What is the Paycheck Protection Program?
The Paycheck Protection Program, one of the largest financial stimulus portions of the CARES Act, is the most important provision in the new stimulus bill for most small businesses. This new program sets aside $350 billion in government-backed loans, and it is modeled after the existing SBA 7(a) loan program many businesses already know.
The full text of the bill is here – https://www.npr.org/2020/03/25/820759545/read-2-trillion-coronavirus-relief-bill. The most relevant portions to small businesses are sections 1102 and 1106.
Qualified businesses can get a Small Business Administration (SBA) loan, amounts of which will be forgiven in accordance with the Act if they are used towards eligible expenses, such as payroll, rent, and utilities.
Any business with no more than 500 employees (or, in certain cases, with no more than 500 employees per location) will qualify.
How and where do you apply?
Apply to lenders that currently provide SBA loans. Other lenders will be designated later by the SBA. Your bank or credit union is likely the best place to start. The application to complete and send to your lender is here – https://home.treasury.gov/policy-issues/top-priorities/cares-act/assistance-for-small-businesses
What is the difference between the Paycheck Protection Program and a SBA Disaster Loan?
The Paycheck Protection Program is designed to help cover payroll for an 8-week period and is forgivable under the Act if used for covered purposes. In contrast, the SBA Disaster Loans are designed to help make up for lost business revenue if your business is impacted by COVID and you can demonstrate that loss. For many in the live entertainment space like festivals and vendors who are forced to cancel events, miss out on revenue, and incur expenses in excess of payroll, the SBA Disaster Loan may help bridge expenses in excess of payroll of up to $2M that cannot be met during this time. Unlike the Paycheck Protection loans, these loans will require a personal guarantee by anyone with over 20% ownership in the business and are generally not forgivable. The SBA Disaster Loans should be applied for directly from the SBA at www.SBA.gov/Disaster.
What is the maximum amount I can borrow?
The maximum loan amount under the Paycheck Protection Program is $10 million but for any specific company is based on average total monthly payments for payroll costs which would include salaries up to $100,000 for all employees. To the extent that any salary exceeds $100,000, only the excess above $100,000 would be excluded. You are able to borrow 2.5x average monthly payroll costs for the prior 12 month period preceding the loan.
What are the other terms of Paycheck Protection Program loans?
All loans under this program will have the following identical features:
- Interest rate of 0.5%
- Maturity of 2 years
- First payment deferred for six months
- 100% guarantee by SBA
- No collateral
- No personal guarantees
- No borrower or lender fees payable to SBA
We have been told to expect that rules governing the loan program (to help administer the Act itself) will soon be issued and that banks may begin to accept loan applications on Friday, April 3. These loans are limited to the amount specified in the Act, so applicants should get in their applications as soon as possible.
What eligible expenses are forgivable from the loan?
According to section Section 1106(b) and 1106(a)(3), the following expenses are covered:
- Payroll costs;
- Interest on any covered mortgage obligation;
- A covered rent obligation; and
- Covered utilities.
You should be aware that the amount that you are able to have forgiven may be greater than the amount that you are able to borrow if non-payroll costs are greater than 25% of your payroll costs as you will get 2.5 months of payroll costs to cover all covered expenses for 8 weeks.
What utilities are covered?
Electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.
What are the details about what payroll expenses are forgivable?
Section 1106 (b) provides that the amount of forgiveness is equal to the sum of eligible costs “incurred and payments made during the covered period.” The “covered period” is defined in section 1106 (a)(3) as “the 8-week period beginning on the date of the origination of a covered loan.”
Payroll costs are defined in section 1106(a)(8) which incorporates the definition in section 1102(A)(viii) and includes payments to employees for salary, wages, commissions, similar compensation and paid leave (vacation, sick, etc.) and payments for group health care benefits, retirement benefits, and a few other items. The definition of “payroll costs” also includes “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 not more than $100,000 in 1 year, as prorated for the covered period.” Excluded from the definition of “payroll costs” is the compensation of an individual employee in excess of an annual salary of $100,000 as prorated for the covered period”. There are additional exclusions set forth in section 1102 (A)(iii)(bb) to (ee).
What does the $100,000 salary restriction mean? If an employee makes $150,000, does this mean $100,000 of the salary is forgivable, or none of it?
For those whose salary exceeds $100,000, the excess above that amount is an expense that is not forgivable. The first $100,000 is eligible. This interpretation is based on the words “in excess of an annual salary of $100,000, as prorated for the covered period.”
What if I already laid off some employees or reduced salaries?
This relates to the loan forgiveness provisions. Section 1106(d)(5) is entitled “Limits on Amount of Forgiveness.” There are reduction formulas for two categories: (1) reduction based upon a reduction in the number of employees and (2) a reduction related to salaries or wages that were reduced in excess of 25%. This applies to employees 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.
However, section 1106 (5) entitled “Exemption for Rehires” provides that there will be no reduction where no later than June 30, 2020, all employees are rehired and salary reductions eliminated.
What if I laid off some people, but only hired a portion of them back?
Your expenses eligible for forgiveness will be reduced by an amount calculated by the formulas above.
What if I need to reduce salaries?
For employees who make under $100,000 annually, if you reduce their salaries by more than 25%, the amount of the forgiveness is reduced by the percentage of the largest such reduction in excess of 25%, e.g. if you had an employee who made $80,000 on an annualized basis in the prior quarter and reduced their salary during the period to an annualized rate of $48,000 (40%), then the total amount that would have been forgivable is reduced by 15% and you will need to repay that amount.
What if I am not a corporation or do not have employees?
For sole proprietors, you can also include 1099-misc expenses. The law is less clear on the requirements for re-hiring and retention, but it does appear that you can gain funds to pay contractors who you have issued 1099’s for in 2019 and that amount is forgivable as well as the other eligible expenses covered above.
What if my economic harm is in excess of the amounts described here?
You should consider applying for an SBA Disaster Loan in addition to the Paycheck Protection Program. These amounts are not forgivable in general, even for the covered expense of the Paycheck Protection loans, unless it is received before the Paycheck Protection loan and rolled into the loan. However, it allows for up to $2M in funds at a 3.75% interest rate which may help out many businesses who have costs in excess of payroll that cannot be met during this time. Unlike the Paycheck Protection loans, these loans will require a personal guarantee by anyone with over 20% ownership in the business.
Please note that we do not intend to, and are not, providing legal or financial advice with this summary. You should consult with your legal and financial advisors as to the best course of action for you.