A Guide to the Paycheck Protection Program
The Coronavirus Aid, Relief, and Economic Security (CARES) Act allocated $350 billion to help small businesses and nonprofit organizations keep teams employed amid the pandemic and economic downturn. This provision is known as the Paycheck Protection Program. The initiative provides 100% federally guaranteed loans to small businesses and nonprofit organizations. Uniquely, these loans may be forgiven if borrowers maintain their payrolls during the crisis or restore their payrolls afterward. This guide is intended to help you determine if the Paycheck Protection Program is right for you and to prepare you for the loan filing process. This program is rapidly changing, and we'll adjust this guide as the Government and banks make changes. To stay up to date, join our email list. For information about Payroll Protection Program and assistance with the loan process, contact us.
1. Understanding your Eligibility.
You are eligible if you are:
A small business with fewer than 500 employees. (Remember 500 employees includes all employees; full-time, part-time, and any other status.)
A small business that otherwise meets the SBA’s size standard
A 501(c)(3) with fewer than 500 employees
An individual who operates as a sole proprietor
An individual who works as an independent contractor
An individual who is self-employed who regularly carries on any trade or business
A Tribal business concern that meets the SBA size standard
A 501(c)(19) Veterans Organization that meets the SBA size standard
Special Note for Hotels & Restaurants:
If you are in the accommodation and food services sector (NAICS 72), the 500-employee rule is applied on a per physical location basis.
Other special rules:
If you are operating as a franchise or receive financial assistance from an approved Small Business Investment Company, the standard affiliation rules do not apply.
2. Understanding what LENDERS will be looking for.
When considering a borrower's eligibility, lenders are looking to see if the borrower was in operation before February 15, 2020, and had employees for whom they paid salaries and payroll taxes or paid independent contractors. Lenders will also ask you for a good faith assurance that:
The uncertainty of current economic conditions makes the loan request necessary to support ongoing operations
The borrower will use the loan to retain workers and maintain payroll or make a mortgage, lease, and utility payments
The borrower does not have an application pending for a loan duplicative of the purpose and amounts applied for here
From February 15, 2020, to December 31, 2020, the borrower has not received a loan duplicative of the purpose and amounts applied for here
Special note for an independent contractor, sole proprietor, or self-employed individual:
Lenders will also be looking for specific documents (final requirements will be announced by the government) such as payroll tax filings, Forms 1099-MISC, and income and expenses from the sole proprietorship.
Lenders will not be looking:
To see that the borrower sought and was unable to obtain credit elsewhere.
For a personal guarantee is not required for the loan.
For collateral for the loan. (It is not required.)
3. Understanding how much you can borrow.
How to calculate average monthly payroll costs?
sum of included payroll costs - sum of excluded payroll costs = average monthly payroll costs[sc name="calculator"]
What is INCLUDED in Payroll Cost:
For Employers:
The sum of payments of any compensation with respect to employees that is a:
salary, wage, commission, or similar compensation;
payment of cash tip or equivalent;
payment for vacation, parental, family, medical, or sick leave
allowance for dismissal or separation
payment required for the provisions of group health care benefits, including insurance premiums
payment of any retirement benefit
payment of state or local tax assessed on the compensation of the employee
For Sole Proprietors, Independent Contractors, and Self-Employed Individuals:
The sum of payments of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment, or similar compensation and that is in an amount that is not more than
$100,000 in one year, as prorated for the covered period.
What is EXCLUDED from Payroll Cost:
Compensation of an individual employee in excess of an annual salary of $100,000, as prorated for the period February 15, to June 30, 2020
Payroll taxes, railroad retirement taxes, and income taxes
Any compensation of an employee whose principal place of residence is outside of the United States
Qualified sick leave wages for which a credit is allowed under section 7001 of the Families First Coronavirus Response Act (Public Law 116– 5 127); or qualified family leave wages for which a credit is allowed under section 7003 of the Families First Coronavirus Response Act
Maximum Loan Notes
Non-Seasonal Employers
Maximum loan = 2.5 x Average total monthly payroll costs incurred during the year prior to the loan date. For businesses not operational in 2019: 2.5 x Average total monthly payroll costs incurred for January and February 2020.
Seasonal Employers
Maximum loan = 2.5 x Average total monthly payments for payroll costs for the 12-week period beginning February 15, 2019, or March 1, 2019 (decided by the loan recipient) and ending June 30, 2019.
4. Understanding the Loan Forgiveness Element
Borrowers are eligible to have their loans forgiven.
How much is forgiven?
A borrower is eligible for loan forgiveness equal to the amount the borrower spent on the following items during the 8-week period beginning on the date of the origination of the loan:
Payroll costs (using the same definition of payroll costs used to determine loan eligibility)
Interest on the mortgage obligation incurred in the ordinary course of business
Rent on a leasing agreement
Payments on utilities (electricity, gas, water, transportation, telephone, or internet)
For borrowers with tipped employees, additional wages are paid to those employees
Loan forgiveness cannot exceed the principal.
Special Note on Reduced Loan Forgiveness
The amount of loan forgiveness calculated above is reduced if there is a reduction in the number of employees or a reduction of greater than 25% in wages paid to employees.
Reduction Calculation based on reduction of the number of employees
Payroll cost (Calculated on page 2) x Average Number of Full-Time Equivalent Employees (FTEs) per month for the 8-Weeks Beginning on Loan Origination /A: Average number of FTEs per month from February 15, 2019, to June 30, 2019B: Average number of FTEs per month from January 1, 2020, to February 29, 2020For Seasonal Employers: Average number of FTEs per month from February 15, 2019, to June 30, 2019.
Reduction Calculation based on reduction in salaries
Payroll cost (Calculated on page 2) - For any employee who did not earn during any pay period in 2019 wages at an annualized rate of more than $100,000, the amount of any reduction in wages that is greater than 25% compared to their most recent full quarter.
Special note on bringing employees back and restoring wages:
Reductions in employment or wages that occur during the period beginning on February 15, 2020, and ending 30 days after enactment of the CARES Act, (as compared to February 15, 2020) will not reduce the amount of loan forgiveness IF, by June 30, 2020, the borrower eliminates the reduction in employees or reduction in wages. Source: U.S. Chamber of Commerce