FAQ & SMALL BUSINESS SUPPORT UNDER THE CARES ACT
Key aspects of the recently-enacted CARES Act offer support to small businesses, including loans intended to fund payroll and related costs during the pandemic. While the CARES Act signaled much-needed hope for small businesses, it also left open many practical questions about how this stimulus funding will work. This DDWK Update addresses the Paycheck Protection Program – a critical component of the Act’s support for small businesses.
FAQs Regarding the Paycheck Protection Program
One of the largest sections of the newly enacted CARES Act is the Paycheck Protection Program (“PPP”). Under the PPP, the federal government has made available in excess of $350 billion for unsecured, non-recourse loans to small businesses, which is generally defined as businesses that employ less than 500 employees. Large portions of the loans are forgivable, meaning they convert to grants when used by small businesses for specific purposes, including payroll. Grants do not need to be repaid. For more information on the specifics of the PPP, please read our COVID-19 Update here.
Below are answers to some frequently asked questions about the program.
When can I apply?
April 3, 2020 for small businesses and sole proprietorships.
April 10, 2020 for independent contractors and self-employed individuals.
This afternoon, Secretary of Treasury Steven Mnuchin committed that PPP loans can be funded on the same day.
How do I apply for the Paycheck Protection Program?
You can apply for a PPP loan at any lending institution that is approved to participate in the program through the existing U.S. Small Business Administration (“SBA”) 7(a) lending program and additional lenders approved by the Department of Treasury. This could be the bank you already use. You will work primarily with the bank during the application and during the loan forgiveness processes.
A draft PPP application form is now available here.
What documentation should I provide?
Each bank may require different information, but you should start gathering the following:
- Payroll reports for 2019 and 2020 year-to-date showing the following by employee and/or officers:
- Gross wages
- Paid time off
- Paid vacation
- Pay for family medical leave
- State and local taxes (form 940, 941 or 944)
- 1099’s for independent contractors (if applicable)
- Health insurance premiums paid by the employer under a group health plan
- Sum of all retirement plan funding contributed by the employer (include 401K plans, Simple IRA & SEP IRAs)
- Bills from utilities providers (electricity, gas, water, phone, and internet) that you began paying prior to February 15, 2020
- Documents showing rent payments, under lease agreements in force before February 15, 2020
How much can I borrow?
Loans can be up to 2.5x the borrower’s average monthly payroll costs, not to exceed $10 million. The average monthly payroll costs is calculated by determining the average monthly payroll costs during the one year prior to the loan application. However, the draft PPP application form indicates that a borrower may use the average monthly payroll costs incurred during 2019.
What are included in PPP “payroll costs”?
For purposes of the PPP, payroll costs include:
For employers: the total compensation paid towards:
- Employee salary, wages, commissions, or tips (capped at $100,000 on an annualized basis for each employee);
- Employee benefits including costs for vacation, parental, family, medical, or sick leave;
- allowance for separation or dismissal;
- Payments required for the provisions of group health care benefits including insurance premiums;
- Payment of any retirement benefit; and
- State and local taxes assessed on compensation.
For sole proprietors and independent contractors: compensation in the form of wages, commissions, income, or net earnings from self-employment, capped at $100,000 on an annualized basis for each employee. Compensation paid to independent contractors cannot be included in “payroll costs” for employers.
What are excluded from PPP “payroll costs”?
Under the PPP rules, payroll costs may not include:
- Compensation to an individual employee in excess of an annual salary of $100,000, prorated for the covered period;
- Payroll taxes, railroad retirement taxes, and income taxes;
- Compensation of employees whose principal place of residence is outside the US; and
- Qualified sick or family leave for which credit is allowed under the Families First Coronavirus Response Act
What can I use PPP loan proceeds for?
You can use the PPP loan proceeds on qualifying:
- 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
Will a PPP loan be forgiven?
Yes, subject to certain requirements. During the 8 weeks after getting the loan (the “covered period”), the proceeds must be used to pay payroll costs, rent, interest on mortgage obligations, and utilities. Due to likely high subscription, it is also anticipated that there will be a requirement that not more than 25% of the forgiven amount may be for non-payroll costs. Therefore, the remaining 75% should be used towards payroll costs.
What if I have already laid off employees, furloughed employees, or reduced employee salaries/wages?
Loan forgiveness is also based, in part, on maintaining staff and payroll levels during the 8-week period after receiving your loan. Loan forgiveness will be reduced if you decrease your full-time employee headcount. The reduction will be the expected forgiveness amount less the average number of full-time equivalent employees per month the recipient employed during the covered period divided by the average number of full-time equivalent employees per month that the company had either:
- From February 15, 2019, through June 30, 2019, or
- From January 1, 2020, through February 29, 2020.
Loan forgiveness will also be reduced by any decrease in salary and wages in excess of 25% for any employee who earned less than $100,000 annualized in 2019.
However, if you make reductions to headcount or to salaries/wages in excess of 25% between February 15, 2020 and April 26, 2020, you can reverse those reductions by June 30, 2020 and avoid any negative impact to the loan forgiveness amount. It should be noted, however, that the anticipated requirement that 75% of the loan go to payroll costs would indicate that the program is meant to encourage employers to reverse any reductions as soon as possible after receiving the loan.
What if some or all of my PPP loan is not forgiven?
The portion of the PPP loan that is not forgiven will be due in 2 years. There is no requirement of a personal guarantee or pledged collateral. Loan payments are also deferred for a minimum of 6 months and up to one year.
Can I also apply for an Economic Injury Disaster loan (EIDL)?
Yes. The CARES Act also expanded access to the SBA’s EIDL program. You can receive both PPP loans and EIDLs, so long as both loans are not used for the same purpose or otherwise duplicative.
Eligible businesses that suffer substantial economic injury can apply between January 31, 2020 and December 31, 2020 for an EIDL for up to $2 million. There is no personal guarantee required for EIDLs under $200,000, and the loan can be made solely upon the applicant’s credit score. Initial advances of up to $10,000 can be issued within three days and need not be repaid but that amount may count against loan forgiveness under the PPP program.
- It is critical to identify and begin working with an SBA-approved lender on the PPP loan application process
- Begin gathering relevant payroll documents for 2019 and 2020, as well as documents showing employee benefits paid and other expenses related to utilities and rent
- Get your application filed as soon as possible.
Understand that there are still many unanswered questions about this program, as the subject matter is fluid, and changing daily. The Treasury Department is issuing guidance and is expected to provide regulations shortly. We are here to answer your PPP questions.
Please do not hesitate to contact us for assistance.