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The Coronavirus Aid, Relief and Economic Security Act (CARES Act) is a $2 Trillion stimulus bill meant to provide relief in the difficult times of COVID-19. As part of the program, the CARES Act allocated $349 billion to a program known as the Paycheck Protection Program, more commonly known as PPP.
The purpose of the program is to help many small and medium businesses who are struggling to maintain a stable cash-flow for paying their day-to-day business expenses, such as payroll, rent, mortgage interest and utilities. The information about the program and its requirements gradually accumulates. We will set forth below the application process, requirements and the terms of the Paycheck Protection Program based on the information known as of April 2, 2020 and follow up with any updates. This post is helpful for e-commerce merchants, small business owners, and early and growth stage startups who want to start preparing for the application.
The Paycheck Protection Program provides financing to businesses with 500 or less employees. The financing provided under the program will be provided without collateral or personal guarantees, as it will be 100% guaranteed by the Small Business Administration (SBA). Under certain conditions, the loan may be subject to full or partial forgiveness. The loan, which bears a low interest rate, will be provided by commercial lenders participating in the program.
Who Can Apply for the Paycheck Protection Program?
All businesses with a place of business within the U.S can apply for the program. The business should operate mainly within the U.S. or make a significant contribution to the U.S. economy. A significant contribution could be payment of taxes or the use of U.S. products, materials or labor. Another condition is that the business employs less than 500 employees. Businesses in certain industries can apply to the program even if they have more than 500 employees provided that they meet applicable guidelines for those industries. Note, that the threshold includes full time employees, part time employees, and employees on any other basis of employment.
The majority of small and medium businesses can apply for the Paycheck Protection Program. This will include companies (corporations, partnerships and LLCs), self-employed individuals / independent contractors, and freelancers. You can apply whether your business is treated as a C corporation, S corporation, Sole Proprietorship or Partnership for tax purposes.
The Loan Amount
The maximum loan amount is the lesser of (i) $10 million; and (ii) 2 months of the average monthly payroll costs plus 25% of that amount. The average monthly cost is calculated over the one-year period prior to the date the loan was originated. If the business is seasonal or new, the average monthly costs will be calculated over different applicable time periods.
For the purpose of calculating the loan amount, payroll costs include:
(i) salary, wages, commissions or tips (capped at $100,000 on an annualized basis for each employee);
(ii) employee benefits such as vacation, sick, parental, family, or medical leave;
(iii) allowance for separation or dismissal;
(iv) payments for required health care benefits including insurance premiums;
(v) retirement benefits;
(vi) state and local taxes assessed on compensation.
Payroll costs exclude FICA tax and withheld income tax, compensation to employees whose principal residence is outside the U.S. as well as sick leave and family leave wages for which the employer receives a tax credit under the Family and Medical Leave Act (FMLA).
For Sole-Proprietors (including independent contractors), S corporation owners, and partners in a partnership, the payroll costs include wages, commissions, income, or net earnings from self-employment, capped at $100,000 on an annualized basis. Note: Since payroll includes net earnings broadly, it appears to include the net income of the business owner (including an owner in an S corporation and a partner in a partnership) in addition to any payroll costs incurred by the business.
What Are the Loan's Terms?
The CARES Act provided that the interest rate on the loan under the program would be capped at 4% and have a maximum maturity of 10 years. A further guidance published on March 31, 2020, provided that the loan will bear a fixed rate of 0.5% and have a two-year term. The loan payments will be deferred for 6 months. Businesses should use the proceeds from the loan to cover the following costs: payroll costs, including benefits; interest on mortgage obligations, incurred before February 15, 2020; rent, under lease agreements in force before February 15, 2020; and utilities, for which service began before February 15, 2020.
How Can the Loan Be Forgiven?
The borrower will be eligible for non-taxable loan forgiveness in the amount of up to the following costs that were incurred and paid during the 8-week period beginning on the date the loan was originated: payroll costs (as detailed above); interest on mortgage obligations, incurred before February 15, 2020; rent, under lease agreements in force before February 15, 2020; and utilities, for which service began before February 15, 2020.
It was expressed in the recent guidance that due to likely high subscription, it is anticipated that no more than 25% of the forgiven amount may be for non-payroll costs. The loan forgiveness will be reduced if the business decreases the full-time employee headcount. For the headcount purpose, part-time employees would be counted in aggregation (for example, two half-time employees will be counted as one full time employee). In addition, the loan forgiveness amount will also be reduced if the business decreases salaries and wages by more than 25% for any employee who made less than $100,000 annually in 2019.
It is still unclear whether employees whose principal residence is outside the U.S. are counted for the headcount and pay rate thresholds. In addition, in case that the business will reduce the full-time employment and salary levels between February 15, 2020 and April 26, 2020, the amount of loan forgiveness will not be reduced, in case the business will reverse such by June 30, 2020.
To request a loan forgiveness, the business can submit a request to the lender that is servicing the loan. The request will include documents that verify the headcount of full-time employees and salaries and wages rates, as well as the payments on eligible mortgage, lease, and utility obligations. The borrower would be required to certify that the documents are true and that the business used the forgiven loan amount to keep employees and make eligible mortgage interest, rent, and utility payments. The lender must make a decision on the forgiveness of the loan within 60 days.
How to Apply for the Paycheck Protection Program?
Businesses can apply through any existing SBA lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. To apply for the loan with an approved lender, businesses will need to complete the Paycheck Protection Program loan application and submit the application with required documentation, such as:
- Articles of incorporation
- By-laws or operating agreement
- Payroll expense documents: Forms 940 and 941, documentation verifying the number of full time employees and the amount of their salaries, and certification or other proof that the employees live within the U.S.
- A 12-month profit and loss statement (as of the date of application)
- Most recent mortgage or rent statement
- Sole Proprietors - most recent Schedule C (which is filed with the personal tax return).
Independent contractors would also need to add their Form 1099s. Self-employed individuals would also need to submit self-employment tax filings.
As part of your application, businesses would need to certify in good faith that:
1. Current economic uncertainty makes the loan necessary to support the business ongoing operations;
2. The funds will be used to retain workers and maintain payroll or to make mortgage, lease, and utility payments;
3. The business has not and will not receive another loan under this program;
4. The business will provide to the lender documentation that verifies the number of full-time equivalent employees on payroll and the dollar amounts of payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities for the 8 weeks after getting the loan;
5. Loan forgiveness will be provided for the sum of documented payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities;
6. All the information provided in the application and in all supporting documents and forms is true and accurate. Knowingly making a false statement to get a loan under this program is punishable by law; and
7. The business acknowledges that the lender will calculate the eligible loan amount using the tax documents submitted with the application.
The business will affirm that the tax documents are identical to those submitted to the IRS, and that it understand, acknowledge, and agree that the lender can share the tax information with the SBA's authorized representatives, including authorized representatives of the SBA Office of Inspector General, for the purpose of compliance with SBA Loan Program Requirements and all SBA reviews.
When Can a Business Apply for the Program?
Small businesses and Sole Proprietorships can start the application process for the Paycheck Protection Program on April 3, 2020. Independent contractors and self-employed individuals would also be able to apply for the program starting from April 10, 2020. All applications must be received by June 30, 2020.
The Paycheck Protection Program is an opportunity for businesses to receive a high beneficial loan in the difficult times of COVID-19. Although the program is open for applications until June 30, 2020, it is recommended to start the process as soon as possible, as the program has a funding cap and lenders need time to process your loan.
For the application process, you would need recent financial information (balance sheet and profit and loss statements) and tax returns available. As always, Finaloop is here to help you catch-up with your ecommerce or small business bookkeeping and accounting so you can substantiate your eligibility and apply for the Paycheck Protection Program.
For more information on how the Coronavirus stimulus bill can benefit your business, click here!