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The Paycheck Protection Program: free money for small businesses – what you need to know

The Paycheck Protection Program: free money for small businesses – what you need to know

By Christopher B. Branson, Esq.

(Information regarding the Paycheck Protection Program is changing rapidly. This article was published on April 1, 2020.)

In response to the COVID-19 pandemic, the federal government is offering nearly every small business in the United States funds equal to 2 ½ months of payroll expenses, and those funds can be accepted tax-free. Known as the “Paycheck Protection Program,” that is the amazing deal Congress approved when it recently enacted the CARES Act.

This grand give-away is billed as a “loan” program, but don’t be fooled – it is tax-free grant program in all significant respects. While the funds will initially be delivered by a bank or financial institution in the form of a “loan,” in most circumstances, that loan is designed to be “forgiven” within a matter of months, with the business retaining the funds, tax-free. Don’t worry, your bank will be reimbursed in full by the federal government for the amounts forgiven, so both you and your bank come out ahead in the end.

While the Paycheck Protection Program was enacted just days ago (as of this writing), and the regulations needed to implement the program are not yet final, here is what you need to know (in slightly over-simplified terms) about the Paycheck Protection Program (“PPP”) now.

Who is eligible to receive funds under the Paycheck Protection Program?
    • Almost any small business with fewer than 500 employees is eligible.
    • This includes nonprofits (501(c)(3)), sole proprietors, independent contractors and self-employed individuals.
Who is ineligible to receive funds under the Paycheck Protection Program?
    • Businesses engaged in illegal activity, household employers (i.e., a household employing a nanny), a business with a 20 percent owner in jail or being in violation of certain laws, or if the business or an affiliate defaulted on an SBA loan in the last 7 years.
How much is each small business entitled to “borrow” (receive) under the Paycheck Protection Program?

Each small business may “borrow” 2.5 times its average monthly payroll costs over the 12 months prior to the date of the application, up to a maximum of $10 million.

How is “average monthly payroll costs” calculated?

Average Monthly Payroll Costs = Included Payroll Costs – Excluded Payroll Costs

Included Payroll Costs:

      • Salary, wage, commission, or similar compensation
      • Vacation, medical leave, sick leave
      • Group healthcare benefits, including insurance premiums

Excluded Payroll Costs:

      • Compensation of any individual employee in excess of $100,000
      • Payroll taxes and federal income taxes (further guidance from the SBA on these items is expected)
      • Any compensation of an employee whose principal place of residence is outside of the U.S.
How may the PPP funds be used?

The PPP Funds may be used only to pay:

      • Payroll costs
      • Mortgage Interest
      • Rent and Utilities
      • Interest on debt incurred before 2-15-20
      • Limited amounts for other permitted purposes
Under what circumstances will the “Loan” be forgiven?

The “loan” will be forgiven to the extent that the PPP funds are spent on the following expenses during the 8-week period after the funds are received:

      • Payroll costs (at least 75% of the forgiven amount)
      • Mortgage Interest
      • Rent and Utilities
      • Interest on debt incurred before 2-15-20

Amounts used for other purposes are not eligible for forgiveness.

When Could the Amount Forgiven be Reduced?

The amount forgiven is reduced if:

a) There is a reduction in the number of employees (FTEs) during the 8 weeks following receipt of the PPP funds (compared to the lesser of either (1) the average monthly FTEs from 2-15-2019 to 6-30-2019 or (2) the average monthly FTEs from 1-1-20 to 2-29-20)
– OR –
b) There is a reduction in pay of more than 25% of any individual full-time employee

If the amount forgiven is reduced, typically a portion of the PPP funds will still be eligible for forgiveness and the balance will need to be repaid subject to the terms of the loan.

If cut-backs in staff or wages cause a reduction in forgiveness, how can the loan forgiveness be restored?

Forgiveness will be restored if, by June 30, 2020, any reductions in staff or wages are “eliminated” (probably meaning restored to their original levels).

For Amounts which are not forgiven, what are the terms of the “Loan”?
    • SBA website currently says 1.0% APR with 2-year term
    • CARES Act says maximum 4% fixed APR with maximum 10-year term
    • No payments for first 6-12 months
    • No collateral or personal guarantees are required
What are the tax consequences of the loan forgiveness?

Any portion of the PPP loan which is forgiven is received tax-free by the business (i.e., the forgiven portion of the loan will be “excluded from gross income”).

Who administers the Paycheck Protection Program and who delivers the funds?

The PPP is administered by the Small Business Administration (SBA), but all loans will be issued by participating banks and financial institutions.

When and How can Small Businesses apply for a PPP Loan?
What Documentation Will be Needed to Apply for a PPP Loan?

The documentation requirements are, to some extent, up to the lender/bank, but the required documentation is likely to include, for the 12 months prior to the application:

      • Verification of employees (FTEs) and pay rates, including:
        • Payroll tax filings reported to the IRS (Form 941)
        • State income, payroll and unemployment insurance filings
      • Verification of vacation, medical leave, sick leave paid
      • Verification of health insurance premiums paid for any Group Health Plan
      • Other information required by the lender