Understanding the Paycheck Protection Program
The CARES Act utilizes the infrastructure already in place to focus on the distribution of emergency funds directly to small businesses. This technique can be seen with regard to the Paycheck Protection Program (PPP) which is a forgivable loan that utilizes the Small Business Association's 7(a) loan framework. This means that a business owner must go through their local lender to access the program.
The U.S. Chamber of Commerce has put together an excellent Small Business Guide and Checklist regarding Coronavirus Emergency Loans. We touch on this information below, but to access their resource, click here to download the pdf.
The Treasury Department has also produced a series of information:
- Paycheck Protection Program overview
- Information for lenders
- Information for borrowers
- Application for borrowers
- Loan Forgiveness Application
SBA recently issued a new FAQ that is significant for PPP loan borrowers:
Question: Will a borrower’s PPP loan forgiveness amount (pursuant to section 1106 of the CARES Act and SBA’s implementing rules and guidance) be reduced if the borrower laid off an employee, offered to rehire the same employee, but the employee declined the offer?
Answer: No. As an exercise of the Administrator’s and the Secretary’s authority under Section 1106(d)(6) of the CARES Act to prescribe regulations granting de minimis exemptions from the Act’s limits on loan forgiveness, SBA and Treasury intend to issue an interim final rule excluding laid-off employees whom the borrower offered to rehire (for the same salary/wages and the same number of hours) from the CARES Act’s loan forgiveness reduction calculation. The interim final rule will specify that to qualify for this exception, the borrower must have made a good faith, written offer of rehire, and the employee’s rejection of that offer must be documented by the borrower. Employees and employers should be aware that employees who reject offers of re-employment may forfeit eligibility for continued unemployment compensation.
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Who Is Eligible?
Generally speaking, this program provides forgivable loans to businesses with 500 or fewer employees, including:
- Sole proprietors
- Other Self-employed individuals
- 501(c)(3) nonprofits
- 501(c)(19) veterans organizations
- Tribal businesses
Please Note: Businesses in the hospitality and restaurant industry and certain other businesses are excused from the 500 employee limitation. Please speak to your Rea advisor to learn more.
What You'll Need To Apply
Our SBA Disaster & CARES Act Loan Task Force have worked to develop a handy template designed to help you pull your application for the Payroll Protection Program loan together. You can download this document here. For a general overview of the information you will need to collect, please keep reading.
While there are still a lot of unknowns pertaining to the CARES Act, we do know that to apply for the PPP program, you will be required to compile and present documentation. Below is a list of items you should start gathering now to ensure that you are ready as soon as the government gives us the green light to apply for these funds. Please note that while we consider the following to be necessary to the application process, the final list of necessary documents is subject to change upon receiving final SBA guidance.
- 2019 and 2020 year-to-date monthly profit and loss statement
- 2019 and 2020 year-to-date payroll reports
- State income, payroll, and unemployment insurance filings
- IDs for anyone who owns 25 percent or more of the business
- Ownership percentage breakdown of the business
- Commercial insurance declaration page
- Forecast of financial obligations for 6 months (taking the following four items into consideration)
- Documentation of payroll obligations
- Interest expense
- Rent expense
- Utility payments
- SOS documentation
- Tax ID/Employer Identification Number and complete ownership information
- Entity articles
- Personal financial statement
- Business debt schedule
- Business tax returns for 2017 and 2018
Loan amounts are determined by a formula that is tied to the business's payroll costs (2.5 times the average monthly payroll cost prior to the crisis). The maximum loan amount is $10 million and the maximum interest rate is 1 percent.
How to calculate your business's payroll prior to the crisis:
- Eligible costs for payroll
- Gross compensation (Each person limited to $100k annually)
- Including payment for vacation, parental, family, medical or sick leave (excluding qualified sick and family leave for which a credit is allowed under the Families First Coronavirus Response Act)
- Including allowance for dismissal or separation
- Including group health care benefits/premiums
- Including retirement benefits (company contributions; employee contributions included in compensation above)
- Including State or local payroll taxes (not federal)
Allowable loan uses include:
- Payroll costs (as calculated above)
- Mortgage interest, rent, and utility payments
Loan Forgiveness Process
Forgiveness on this loan is equal to the amount spent by the borrower during an eight-week period after the date the loan is disbursed (borrower may delay disbursement of the loan for up to 10 calendar days) on payroll costs, interest payment on any mortgage, payment of rent on any lease, and payment on any utility. Additionally, the business:
- Must apply to the bank for forgiveness after June 30, 2020.
- You will owe money when your loan is due if you use the loan amount for anything other than payroll costs, mortgage interest, rent, and utility payments over the 8 weeks after getting the loan. Due to the likely high subscriptions, it is anticipated that not more than 25 percent of the forgiven amount may be for non-payroll costs. You will also owe money if you do not maintain your staff and payroll.
- The number of staff: Your loan forgiveness will be reduced if you decrease your full-time employee headcount.
- Level of payroll: Your loan forgiveness will also be reduced if you decrease salaries and wages by more than 25 percent for any employee that made less than $100,000 annualized in 2019.
- Re-hiring: You have until June 30, 2020, to restore your full-time employment and salary levels for any changes made between February 15, 2020, and April 26, 2020.
- Portions of loans not forgiven are payable over a maximum of two years at a maximum rate of 1 percent interest.
IMPORTANT: Those who have applied for a Disaster Relief Loan prior to the CARES Act being signed into law MUST reapply at the SBA's new portal to receive the forgivable $10,000 loan advance.
Due to the nature of the COVID-19 crisis, this information may be subject to revision as we are able to get more guidance from banks, the SBA and the U.S. Department of Treasury. You are advised to discuss your specific situation with your Rea & Associates advisor, legal counsel, and your lender before making any decisions.