Paycheck Protection Program Demystified
Updated: April 6, 2020
The Coronavirus Aid, Relief, and Economic Security (CARES) Act allocated $349 billion to provide economic relief to small businesses nationwide adversely affected by COVID-19 as laid out in the Paycheck Protection Program (PPP). The program provides 100% SBA backed loans to help keep employees on payroll and small businesses open. Under certain circumstances, the PPP loan will ultimately be forgiven.
Here are the questions that this post will answer:
Who is eligible for the loan?
- A small business with less than 500 employees. Hotels and restaurants will be able to count employees per location.
- 501(c) (3) non-profit organizations with less than 500 employees
- 501(c) (19) veteran organizations with less than 500 employees
- Tribal business concern
- An individual who operates as a Sole Proprietor
- An individual who operates as an Independent Contractor, gig economy workers
- An individual who is Self-employed who conducts trade or business
- Must be in business before February 15, 2020
How much can be borrowed?
2.5x average monthly ”payroll costs” based on a 12-month look-back period. The amount of money a business can borrow is capped at $10 million.
Payroll cost here means:
- salary wages, commissions, bonuses, or tips and bonus capped at $100,000 for each employee.
- Employee benefits e.g. vacation, parental, family, medical or sick leave; health care benefits including insurance premiums, and retirement benefits
- State and local taxes on compensation
For Sole Proprietors or Independent contractors, payroll costs here mean, wages, commissions, income or net earnings from self-employment capped at $100,000.
To calculate “payroll costs” – take the payroll average from any 12 months lookback period before February 15, 2020 e.g. all of 2019 or Feb 15, 2019 to Feb 15, 2020, then multiply that by 2.5 to get your eligible loan amount.
For businesses that have been in business less than a year, they are still eligible – you just annualize based on the months you have been in service.
2.5x AVERAGE MONTHLY PAYROLL COST
Where can you apply for a Paycheck Protection Program loan?
The Small Business Administration has a network of banks and credits unions that already participate in the SBA 7(a) lending program. You can call your bank or find an SBA-approved lender in your area through the SBA’s online Lender Match tool. An application has been posted on the Treasury Department’s CARE Act resource page. The lending institutions will also have an application on hand.
What documentation is needed for the application?
- Proof you were in business before February 15, 2020.
- Tax Identification Numbers such as EIN – Employer Identification Number or SSN- Social Security Number
- Payroll documentation (W-2s, W-3s, 940, 941 for all full-time employees residing in the USA)
- List of all owners with more than 20% ownership
Independent contractors can include wages, commissions, income, or net earnings from self-employment or similar compensation for “payroll costs”.
Borrowers can also provide other supporting documentation such as bank records if they do not have any of the documents listed above.
When can you apply for the loan?
Starting April 3, 2020 for small businesses, Sole Proprietors
Starting April 10, 2020 for Self-employed individuals, Independent contractors.
Is there an application deadline?
Eligible businesses can apply for a PPP loan until June 30th, 2020.
How can the loan become eligible for forgiveness?
60 days after funding, any loan amount that is used for eligible expenses over an 8 week period after the loan is made can be forgiven. The business will have to request for loan forgiveness with their specific lender and provide supporting documentation.
Eligible expenses (payments) include:
- Payroll costs, including benefits
- Mortgage interest (mortgage entered before February 15, 2020)
- Rent (lease agreement made before February 15, 2020)
- Utilities (services began before February 15, 2020)
- Interest payments on other debt
- Refinance costs for EIDL (this is now being rolled into the application)
Conditions for loan forgiveness:
- 75% of the amount must be used for payroll
- Staff count is maintained. The aim of the Paycheck Protection Program is to help businesses retain employees. Forgiveness will be reduced proportionately to headcount i.e. if 40% of employees are laid off then only 60% of the loan will be forgiven.
- Payroll level cannot be reduced by more than 25%
- Re-Hiring: If a business has already laid-off employees, they can still be forgiven if they rehire the employees by June 30, 2020 for any changes made between February 15, 2020 and April 26, 2020.
What happens to the unforgiven portion of the loan?
Any amount that is not forgiven converts to a 2-year loan at 1%APR. The first payment can be deferred for the first six months but interest will continue to accrue.
No personal guarantee or collateral is needed.
What if a business had applied for an Economic Injury Disaster Loan (EIDL)?
The EIDL can be refinanced into the PPP for the purposes of loan forgiveness.
Can a business get disqualified from getting the PPP loan?
An eligible business can be disqualified for a PPP loan if:
- Owner is engaged in any illegal activity under federal, stare or law law
- Owner is subject to an indictment, arraignment, is incarcerated, on probation or parole
- The owner has been convicted of a felony within the last 5 years
- You or any business owned or controlled by you is currently delinquent or has defaulted within the last seven years on a direct or guaranteed loan from SBA or any other Federal agency.
- You’re a household employer (individuals who employ nannies or housekeepers)
DISCLAIMER: I am not an accountant, lawyer or government official and information is subject to change. I am a small business owner and supporter of small businesses sharing what I’ve learned through my own research. I will continue to update this page as more questions keep coming in or as the information changes.
