under this subsection for the same purpose and duplicative of amounts applied for or received under a covered loan; and

“(IV) during the period beginning on February 15, 2020 and ending on December 31, 2020, that the eligible recipient has not received amounts under this subsection for the same purpose and duplicative of amounts applied for or received under a covered loan.

No Payments for at Least 6-Months

The law considers each/all eligible recipients that applies for a covered loan to be an impacted borrower; and requires lenders to provide complete payment deferment relief of not less than 6 months, including payment of principal, interest, and fees, and not more than 1 year.

Deadline to Apply for a PPP

Applicants must apply by June 30, 2020. SBA published their PPP Application on April 2.

Impact of Receiving Both EIDL related to COVID19 and PPP

If you received an EIDL loan related to COVID-19 between January 31, 2020 and the date at which the PPP becomes available, you would be able to refinance the EIDL into the PPP for loan forgiveness purposes.

The current assumption is that for the vast majority of EIDL’s who later receive a PPP, the EIDL will be refinanced and rolled into the PPP so that the transfer, via refinancing, is such that there is no duplication.

However, you may not take out an EIDL and a PPP for the same purposes.

Specifically, the law says, “Nothing…shall prohibit a recipient [small business] of an economic injury disaster loan [(EIDL)]…made during the period beginning on January 31, 2020 and ending on the date on which covered loans [(PPP loans)] are made available that is for a purpose other than paying payroll costs and other obligations…(i.e. payroll, 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; utilities; and interest on any other debt obligations that were incurred before the covered period)…from receiving assistance under [(PPP)].”

But you may, and should, apply for both loans

If you took advantage of an emergency EIDL grant award of up to $10,000, that amount would be subtracted from the amount forgiven under PPP.

We anticipate this will be made clearer in soon-to-be released regulations and guidance on PPP, which we will update this article with once published. But for now, the recommendation if you think you will apply for both loans – an emergency EIDL grant now, and a PPP as soon as the approved lenders come online – make sure to distinguish, track, and document to the best of your ability any EIDL grant funds (the $10,000) that are used for purposes other than for the 7 allowed purposes of a PPP loan.

But recall that EIDL grant funds can only be used for: “providing paid sick leave to employees unable to work due to the direct effect of the COVID–19; maintaining payroll to retain employees during business disruptions or substantial slowdowns; meeting increased costs to obtain materials unavailable from the applicant’s original source due to interrupted supply chains; making rent or mortgage payments; and repaying obligations that cannot be met due to revenue losses.”

Inherently there is confusing overlap in approved uses of funds. Again, we expect clarity on this specific point, but for now, it appears that those wanting to apply for both programs with maximum effect and not duplicating purposes, need to document and use the emergency EIDL grant funds for, “meeting increased costs to obtain materials unavailable from the applicant’s original source due to interrupted supply chains, making mortgage [principal] payments, and repaying obligations that cannot be met due to revenue losses.”

As the law is currently written, there appears to be a distinction in approved use of funds between EDIL grants and PPP related specifically to mortgage principal payments. PPP specifically states PPP funds can only be used for the interest expense on a mortgage, not the principal. PPP makes this clear with the wording, “payments of interest on any mortgage obligation (which shall not include any prepayment of or payment of principal on a mortgage obligation).”

Meanwhile the EIDL grant use of funds allows for,”making…mortgage payments.” EIDL grant does not specifically limit the use to only interest on a mortgage like PPP. Meaning, it currently appears that a recipient of an EIDL grant could use the grant to pay the principal portion of their business mortgage, but not the interest portion, and this would not cross into the prohibition on using the funds for the same purposes.

Of course, some businesses will need to use the EIDL grant for expenses like payroll and rent to even make it to the timeframe when PPP comes online. If this is your case, use the EIDL grant money in those ways to stay afloat, and we will work through the results of this in the future as new guidance becomes available.

While confusing, it appears likely that if you use an EIDL grant for payroll, sick leave, rent or other of the 7 purposes that your eventual PPP will cover, but the EIDL grant simply bridges the time gap from now until you secure your PPP, that your PPP forgiveness amount will just be reduced by the amount of your EIDL grant that was used for expenses in the 7 PPP categories. This makes sense that you would have already received a grant so to later get effectively an addition grant/loan forgiveness from PPP for the same expenses over the same time would be a double dip.

Needless to say, it is critical that you document and track exactly what money proceeds you spend on specific expenses.

PPP Specific Statutory Text on Limits of Loan Forgiveness

(d) Limits On Amount Of Forgiveness.—

(1) AMOUNT MAY NOT EXCEED PRINCIPAL.—The amount of loan forgiveness under this section shall not exceed the principal amount of the financing made available under the applicable covered loan.

(2) REDUCTION BASED ON REDUCTION IN NUMBER OF EMPLOYEES.—

(A) IN GENERAL.—The amount of loan forgiveness under this section shall be reduced, but not increased, by multiplying the amount described in subsection (b) by the quotient obtained by dividing—

(i) the average number of full-time equivalent employees per month employed by the eligible recipient during the covered period; by

(ii) (I) at the election of the borrower—

(aa) the average number of full-time equivalent employees per month employed by the eligible recipient during the period beginning on February 15, 2019 and ending on June 30, 2019; or

(bb) the average number of full-time equivalent employees per month employed by the eligible recipient during the period beginning on January 1, 2020 and ending on February 29, 2020; or

(II) in the case of an eligible recipient that is seasonal employer, as determined by the Administrator, the average number of full-time equivalent employees per month employed by the eligible recipient during the period beginning on February 15, 2019 and ending on June 30, 2019.

(B) CALCULATION OF AVERAGE NUMBER OF EMPLOYEES.—For purposes of subparagraph (A), the average number of full-time equivalent employees shall be determined by calculating the average number of full-time equivalent employees for each pay period falling within a month.

(3) REDUCTION RELATING TO SALARY AND WAGES.—

(A) IN GENERAL.—The amount of loan forgiveness under this section shall be reduced by the amount of any reduction in total salary or wages of any employee described in subparagraph (B) during the covered period that is in excess of 25 percent of the total salary or wages of the employee during the most recent full quarter during which the employee was employed before the covered period.

(B) EMPLOYEES DESCRIBED.—An employee described in this subparagraph is any employee who did not receive, during any single pay period during 2019, wages or salary at an annualized rate of pay in an amount more than $100,000.