The Paycheck Protection Program

The CARES ACT

President Trump signed the Coronavirus Aid, Relief, and Economic Security (CARES) into law on March 27th, 2020.  Congress designed this over $2 trillion economic relief package to protect the American people from the public health and economic impacts of COVID-19. The CARES Act established the Paycheck Protection Program (PPP) as a $669-billion business loan program to help small businesses, self-employed workers, sole proprietors, certain nonprofit organizations, and tribal businesses keep paying their workers.

The Small Business Association (SBA) is accepting, approving, and disbursing PPP loans on a first-come first-served basis. Applicants depleted the initial $349 billion appropriation by Congress on April 16, 2020. Consequently, the SBA stopped accepting new applications as of that date. The President and Congress authorized an additonal $320 billion in funding on April 24. You must complete your PPP loan by June 30, 2020. So, act fast.

The SBA issued guidance and a sample application for PPP loans on March 31, 2020. The SBA issued interim final rules on April 3, 2020. The following is a summary of the details you need to know.

Paycheck Protection Program Guidance

Eligible Businesses

Your business is eligible if it is a small businesses with less than 500 employees, you are a self-employed individual, an independent contractors, a 501(c)(3), etc., whose employee’s principal place of residence is in the United States. Your business also must have been in operation as of February 15, 2020.

What is the Loan Amount?

There are a few steps to figure out how much your business is eligible for. First, you have to calculate the average monthly payroll. In this instance they are concerned with what accountants call Medicare Wages. This means you do not include what you pay to independent contractors. They are eligible on their own. The average monthly payroll calculation caps each employee’s wages at $100,000/year or $8,333/month.

Next, you multiply the the average monthly payroll calculation by 2.5. Businesses can also add 2 months of 401(k) contributions; health insurance; state payroll taxes; etc. This total is the loan amount. The maximum loan amount is $10,000,000.

Interest Rate and Maturity Date

The PPP Loan interest rate is 1% (100 bps). However, the CARES Act allows for a maximum interest rate of 4%. Initally, the borrower defers the PPP Loan for six months. The PPP Loan’s maturity is 2 years. However, the maximum maturity is 10 years from date borrower applies for loan forgiveness. The loan requires no personal guarantee or collateral because the SBA guarantees it 100%. Most importantly the loan is forgivable if you meet certain requirements.

Loan Forgiveness Requirements

PPP loan forgiveness can be for up to the full principal amount of the loan including any accrued interest. The loan can be forgiven if used for qualifying expenses within 8 weeks after receiving loan. Qualifying expenses include payroll, rent, interest on mortgage debt, utilities, etc.

75% of the loan amount must be used for wages for it to be forgiven. Additionally, compensation levels need to be maintained until June 30. The additional money (25% of the loan) can be used for other business expenses, rent, utilities, debt, etc. It is important to note that a business might consider placing the loan proceeds in a separate account to make the accounting easier.

Certifications

The PPP requires the business owner to complete various pre-loan and pre-forgiveness certifications in order to qualify for the Loan. First, the business must certify that economic uncertainty makes the loan necessary. Second, the business must certify it will use the PPP funds to retain workers and maintain payroll, and make mortgage interest payments, lease payments, and utility payments. Third, before forgiveness, the business must certify it used the funds for the intended purposes. The business will likely need to be support this with accounting records. If a business owner misuses PPP Loan funds they are subject to criminal charges for fraud.

What Should I do Now?

Figure out if your business is eligible and go apply. Fast. If you bank with a large national bank like Bank of America or Wells Fargo, the application is likely online and there may be a long line of applicants already ahead of you. There are special carve out provisions for community banks, so leverage one of these relationships if you have one.

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