FAQs – Paycheck Protection Program

The CARES Act is lengthy and written in legalese.  The SBA guidelines and Interim Final Rules can be confusing.  To add a little simplicity to the fast-paced and complex world of the Paycheck Protection Program (PPP), here are answers to some of the most frequently asked questions from the first few days of the Paycheck Protection Program’s application window.

 

How Do I Benefit From Loan Forgiveness?

Borrowers under the PPP can request forgiveness of the principal portion of the loan for the 8 week period after receiving the loan proceeds which covers:

• Payroll costs;
• Interest on a pre-existing mortgage;
• Rent;
• Interest on pre-existing debt obligations, and;
• Utilities.

However, 4/3 (or 133.3%) of the amount of payroll made during the 8 weeks following the loan’s origination date will serve as the maximum amount of loan forgiveness a borrower can receive.  In other words, no more than 25% of the amount to be forgiven can have been used for non-payroll expenses.  Remember, the purpose of the PPP is to help employers keep its employees employed and paid, so the more you used the proceeds for payroll costs, the more the government will forgive the loan.

Loan forgiveness will be reduced pro-rata if you reduce your FTE headcount.  It will also be reduced if you decrease wages by more than 25% for any employee that made less than $100,000 in 2019, and you may receive forgiveness for additional wages paid to tipped workers.

 

Will I Be Taxed on the Forgiven Amount?

No.  But be careful, because penalties may apply if you misreport information on your application.

 

Can I Still Qualify If I Don’t Have Employees?

Yes.  The CARES Act states: “…individuals who operate under a sole proprietorship or as an independent contractor and eligible self-employed individuals shall be eligible.  Applicants who fall in this category will need to provide documentation such as “payroll tax filings reported to the Internal Revenue Service, Forms 1099-MISC, and income and expenses from the sole proprietorship, as determined by the [SBA] Administrator and the [Treasury] Secretary.”

 

Do Foreign Employees Count Towards the 500-Employee-Max?

No.  According to the SBA’s Interim Final Rule, “An entity generally is eligible for the PPP if it, combined with its affiliates, … has 500 or fewer employees whose principal place of residence is in the United States…”

 

Who Is the “Owner” on the Application? 

The application requests that you name each person or entity owning 20%+ of the applicant-entity.  Learning as we go, some lenders have provided more feedback.  There is also an unwritten 50%+ requirement, meaning that the applicant must list (a) each person or entity owning 20%+ of the applicant-entity and (b) owners which, in the aggregate, represent not less than 50% of the collective ownership of the applicant-entity.

For example, if the applicant has 8 owners, 2 of which each own 20% and 6 of which each own 10%, the application must list (a) the 2 owners owning 20% and (b) at least 1 of the owners owning 10%.

 

Do Independent Contractors Count as Employees?

No.  They can apply for a PPP loan on their own, however.

 

How Much Money Can I Borrow?

In short, you can borrow up to 2.5 times the average monthly payroll for the 12 months preceding the date the loan is made, up to $10 million.

Seasonal businesses can apply to borrow 2.5 times their payroll for either the 12-week period beginning February 15, 2019 and ending May 10, 2019, or the period of March 1, 2019 through June 30, 2019.

Newer businesses which were not in business for the time period beginning on February 15, 2019 and ending on June 30, 2019, can use their average total monthly payroll costs incurred from January 1, 2020 to February 29, 2020 and multiply that figure by 2.5.

For these purposes, payroll does not include salary in excess of $100,000 per employee.  It also excludes qualified sick leave pay under the Families First Coronavirus Response Act (FFCRA).

 

How Can These Funds Be Used?

A borrower can use the loan proceeds for:

• Payroll costs;
• Costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;
• Employee salaries, commissions, or similar compensations;
• Payments of interest on any mortgage obligation (but not to pay principal or to prepay a mortgage)
• Rent (including rent under a lease agreement);
• Utilities;
• Interest on any other debt obligations that were incurred before the covered period;
• Refinancing an SBA Economic Injury Disaster Loan (EIDL) made between January 31, 2020 and April 3, 2020

Note that the applicant must certify in its application that, if approved, the funds will be used only for these expenses.

 

What Does Payroll Include?

The CARES Act states that payroll includes:

• Salary, wages, commissions, or similar compensation;
• Payment of cash tips or equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate);
• Payment for vacation, parental, family, medical, or sick leave;
• Allowance for dismissal or separation;
• Payment required for the provisions of employee benefits including insurance premiums;
• Payment of State or local tax assessed on the compensation of employees, and;
• For sole proprietors or independent contractors, wages, commission, income, or income from net earnings from self-employment, or similar compensation.

 

How Do I Document Payroll?

Payroll processor records, payroll tax filings, or Form 1099-MISC will work.  For sole proprietorships, income and expense reports are appropriate.

 

What If PPP Loan Funds Are Misused?

The SBA will require repayment of any misused amounts.  If you knowingly use the funds for unauthorized purposes, you will be subject to additional liability, including fraud charges.  If one of your shareholders, members, or partners uses funds for unauthorized purposes, that person or entity will be subject to liability owed to the SBA.

 

How Quickly Can I Get a PPP Loan?

Too soon to tell.  The legislation is designed to allow for PPP loans to be processed more easily and to enable lenders to approve and fund the loans more quickly.  Typical SBA 7(a) loans can take a couple of weeks to a couple of months.  The relaxed standards of the PPP process will be counterbalanced by a rush of borrowers and the lenders’ learning curve of the new rules.

 

When Do I Have to Repay It?

PPP loans have a 2 year term, and there is no prepayment penalty.

 

What Is the Interest Rate?  Are There Any Fees?

The interest rate is 1%, no matter which lender makes the loan.  The standard SBA 7(a) loan fees are waived.

 

Do I Have to Guarantee Repayment of the Loan?  Do I Have to Provide Collateral?

No.  There is no personal guarantee required.  As long as the loan proceeds are used for covered purposes, these are non-recourse loans.  Unlike typical SBA loans, which require collateral for loans in excess of $25,000, the collateral requirement is waived.

 

When Do I Have to Begin Making Payments?

Although interest will accrue right away, payments may be deferred for 6-12 months.

 

Are Employees Outside the United States Counted as Employees for PPP Purposes?

This one is hazy.  The rules are confusing and the interpretations are constantly changing.  But, the SBA’s Interim Final Rule indicates that an entity is generally eligible for a PPP loan if it, combined with its affiliates, has 500 or fewer employees whose principal place of residence is in the United States.  Although this language conflicts with typical SBA protocol, it seems that foreign employees are not required to be counted under the affiliation rules.

By this same token, however, foreign employees’ payroll cannot be counted toward a loan’s forgiveness calculation.