Basics on the Payroll Protection Plan (PPP)
While the Payroll Protection Program application process may seem overwhelming, there are some PPP basics that can help you through the process.
What is the Payroll Protection Program (PPP)?
The PPP is a brand-new loan program created by the CARES Act in response to the COVID-19 crisis.
How much money is available for loans under the PPP? (Or, when does the PPP program run out?)
The CARES Act funded the PPP with $349 billion. The window to apply for the PPP closes either when the $349 billion runs out (on a first-come-first-served basis) or on June 30, 2020—whichever happens first.
(Note: At the time of this writing, some Congressional leaders are advocating additional dollars toward the PPP, but that proposal has not been enacted into law.)
What interest rate applies to PPP loans?
The interest rate is 1.0%.
(Note: This figure changed several times as the PPP was being rolled out, but it has settled on 1.0%.)
What is the maturity date for PPP loans?
The maturity date is two years, beginning when a PPP loan is made.
(Note: This figure changed several times as the PPP was being rolled out, but it has settled on two years.)
Does the business owner need to guarantee the PPP loan personally?
No personal guarantee is required.
Does the business owner need to provide collateral for a PPP loan?
No. The Small Business Administration (SBA) has waived the traditional collateral requirement for PPP loans.
Does an applicant need to have tried and been unsuccessful in obtaining credit elsewhere?
No. The SBA has waived the traditional requirement that an applicant has been unsuccessful in obtaining credit elsewhere.
What businesses are eligible to obtain PPP loans?
Generally, businesses that employ no more than 500 employees. This includes sole proprietorships, self-employed individuals, and most non-profit organizations.
However, some businesses can be eligible even if they have more than 500 employees, as long as they satisfy the existing statutory and regulatory definition of a “small business concern” under section 3 of the Small Business Act, 15 U.S.C. 632. A business can qualify if it meets the SBA employee-based or revenue-based size standard corresponding to its primary industry. Go to www.sba.gov/size for the industry size standards.
Additionally, a business can qualify for the Paycheck Protection Program as a “small business concern” if it met both tests in SBA’s “alternative size standard” as of March 27, 2020: (1) maximum tangible net worth of the business is not more than $15 million; and (2) the average net income after Federal income taxes (excluding any carry-over losses) of the business for the two full fiscal years before the date of the application is not more than $5 million.
If in doubt, contact your SBA-approved lender.
Can independent contractors apply for PPP loans?
Yes. While the PPP regulations clearly state that businesses cannot include independent contractors in their payroll calculations, it also states that independent contractors can apply separately for their own PPP loans starting on April 10, 2020.
How do you calculate the number of employees to determine the employee-based size limits?
Borrowers may use their average employment per pay period over the 12 months prior to the loan application date, or during calendar year 2019, to determine their number of employees.
(Note: Some lenders seem to be emphasizing using calendar year 2019 data.)
Can companies that have private equity or venture capital ownership/investments obtain loans under the PPP?
Potentially. The answer will depend on the type of investment and the degree of control held by the PE or VC organization. Contact your SBA-approved lender.
How do the $10 million cap and affiliation rules work for franchises?
If a franchise brand is listed on the SBA Franchise Directory, each of its franchisees that meets the applicable size standard can apply for a PPP loan. (The franchisor does not apply on behalf of its franchisees.) The $10 million cap on PPP loans is a limit per franchisee entity, and each franchisee is limited to one PPP loan. Franchise brands that have been denied listing on the Directory because of affiliation between franchisor and franchisee may request listing to receive PPP loans. SBA will not apply affiliation rules to a franchise brand requesting listing on the Directory to participate in the PPP, but SBA will confirm that the brand is otherwise eligible for listing on the Directory.
How do the $10 million cap and affiliation rules work for hotels and restaurants (and any business assigned a North American Industry Classification System (NAICS) code beginning with 72)?
Under the CARES Act, any single business entity that is assigned a NAICS code beginning with 72 (including hotels and restaurants) and that employs not more than 500 employees per physical location is eligible to receive a PPP loan.
In addition, SBA’s affiliation rules (13 CFR 121.103 and 13 CFR 121.301) do not apply to any business entity that is assigned a NAICS code beginning with 72 and that employs not more than a total of 500 employees. As a result, if each hotel or restaurant location owned by a parent business is a separate legal business entity, each hotel or restaurant location that employs not more than 500 employees is permitted to apply for a separate PPP loan provided it uses its unique EIN.
The $10 million maximum loan amount limitation applies to each eligible business entity because individual business entities cannot apply for more than one loan.
How much can an eligible borrower apply for under the PPP?
Applicants can generally borrow the lesser of $10 million, or 2.5 times the average monthly “payroll costs,” as explained below.
If there is an outstanding amount of an Economic Injury Disaster Loan (EIDL) made between January 31, 2020, and April 3, 2020, that amount can be added to the PPP loan amount request, less the amount of any loan advance received.
What time period should borrowers use to determine their payroll costs to calculate their maximum loan amounts?
Most borrowers will use the calendar year 2019 aggregate payroll data.
(Note: There has been inconsistent information released by the Treasury Department and SBA on this question, with many sources stating that payroll data for the immediate 12-months prior to submitting the loan application may be used instead of calendar year 2019 data. However, the SBA and lenders seem to be emphasizing using calendar year 2019 data.)
What if the business has seasonal workers, or is a newly established business?
For seasonal businesses, the applicant may use average monthly payroll for the period between February 15, 2019, or March 1, 2019, and June 30, 2019. An applicant that was not in business from February 15, 2019 to June 30, 2019 may use the average monthly payroll costs for the period January 1, 2020 through February 29, 2020.
What are “Payroll Costs?”
“Payroll costs” generally mean the following compensation elements for employees (not any independent contractors) whose principal place of residence is in the US:
- Salary, wage, commission, or similar compensation for any employee whose principal place of residence is in the U.S. (capped at $100,000 on an annualized basis for each employee)
- Cash tips or equivalents
- Payment for vacation, parental, family, medical, or sick leave
- Allowance for dismissal or separation
- Payment required for the provision of group healthcare benefits, including insurance premiums
- Payment of any retirement benefit
- Payment of state and local taxes assessed in connection with the foregoing
Are part-time or seasonal employees included in the payroll costs?
Yes. All employees paid during the period of time are included in payroll costs.
Are benefits such as healthcare, 401k, and payment of state and local taxes included in the $100,000 per employee cap?
No. The exclusion of compensation in excess of $100,000 annually applies only to cash compensation, not to non-cash benefits, including:
- Employer contributions to defined-benefit or defined-contribution retirement plans
- Payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums
- Payment of state and local taxes assessed on the compensation of employees
Are federal taxes included in the payroll costs used to calculate the maximum loan amount?
No. Payroll costs are calculated on a gross basis without regard to federal taxes imposed or withheld, including FICA and Medicare. Payroll costs are not reduced by taxes imposed on an employee and are not increased by the employer’s share of payroll taxes.
Do PPP loans cover paid sick leave?
Yes. “Payroll costs” includes costs for employee vacation, parental, family, medical, and sick leave. However, the CARES Act excludes qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act (Public Law 116–127).
If the borrower is an S-corporation, are S-corporation distributions included in the payroll costs?
“Specific guidance is not available related to shareholder distributions, but since these distributions are not considered wages to the shareholder, it is presumed that shareholder distributions are not to be included in payroll costs.”
If the borrower is a partnership or LLC, how should partner/member compensation be treated?
“Partners/members are not treated as employees of the partnership/LLC, so they do not receive wages. However, partners/members may receive guaranteed payments. Further guidance is needed to determine whether these guaranteed payments are considered similar compensation as noted in the interim guidance, or if they are considered payments to independent contractors and therefore not included in payroll costs (but available as payroll costs for partners/members to request PPP funding based on their self-employment income from the partnership/LLC). Further guidance is also needed to determine if distributions and/or amounts subject to self-employment for each partner/member can be included as part of payroll costs.”
Source: AICPA’s PPP Resources
What if the business uses a Professional Employer Organization (PEO) and therefore, may not be able to document its own payroll information?
There should be proper documents that the borrower can obtain from its payroll provider for the PPP loan application process.
What are permissible uses for PPP funds?
Borrowers may use PPP loan funds to pay payroll costs (as previously defined), health care benefits, mortgage interest payments, rent, utility, interest payments on debt incurred prior to February 15, 2020, and/or refinancing an SBA EIDL loan made between January 31, 2020 and April 3, 2020.
How much of the PPP loan amount may be forgiven?
The entire PPP loan potentially may be forgiven, plus any accrued interest.
Is the loan forgiveness taxable?
No. Forgiveness of any portion of the PPP loan does not constitute taxable income for the borrower.
How is the amount of loan forgiveness calculated?
The debt eligible for forgiveness is equal to the eligible expenses paid by the borrowing company during an eight week-period beginning on the date the lender makes the first disbursement of the PPP funds to the borrower. The eligible expenses include:
- Payroll costs (as defined earlier)
- Interest on mortgage obligations incurred before February 15, 2020*
- Rent under a lease existing before February 15, 2020*
- Utilities for which service began prior to February 15, 2020*
- Refinancing an SBA EIDL loan made between January 31, 2020, and April 3, 2020 (less any advance on the EIDL loan up to $10,000)*
*No more than 25% of the forgiven amount may be attributable to non-payroll costs.
How is loan forgiveness reduced if the borrower lowers salaries or wages, or loses employees, during the eight-week period?
The amount of loan forgiveness is generally reduced by two factors:
- Any reduction in the ratio of (1) the average number of monthly full-time equivalent (FTE) employees during the eight-week period versus (2) those employed during one of two reference periods selected by the borrower: either February 15 to June 30, 2019 OR January 1 to February 29, 2020
- The amount of any reduction in total salary or wages of any employee during an eight-week period in excess of 25% of the total wages and salary of the employee during the most recent full quarter during which the employee was employed—taking into account only employees whose annualized salary was less than $100,000.
(Note: The SBA may provide further guidance to address any changes in non-wage benefits during the eight-week period or any changes outside of the eight-week period.)
Can any loan forgiveness be restored if the borrower has already cut employee salaries and/or wages, and/or reduced headcounts?
The reduction in loan forgiveness for a reduction in salaries or wages can be avoided if the borrower restores by June 30, 2020 the same wages the employee(s) was earning as of February 15, 2020 as compared to wages paid between February 15, 2020 and April 26, 2020.
The reduction in loan forgiveness for a reduction in headcount can be avoided if the reduction in FTEs that occurred during the period between February 15, 2020 and April 26, 2020 is restored by June 30, 2020.
(Note: We expect further guidance on this issue from the SBA.)
What if an employee voluntarily terminates or is terminated for poor job performance? Is the loan forgiveness still reduced in those situations?
Likely yes. At this time, the CARES Act and the PPP guidance issued by the Treasury Department and SBA do not make any distinctions for why an employee may have terminated employment, so that loan forgiveness is only tied to employee count comparisons and whether or not specific employees had their pay substantially reduced. Specific guidance on this question may be forthcoming.
When do borrowers need to start repaying a PPP loan?
For any amount of PPP loan that is not forgiven, borrowers may defer making principal or interest payments for six months. But interest does accrue during this deferral period.
Are there any prepayment penalties for PPP loans?
No, there are no prepayment penalties on PPP loans.
Are there any fees for PPP loans?
No, PPP loans do not require any fees to be paid by the borrower.
How many PPP loans can a company obtain?
The program is limited to one loan per borrower, as identified by its Tax Identification Number (TIN) such as the Employer Identification Number (EIN) or the Social Security Number (SSN).
How do you get a PPP loan?
Contact a bank or other lending institution that is approved to work with the SBA. Due to the very high demand for PPP loans, it is best to start with your existing banking relationship.
When can eligible applicants apply?
Applicants can apply from April 3, 2020, to June 30, 2020.
What do applicants need to submit?
Generally, applicants must initially submit a completed SBA Form 2483 (Paycheck Protection Program Application Form) and payroll and other documentation to a PPP lender. The lender may require additional documentation as it deems necessary.
Should a business apply for PPP loans through multiple banks?
While there is no restriction against filing multiple PPP applications through different lenders, at the time of this writing, many lenders are only taking applications from existing customers due to high volume. Plus, it is possible that multiple applications from the same applicant could cause confusion, slowing the application, or even triggering potential fraud alerts. Therefore, it seems advisable to work with only one lender, if possible.
How long will it take until the borrower gets its funds once a PPP loan has been submitted?
The PPP regulations stipulate that lenders should issue PPP funds within 10 calendar days from the date of loan approval. However, given the massive volume of PPP loans, it is difficult to generalize on loan review and approval times. Contact your SBA-approved lender to inquire about your PPP application status.
Once you have read through the PPP basics and filed your PPP loan application, then read the article on our website on how to maximize the loan forgiveness for your company.
If you have additional questions, then please contact the office of Beyer, Pongratz & Rosen, by phone at 916-250-1511 or online For a Free Consultation.