On March 31, 2020, the Small Business Administration ("SBA") released important new guidance for borrowers and lenders seeking to utilize the Paycheck Protection Program ("PPP") created by the CARES Act. Eligible businesses can apply for PPP loans of up to 250% of monthly payroll costs, all of which will be forgiven so long as (A) the loan proceeds are used to cover approved costs, including payroll, benefits, utilities, rent and mortgage interest, and (B) employee and compensation levels are maintained. Any payroll costs over $100,000 per individual employee are to be excluded for purposes of calculating the total loan amount and PPP loans will be made up to a maximum of $10,000,000 per business.
Beginning on April 3, 2020, small businesses (generally those with less than 500 employees) and sole proprietorships can apply for PPP loans, with applications opening on April 10, 2020 for independent contractors and self-employed individuals. The application period extends through June 30, 2020, but businesses are encouraged to contact lenders as soon as possible to confirm that such lender is participating in the program and to ensure time for processing.
All applicants will receive the same basic terms for PPP loans – 2-year term at a fixed interest rate of 0.5% with loan payments deferred for the first 6 months. PPP loans do not require any collateral nor any personal guarantee.
PPP loans are to be used for the following expenses:
- Rent and Mortgage Interest (only as to obligations in force prior to February 15, 2020)
The SBA guidance provides that "payroll costs" is an expansive category including:
- Salary, wages, commissions, or tips (capped at $100,000 on an annualized basis for each employee)
- Employee benefits including costs of vacation, parental, family, medical or sick leave; allowance for separation or dismissal; payments required for the provision of group health care benefits including insurance premiums; and payment of any retirement benefit
- State and local taxes assessed on compensation
- For a sole proprietor or independent contractor: wages, commissions, income, or net earnings from self-employment capped at $100,000 on an annualized basis
Any portion of the PPP loan not used for the above described approved expenses will not be forgiven, and due to likely high subscription, it is anticipated that not more than 25% of the forgiven amount may be for non-payroll costs. Any portion of the PPP loan not forgiven will be repaid at terms not to exceed a 10-year term at 4% interest.
PPP loan forgiveness is also subject to the following employment requirements:
- Loan forgiveness will be reduced if full-time employee headcount decreases
- Loan forgiveness will be reduced if salaries and wages are reduced by more than 25% for any employee that made less than $100,000 annualized in 2019
- Full employment and salary levels are to be restored by June 30, 2020 for any changes made between February 15, 2020 and April 26, 2020
A sample PPP loan application form describing the various information required and certifications needed can be found
here
.
Applicants should be expected to provide documentation to verify 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 eight weeks after getting the PPP loan.
Additionally, all individuals with greater than 20% ownership of the applying business shall be required to make good faith certifications as to the economic need and future use of the PPP loan proceeds.
In order to process loan forgiveness after the expiration of the applicable period, borrowers will be required to submit a request to the servicing lender and provide all necessary documents and certifications. Lenders will be required to process forgiveness decisions within 60 days.
Lastly, unlike other types of debt forgiveness, all PPP loan amounts forgiven are excluded from gross income for income tax purposes.
