What is the Paycheck Protection Program (“PPP”)? PPP was put in place as part of the CARES Act on March 27, 2020, to offer loans under Section 7(a) of the Small Business Act and to incentivize small business employers to retain headcount and current pay for their employees. The funding period is February 15, 2020 through June 30, 2020. More information can be found in the Treasury Department’s FAQs recently updated on April 8, 2020. If Employer has already filed and received approval on a PPP loan based on the earlier version of the PPP Interim Final Rule published on April 2, 2020, they may rely on the laws, rules and guidance available at the time of the relevant application.
Which employers are allowed to participate in the PPP? Generally, employers in operation on February 15, 2020, that have fewer than 500 employees. The total headcount includes full time, part-time, and any other employee status. More specifically, small businesses (including 501(c)(3) non-profits, 501(c)(19) tax-exempt veterans organizations, and certain tribal business concerns) with fewer than 500 employees or that otherwise meet SBA’s size standards, are eligible to apply. Self-employed individuals, such as sole-proprietors and independent contractors, are also eligible to apply. For seasonal businesses that were not fully operational as of February 15, 2020, a lender may consider whether you were in operation for an 8-week period between February 15, 2019 and June 30, 2019, when determining eligibility.
In determining eligibility, you count only the individuals whose principal place of residence is in the United States. In addition, the employee-based calculations are based on the average number of employees per pay period in the 12 completed calendar months prior to loan application date (or average number of employees for each pay period business has been operational if less than 12 months).
What about businesses affiliated with one another? Entities affiliated with other businesses may be aggregated for purposes of determining whether the 500-employee threshold is met. However, for employers in the accommodation and food services section (NAICS 72), the 500-employee rule is applied on a per physical location basis. In addition, normal affiliation rules do not apply to certain franchises and businesses receiving financial assistance from an approved Small Business Investment Company.
The aggregation rules generally take into account control as well as the tax code’s affiliated service group rules. These rules may create unexpected results, such as treating minority shareholders as controlling the business and aggregating entities that do not meet the control test. As an applicant, you will be required to certify that you are eligible for the program, after application of the affiliation rules. It is not the lender’s responsibility to make the determination, so applicants should seek advice from counsel to avoid making incorrect representations.
Affiliation rules, particularly the affiliated service group rules, are complicated. We recommend consulting with a benefits lawyer familiar with those particular rules if you are regularly performing services for or are otherwise affiliated with another entity.
What else must I do to be eligible? You must apply! Small businesses (including sole proprietors) may apply beginning April 3, 2020; other eligible self-employed individuals may apply beginning April 10, 2020. While you may apply at any time on or before June 30, 2020, because funds under this program are limited and loans are approved on a first come first served basis, eligible businesses should apply as soon as possible. To apply for a loan, contact one of the 800+ SBA-approved lenders, where you will complete a Borrower Application Form (lender provided forms are also acceptable provided they contain the same information and certifications).
You must be able to certify that: (1) the current economic uncertainty makes the loan necessary to support ongoing operations; (2) funds will be used to retain workers and maintain payroll or to make mortgage payments, lease payments, and utility payments; and (3) you have not and will not receive another PPP loan. Certain other requirements, such as restrictions on loans to felons, may also apply. We are encouraging clients to file post-haste since funds are limited and loans will be given on a first come first-served basis.
Providing accurate calculations and supporting documents is solely the responsibility of the employer, with the employer attesting to the accuracy of those calculations in the Borrower Application Form and the lender relying on employer’s representations. Lenders are expected to perform a good faith review, and if the lender identifies errors in the calculations or determines that supporting documentation is insufficient, the lender should work with the employer to remedy any issues.
The individual signing the application must be an authorized representative of the business, who can make the necessary representations and certifications contained in the application, with respect to both the applicant and each owner of 20% or more of the applicant’s equity. As such, signers may need to perform certain diligence and/or obtain proper authority before submitting the application.
What is the maximum loan amount? Generally, you may request and receive up to 250% of your average monthly payroll costs, but not more than $10 million. If you received an Economic Injury Disaster Loan, your maximum loan amount may be increased by the amount of your EIDL loan (not including any $10,000 advanced grant).
How do I calculate average monthly payroll costs? For businesses that were operational in early 2019, you generally determine the average total monthly payroll costs that you incurred during the year prior to the loan date. For businesses with seasonal employees, you should determine the average payroll costs you incurred for the 12-week period starting February 15, 2019, or, if elected, March 1, 2019 and ending June 30, 2019. For businesses that were not operational in 2019, you determine your average total monthly payroll costs incurred for January and February 2020.
Payroll costs include both employees’ compensation as well as income received by self-employed individuals (prorated for the covered period), generally limited to $100,000 in annual salary in either case. For employees, the compensation includes (1) salaries, wages, commissions or similar compensation; (2) payments of cash tip or equivalents; (3) payments for vacation, parental, family, medical or sick leave; (4) allowance for separation; (5) payments required for group health care benefits, including insurance premiums; (6) payment of any retirement benefits; and (7) payment of any state or local tax assessed on the employee’s compensation.
You do not include cash compensation over $100,000 annually; federal payroll taxes, railroad retirement taxes, and income taxes; or any compensation for an employee whose principal place of residence is outside of U.S. Non-cash benefits, which may be included even if they would cause total payroll costs of an employee to exceed $100,000 annually, include: (1) employer contributions to retirement plans (to both defined contribution and defined benefit plans), (2) payments toward group health coverage, including insurance premiums, and (3) payment of state and local taxes assessed on employee’s compensation.
Any payments an employer has made to an independent contractor or sole proprietor should not be included in the payroll cost calculation.
What are the terms of the loan under the PPP? The rate on a PPP loan will be 1%, with the principal due in two years, and all payments deferred for 6 months. There is no prepayment penalty. The maximum SBA guarantee is 100% with no guarantee fees, no personal guarantee, non-recourse, and no collateral required. You must use your proceeds for approved purposes, including payroll costs, continuation of benefits during paid leave, interest on a covered mortgage or other debt obligations, rent, and utilities. The first disbursement of the loan must occur no later than ten calendar days from the date of the loan approval
Can All or a Portion of the Loan Be Forgiven? Employers are eligible for loan forgiveness equal to the amount spent during the 8-week period beginning with the first disbursement on the following expenses:
- payroll costs (but excluding any qualified sick leave wages or qualified family leave wages that are eligible for a credit under the Families First Coronavirus Response Act),
- For employees who receive tips, then certain additional wages paid to those employees, and
- Covered mortgage interest, rent, utilities (including electricity, gas, water, transportation, telephone or internet).
Any mortgage, rent, utilities, or other debt obligations must have been in place prior to February 15, 2020, in order to qualify.
If you use 100% of your loan during the 8-week period on qualifying expenses then 100% of your loan may be forgiven. However, the forgiveness will be less than 100% if any of the following are true:
- You use more than 25% of the loan for non-payroll costs.
- You reduce your full-time equivalent employee headcount and do not restore those positions by June 30, 2020.
- You reduce total salary or wages of any employee by more than 25% (measured from the most recent full quarter before origination of the loan) and do not restore those wages by June 30, 2020.
For the above, your full-time equivalent employee headcount will generally be the average full-time equivalent employees you employed from either February 15, 2019 through June 30, 2019, or January 1, 2020 through February 29, 2020. You may choose which period to use. If you are a seasonal employer, then you must use the period February 15, 2019 through June 30, 2019.
To receive forgiveness of the loan, you will need to apply to the lender for forgiveness. You will have to provide the lender with documentation to verify your employee counts, wages, and use of funds to support the forgiveness application. The lender will make a decision on forgiveness no later than 60 days after receiving the application.
Will My Forgiven Loan Be Taxable Income? While forgiven loans are generally taxable to the borrower, the CARES Act specifically provides that a forgiven PPP loan will not result in taxable income.
Poyner Spruill lawyers can help you navigate the Paycheck Protection Program, including whether you are an affiliated entity, whether you are an eligible entity and interpreting which payroll costs are eligible.