The US Congress passed and the president has signed the Paycheck Protection Program and Health Care Enhancement Act, adding $310 billion in funding for the Paycheck Protection Program (PPP). This is in addition to the $349 billion that was recently authorized under the CARES Act.

The legislation also provides provide additional funding for loans and grants under the Small Business Administration’s Economic Injury Disaster Loan (EIDL) program.

Timing Is Important

The timing of your loan application is essential, as the initial funding of $349 billion was quickly exhausted after less than two weeks from initial Small Business Administration (SBA) funding.

This latest round of funding is less than the original release, so you should be aware that loan applications are processed on a first come, first serve basis. If you have not yet submitted your application, it is important to have it ready for submission as soon the SBA announces that additional funds are available.

If you are thinking about applying for a loan, we encourage you to do so now. Please reach out to us for assistance in determining your eligibility and getting started with the application process.

If you have already submitted your application, sit tight. You are not required to update the application based on the new guidance issued. If you believe that the latest guidance makes you eligible for a higher loan amount, check with your lender first to determine if an updated loan amount will delay the application or put you at the back of the line before modifying the application.

Additional guidance on how to calculate the maximum eligible loan has been announced, but there are still questions. As new details and clarifications continue to be released by piecemeal, we are available to assist you in navigating the latest rules as applicable to your situation.

Loan Amounts

The maximum loan amount is 2.5 times your average monthly payroll costs, up to $10 million. Payroll costs include the following:

  • Gross salaries, wages, commissions, cash tips or equivalents, and similar compensation to employees, excluding 1099 payments to independent contractors.
  • Payments for vacation, parental, family, medical or sick leave.
  • Severance payments.
  • Group health care benefits, including insurance premiums.
  • Employer retirement benefit payments.
  • State unemployment insurance.

For self-employed individuals & independent contractors:

  • Self-employment income: wages, commissions or income received or net earnings from self-employment up to $100,000.

The following employment costs are excluded:

  • Total salary paid to any employee in excess of $100,000.
  • Salary of any employee whose principal place of residence is outside the US.
  • Qualified sick or family leave for which a credit is allowed under The Families First Coronavirus Response Act (FFCRA).

There are also special rules that apply to seasonal businesses and new businesses. Guidance on partnerships and S-corporations is also available. We can help you with these rules.

As part of your application, you will need to certify in good faith that:

  • Current economic uncertainty makes the loan necessary to support your ongoing operations.
  • The funds will be used to retain workers and maintain payroll or to make mortgage, lease, and utility payments.
  • You are only submitting one loan application under the program.
  • You will provide to the lender documentation of the use of the loan for the eight weeks after the obtaining the loan. 

You may access the Paycheck Protection Program loan application here

Authorized Use of Loan Funds

There are two key things to keep in mind once your loan is approved: clarity and separation. We strongly encourage you to open a separate bank account to deposit and withdraw the entire loan proceeds – and pay authorized expenditures out of this separate bank account during the covered period: February 15 to June 30, 2020. If you are using an accounting software application or spreadsheets, you should track the loan and expenditures separately and merge it into your financials later.

The authorized uses of the funds are:

  • Payroll costs and benefits, capped at $100,000 per employee.
  • Mortgage interest on loans incurred before February 15, 2020. Note: You may not include principal payments.
  • Rent, under lease agreements in force before February 15, 2020.
  • Utilities, for which service began before February 15, 2020.

We cannot stress enough the importance of clarity and separation in accounting for your use of loan funds. PPP loans are non-recourse and do not require collateral or personal guarantee. However, if the funds are used for non-authorized expenditures, the loan becomes collectible with 1% interest. 

The SBA has also clarified that the lender must make the first disbursement of the loan no later than 10 calendar days from the date the loan is approved.

Loan Forgiveness Requirements

PPP loan principal and interest can be forgiven. The forgiven amount applies to payroll costs, mortgage interest, rent and utilities payments over the eight weeks, which begins on the date the lender makes the first disbursement of the PPP loan. Current SBA guidance provides that not more than 25% of the forgiven amount may be for non-payroll costs. For example: If you borrow $100,000, only $25,000 of the loan used for rent, utilities and mortgage interest payments can be forgiven.

There is still much clarification needed in the amount of the PPP loan forgiveness, as the current rules are conflicting at best. As the US Treasury issues more guidance, we will continue to provide updates for you. 

Additional Loan Forgiveness Concerns

As you consider applying for a PPP loan, you should keep in mind the spirit of the program: paycheck protection. You will owe money if you do not maintain your employees and payroll, specifically as follows:

  • Number of employees: Your loan forgiveness will be reduced if you decrease your number of full-time employee.
  • Level of payroll: Your loan forgiveness will be reduced if you decrease salaries and wages by more than 25% for any employee who makes less  than $100,000 annually.
  • Re-hiring: You have until June 30, 2020 to restore full-time employment and salary levels for any changes made between February 15 and April 26, 2020.

Request for loan forgiveness must be submitted to your lender, including documentation to verify the use of funds will need to be submitted and certified. Lenders are required to decide eligibility for loan forgiveness within 60 days. Any amount not forgiven is due in two years. All interest payments are deferred for six months, but interest continues to accrue over this period.

If you applied for PPP and you also received the $10,000 grant from an Emergency Injury Disaster Loan, the amount of grant received will reduce the forgiveness amount of the PPP.

There are other tax relief available to businesses, but not all are available if you have already secured a PPP loan.

  • Businesses receiving PPP loans are not eligible for the Employee Retention Credit.
  • Businesses that have PPP loans forgiven will not be eligible for Payroll Tax Deferral for amounts due after the business is notified of the loan forgiveness.

We are here to help you navigate various COVID-19 pandemic relief programs available to your business. Please connect with us for guidance.