The Paycheck Protection Program (PPP)
Also known as the Corona-virus Aid, Relief, and Economic Security Act (CARES Act)
On Friday, March 27, the President signed the Corona-virus Aid, Relief, and Economic Security Act (CARES Act). The new law is a $2 trillion economic stimulus package designed to repair the economic damage caused by COVID-19 and provide additional protection to individuals and businesses who may lose income due to the pandemic. While most of the act pertains to direct payments and loans, there are some sections that affect employers.
Providing Alternatives to Closure and Layoffs
The CARES Act gives employers the following options and benefits, which may allow them stay open and keep more people employed:
The CARES Act has 3 key relief options:
Paycheck Protection Program (PPP)
Payroll Tax Deferral
- Social Security Taxes deferred from date of CARES Act until 12/31/2020. Social Security tax rate is 6.2% up to 137,700 in wages per person in per year.
- Payments made over 2 years
- 50% due by 12/31/2021
- 50% due by 12/31/2022
- Self-Employment tax also applicable but only 50% may be deferred. This 50% is the equivalent of the employer portion of SS tax. Same payment schedule as above
Employee Retention Credit
- Refundable credit of 50% of wages during a calendar quarter from 3/31/2020 to 12/31/2020 to be used against payroll taxes. The credit is maxed at $5,000.00 per employee.
- Business in full/partial suspension due to COVID-19
- Significant drop in gross revenue (>50%) in a given quarter vs same calendar quarter in 2019. Wages can continue to count for credit until gross receipts get to 80% of prior calendar quarter with a max through end of 2020.
- If <100 employees all wages count
- If >100 employees, only wages of employees not providing services count
- Small businesses may be eligible for emergency grants of up to $10,000 to cover immediate operating costs.
- The Small Business Administration (SBA) may provide loans of up to $10 million per business; any portion of that spent to pay employees, keep workers on payroll, or pay for rent, mortgages, or existing debt could be forgiven, provided workers remain employed through the end of June.
- Small businesses with existing SBA loans may have up to six months of payments waived.
- Businesses who have experienced a decline in gross receipts of 50% as compared to the same quarter of 2019 or who have been fully or partially shutdown by order may be eligible to receive a refundable tax credit for 50% of qualified employee wages up to $10,000 per employee. This is unrelated to the dollar-for-dollar payroll tax credit that can be taken for FFCRA leaves.
- Businesses may defer payment of employer payroll taxes imposed between the enactment of this law and December 31, 2020 with half of the deferred taxes due by December 31, 2021 and the rest due by December 31, 2022. This is unrelated to the dollar-for-dollar payroll tax credit that can be taken for FFCRA leaves.
We are unable to advise on these topics as they are outside the scope of our expertise. We encourage you to follow the IRS Coronavirus Tax Relief page and the SBA Coronavirus Loan Resources page, as well as consult with your tax professional or financial adviser. Detailed guidance on how to access these financial resources should be coming soon from those sources.
Impact on Unemployment Insurance
The act expands unemployment benefits by 13 weeks and adds $600 to the weekly amount an individual would usually receive. While these unemployment benefits are generous, employers should still consider their options and incentives under the CARES Act mentioned above before making decisions about reduced hours, furloughs, or layoffs.
Employees who experience reduced hours, furloughs, or layoffs should be encouraged to file for unemployment insurance as soon as possible. We recommend that both employers and employees visit their state’s unemployment insurance department website and track local and state news, as departments across the country are updating their rules to facilitate displaced workers during this time.
Covid-19 Small Business Programs through the SBA
The Small Business Administration (SBA) has the following 4 programs for small businesses to help the financial challenges brought about by the Coronavirus (Covid-19) pandemic:
- Paycheck Protection Program
- Economic Injury Disaster Loans and Loan Advance
- SBA Debt Relief
- SBA Express Bridge Loans
1. Paycheck Protection Program (PPP)
The Paycheck Protection Program prioritizes millions of Americans employed by small businesses by authorizing up to $349 billion toward job retention and certain other expenses.
The Paycheck Protection Program will be available through June 30, 2020. If you maintain your workforce, SBA will forgive the portion of the loan proceeds that are used to cover the first 8 weeks of payroll and certain other expenses following loan origination.
Who is Eligible?
This program is for any small business with less than 500 employees including:
- Sole proprietorships
- Independent contractors and self-employed persons
- Private non-profit organization or 501(c)(19)
- Veterans organizations
- Businesses in certain industries may have more than 500 employees if they meet the SBA’s size standards for those industries.
- Certain hospitality businesses such as restaurants and hotels with more than 500 employees, but not per physical location.
What can the Paycheck Protection Program Loans we used for?
If you are going to apply for load forgiveness, please take a note of what the PPP loans can be used for in order to qualify:
- Payroll costs
- Mortgage interest (but NOT prepayments or the payment of the principal)
- Interest on other debt incurred by the borrower before the covered period
What CAN’T Paycheck Protection Program Loans be used for?
- Compensation for employees that is in excess of annualized salary of $100,000.00, and prorated for the covered period
- Compensation to non-US residents
- Sick leave or qualified family leave under the FFCRA program
- Payments to contractors (1099 workers).
What are the terms for the Paycheck Protection Program loans?
- Borrowers can request up to $10 Million
- Based on average monthly payroll costs during the year (calendar year per the SBA) prior to the loan origination date times 2.5.
- Applicants can refinance Economic Injury Disaster Loans (EIDL) obtained after 1/31/2020 and roll into the PPP loan. This can increase the $10million limit
- The loan maturity is 2 years from the date of origination
- Interest rate is 1.00 %.
- Principal and interest payments are deferred for 6 months. Interest accrues during the deferral period.
What portion of the Paycheck Protection Program Loans can be forgiven?
The loan will be fully forgiven if the funds are used for:
- Payroll costs incurred and paid by the borrower during the covered period
- The following non-payroll costs which may NOT exceed 25% of the forgiven amount:
- Payment of interest on mortgages on real or personal property purchased before 2/15/2020.
- Payment of rent under a leasing agreement in force before 2/15/2020
- Payment for utilities (electricity, gas, water, transportation, telephone or Internet) for which service begun before 2/15/2020.
Forgiveness is based on the employer maintaining or quickly rehiring employees and maintaining salary levels. Forgiveness will be reduced if full-time headcount declines, or if salaries and wages decrease.
Are there any limitations on the Paycheck Protection Program Loan forgiveness?
Yes. There are 3 factors that will reduce the amount forgiveness. They are:
- The average number of full-time equivalent (FTE) employees during the covered period is less than it was during the comparable period. There are several options of comparable periods: 2/15/2019 to 6/30/2019, 01/01/2020 to 2/29/2020 and seasonal.
- Employer reduces salaries and wages by 25% or more during the covered period for employees who make less than annualized wages of $100,000 per year compared to the most recent quarter.
If salaries and FTE employees are reinstated by 6/30/2020, you can credit in your calculation for forgivable amount.
The amount of loan forgiven is NOT taxable income to the borrower.
How to Apply
You can apply through any existing SBA 7(a) lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. Other regulated lenders will be available to make these loans once they are approved and enrolled in the program. You should consult with your local lender as to whether it is participating in the program.
Lenders may begin processing loan applications as soon as April 3, 2020.
List of Important Items for Paycheck Protection Program Loan Applications
Your lender may not request all of these documents. Required documents will be based on each lender’s own requirements. Contact your banker for their specific requirements.
However, given the high demand for these loans, it will help to be ready for anything your lender may request.
- 2019 IRS Quarterly 940, 941 or 944 payroll tax reports
- Monthly payroll reports for 2019 (Must show the following:)
- Gross wages for each employee (including the officer(s) if paid W-2 wages)
- Paid time off for each employee
- Vacation pay for each employee
- Family medical leave pay for each employee
- State and local taxes assessed on the employee's compensation for each employee
- 1099s for 2019 for independent contractors that would otherwise be employees of your business. (Do NOT include 1099s for services)
- Documentation showing total health insurance premiums paid by the company owner under a group health plan. (Include all employees and the company owners.)
- Document the sum of all retirement plan funding that was paid by the company owner. (Do not include funding that came from the employees out of their paycheck deferrals.) Include all employees, including company owners, 401K plans, Simple IRA, SEP IRAs.
- Business entity documentation (e.g. operating agreement, certificate of organization, bylaws, articles of incorporation)
- 2017, 2018 and 2019 business tax returns, if applicable, and 2019 internal financial statements if 2019 tax return is not filed
- 2020 interim financial statements (balance sheet, income statement, accounts receivable aging and accounts payable aging)
- Debt schedule for operating business
- List of owners of the business if not included in tax return
- Copy of driver's license for signers of business. (This is likely for 20%+ owners)
How will taking a Paycheck Protection Program loan affect other CARES Act Benefits?
2. Economic Injury Disaster Loans and Loan Advance
- In response to the Coronavirus (COVID-19) pandemic, small business owners in all U.S. states, Washington D.C., and territories are eligible to apply for an Economic Injury Disaster Loan advance of up to $10,000.
- The SBA’s Economic Injury Disaster Loan program provides small businesses with working capital loans of up to $2 million that can provide vital economic support to small businesses to help overcome the temporary loss of revenue they are experiencing. The loan advance will provide economic relief to businesses that are currently experiencing a temporary loss of revenue. Funds will be made available within three days of a successful application, and this loan advance will not have to be repaid.
- To apply for a COVID-19 Economic Injury Disaster Loan, click here.
3. SBA Debt Relief
The SBA Debt Relief program will provide a reprieve to small businesses as they overcome the challenges created by this health crisis.
Under this program:
- The SBA will also pay the principal and interest of new 7(a) loans issued prior to September 27, 2020.
- The SBA will pay the principal and interest of current 7(a) loans for a period of six months.
4. SBA Express Bridge Loans
Express Bridge Loan Pilot Program allows small businesses who currently have a business relationship with an SBA Express Lender to access up to $25,000 with less paperwork. These loans can provide vital economic support to small businesses to help overcome the temporary loss of revenue they are experiencing and can be a term loans or used to bridge the gap while applying for a direct SBA Economic Injury Disaster loan (#2 above). If a small business has an urgent need for cash while waiting for decision and disbursement on Economic Injury Disaster Loan, they may qualify for an SBA Express Disaster Bridge Loan.
- Up to $25,000
- Fast turnaround
- Will be repaid in full or in part by proceeds from the EIDL loan
Find an Express Bridge Loan Lender by connecting with your local SBA District Office.