By: Sharon C. Lincoln
On April 24, 2020, the Paycheck Protection Program and Health Care Enhancement Act (“PPP & HCE Act”), was signed into law. This new federal relief legislation includes $310 billion of additional funding to restart the Paycheck Protection Program (“PPP”).
The PPP is an economic stimulus initiative that makes it easier for eligible organizations to obtain loans through the Small Business Administration (“SBA”) in order to keep operations running and retain employees. Under the PPP, an eligible organization may receive a loan covering up to 2.5 months of its average monthly payroll costs (with some limitations). A significant portion of the loan may be eligible for tax-free forgiveness.
The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) launched the PPP. However, the $349 billion originally earmarked to provide funding for the PPP ran out after less than two weeks after the first PPP applications were accepted.
The PPP & HCE Act also includes $60 billion to provide additional funding for the SBA’s economic injury disaster loan program (“EIDL”).
The SBA periodically updates a list of frequently asked questions regarding the PPP, which can be found here.
Although the PPP & HCE Act increased the funding available for the PPP, organizations that would benefit from a PPP loan are advised to apply as soon as possible.
A summary of the PPP is as follows, updated as of April 27, 2020:
Duration and Terms
The PPP is available until June 30, 2020, or until SBA guarantees authorized under the PPP & HCE Act reach the new $310 billion limit.
Interest on loans made under the PPP is 1.0%. In addition, payments of principal, interest, and fees will be deferred for six months.
Typical SBA borrower and lender fees are waived under the PPP. Borrowers are not required to personally guarantee the loans under this program and no collateral is required.
The PPP is accessible to any business entity, section 501(c)(3) nonprofit organization, section 501(c)(19) veterans organization, and Tribal business concern that has no more than 500 employees or meets the size standard established by the SBA (based upon the relevant industry in which the entity operates). Note that this program is not available to non-charitable tax-exempt organizations (apart from veterans organizations) such as social welfare organizations, agricultural cooperatives or business leagues.
Organizations with multiple physical locations, not more than 500 employees per physical location, and a NAICS code beginning with 72 (i.e., the accommodation and food services sector) are eligible to participate in the PPP.
In addition, organizations may qualify for a PPP loan even if they have more than 500 employees if (i) they satisfy the existing stator and regulatory definition of a “small business concern” under section 3 of the Small Business Act, 15 U.S.C. 632 or (ii) they meet both tests in the SBA’s “alternative size standard.”
Affiliation rules apply to aggregate related entities (and their employees) for purposes of determining eligibility for the PPP. However, such rules do not apply to organizations with a NAICS code beginning with 72, organizations operating as a franchise, and organizations receiving funding from a small business investment company licensed under section 301 of the Small Business Investment Act of 1958.
The PPP is also available to sole proprietors, independent contractors, and self-employed individuals; however, partners in a partnership may not apply on their own behalf and may seek a PPP loan at the partnership level only.
Eligible organizations must certify that:
- The uncertainty of current economic conditions makes the loan request necessary to support the organization’s ongoing operations;
- The funds will be used to retain workers, maintain payroll, or make mortgage interest payments, lease payments, and utility payments;
- The organization does not have another application pending for a PPP loan for the same purpose and amounts;
- During the period beginning February 15, 2020, and ending on December 31, 2020, the organization has not received any amounts under the PPP for the same purpose and duplicative of amounts applied for or received under the PPP.
Loan Amount Tied to Payroll Costs
An eligible organization is able to receive a loan equal to the lesser of $10 million or 2.5 times the organization’s average monthly payroll costs for the one-year period preceding the loan origination date. The Act provides special accommodations for entities that have been in existence for less than one year and for seasonal employers.
For purposes of determining the maximum loan amount, no more than $100,000 of compensation per employee may be included in the calculation of an applicant’s payroll costs. This $100k cap does not apply to non-cash benefits, including employer contributions to defined benefit or defined contribution retirement plans, payments for employee benefits consisting of group health care coverage, including insurance premiums, and state and local taxes assessed on employee compensation.
Certain other exclusions also apply (for example, the compensation of an employee whose principal location is outside of the United States may not be included in the calculation of an organization’s average monthly payroll costs).
For sole proprietors and independent contractors, payroll costs include the sum of payments of any compensation 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 per year or pro-rated as provided under the PPP.
No less than 75% of the loan must be used to cover payroll costs, salaries and commissions, benefits such as paid vacation time, maternity, sick leave and health care. No more than 25% of the loan may be used for certain specific non-payroll expenditures: mortgage interest, rent, utilities, and debt incurred prior to February 15, 2020.
Tax-Free Loan Forgiveness
The PPP offers loan forgiveness so long as no less than 75% of the amount forgiven was solely used to maintain payroll and no more than the 25% of the amount forgiven was used to pay mortgage interest, rent, and/or utilities.
Amounts forgiven under the PPP are not taxable.
The amount eligible for forgiveness includes only expenses incurred and paid during the first 8 weeks following the first date on which the loan was paid to the borrower. Also, the amount forgiven under the loan will be reduced:
- In proportion to the reduction in the borrower’s workforce during this period, measured against the average number of full-time equivalent employees per month between February 15, 2019, and June 30, 2019, or between January 1, 2020, and February 29, 2020, and
- By the amount of any reduction in compensation in excess of 25% of any employee whose annualized salary for 2019 was not more than $100k.
Amounts of an EIDL loan refinanced through the PPP loan may not be forgiven.
To request loan forgiveness, borrowers will need to submit a request to the lender that is servicing the loan. The request must include documents that verify the number of full-time equivalent employees and pay rates, as well as the payments on eligible mortgage, lease, and utility obligations.
In order to clearly show that the PPP loan was used exclusively for permitted expenditures, borrowers may want to set up a separate bank account for the loan.
The lender must make a decision on the forgiveness within 60 days. Any portion of a PPP loan that is not forgiven may be repaid over a term of 2 years from the date the organization applies for loan forgiveness.
The Act provides that the SBA should issue guidance to provide that priority for the loans under the PPP should be given to small business concerns and entities in underserved and rural markets, including veterans and members of the military community, small business concerns owned and controlled by socially and economically disadvantaged individuals, women, and businesses in operation less than 2 years. To date, the SBA has not issued any such guidance.
However, the SBA issued FAQ #31, which asks “Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?” The answer to this question was effectively “No” and includes the comment that “it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification [that the loan is necessary] in good faith.”
The SBA’s response to FAQ #31 also calls into question whether companies with venture capital funding qualify for the PPP.
Unlike other relief programs in the CARES Act (such as the refundable payroll tax credit), the PPP does not require a quantifiable level of economic harm in order to qualify for the program. However, organizations that apply for a PPP loan would do well to document the factors regarding “the current economic uncertainty” that form the basis for determining that the loan is “necessary.”
To apply for a PPP loan
In order to apply for the PPP, an applicant should take the following steps:
- Contact its bank and ask if the bank is planning to offer loans under the PPP. If the answer is “no,” contact a nearby bank that is an SBA preferred lender.
- Prepare the application form. The application form is here
- Compile the appropriate documentation, including documentation that shows the following:
- The number of full-time equivalent employees on payroll.
- The dollar amounts of payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities for the eight-week period following the making of the loan.
As noted above, the Act defines payroll costs broadly, to include wages, salaries, retirement contributions, health care benefits, covered leave and the payment of state or local tax assessed on the compensation of employees.
Many banks appear to require written certification that applying for the PPP loan received board-level approval.
The CARES Act authorized the SBA to provide economic injury disaster loans (“EIDL”) to small businesses as well as to private nonprofit organizations (of any size) and agricultural cooperatives. A loan advance in the form of an emergency grant may be issued to an eligible organization that has applied for an EIDL. The emergency grant may not be in excess of $10,000 and is limited to $1,000 per employee per applicant.
If the SBA denies the organization’s EIDL application, the emergency advance funds do not need to be repaid and may be used for payroll costs, increased material costs, rent or mortgage payments, or for repaying obligations that cannot be met due to revenue losses.
Should you need assistance or have any questions concerning the Paycheck Protection Program, contact Sharon C. Lincoln at email@example.com or your Casner & Edwards attorney.