Overwhelmed? Plain Talk On The Paycheck Protection Program For Small Businesses Affected By COVID-19

As COVID-19 continues to impact the United States, the federal government is taking action to ease the burden on taxpayers. Most recently, Congress passed a massive stimulus package that was signed into law by the President. The stimulus bill (also called the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act) has several moving pieces for taxpayers, including those stimulus checks for taxpayers. But the law also offers some provisions intended to help businesses.

One of those provisions that has gotten a lot of attention is the Paycheck Protection Program or PPP. The program is precisely what it sounds like: nearly $350 billion in (potentially) forgivable loans to keep workers on the payroll. 

The coverage has made the loans sound overwhelming. But, for some, it’s just a matter of breaking down the details. For example, to be eligible, a business must meet some essential criteria:

• Have no more than 500 employees;
• Principal place of business is physically in the United States; and
• Operational as of February 15, 2020.

So far, so good, right? Here are some answers to more questions about the program:

How do I count employees? The Small Business Administration (SBA) calculates all individuals employed on a full-time, part-time, or other basis. You can find out more in the Regulations here.

Are there any exceptions to the 500 employee rule? Yes. Some exceptions apply. Specifically, restaurants and hospitality businesses may qualify if they have 500 or fewer employees per location. You can find out more on the SBA website.

Okay, I get it. Exceptions for the hospitality industry. Otherwise, does it matter what my business does or what I do for a living? Yes, it matters. You can’t apply for a business that is engaged in illegal activities, farming, lobbying, significant gambling (more than 1/3 of your revenue), or if you engage in “live performances of a prurient sexual nature or derive directly or indirectly more than de minimis gross revenue through the sale of products or services, or the presentation of any depictions or displays, of a prurient sexual nature.” Also, the owners can’t be more than 60 days delinquent on child support obligations, household employers, or members of Congress. 

Wait, no farming? There are other programs to help farmers and agricultural businesses. Check out the Farm Service Agency (FSA) loan programs.

I work for myself. Can I get a loan? Yes. Sole proprietorships, independent contractors, gig-economy workers, and self-employed individuals are also eligible for a PPP loan. 

How much can I get? You can borrow up to your average total monthly payroll costs during the one year immediately before the loan multiplied by 2.5, or 250% of average monthly payroll expenses. The cap is $10 million.

Even for highly compensated individuals? Payroll costs are capped at $100,000 (annualized) for each employee. The $100,000 limit does not include healthcare, retirement benefits, and state and local taxes.

What are payroll costs? Payroll costs include what you’d think: salary, wages, commissions, or similar compensation, as well as tips, for employees in the United States. It also includes payment for leave (including vacation, parental, family, medical, or sick leave but not those that you get a credit for under the Families First Coronavirus Relief Act); severance packages; employee group health care benefits; and state and local taxes on compensation. If you’re an independent contractor or sole proprietor, it refers to your wage, commissions, income, or net earnings.

What about payroll taxes? Payroll costs do not include federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020, including Federal Insurance Contributions Act (FICA) and Railroad Retirement Act taxes, as well as income taxes withheld from employees (but you probably already guessed that).

Do payroll costs include the money I pay to independent contractors? No.

So what can I use the money for? You can use the money for employee salaries, paid sick or medical leave, insurance premiums, and mortgage, rent, and utility payments. You can also use the funds for family, medical, and sick leave. But you can’t double-dip: no using PPP for qualified sick and family leave wages if you’re taking a tax credit for those costs under the Families First Coronavirus Response Act. 

How much will this cost? There are no standard 7(a) fees on the loan. There may be fees charged by your tax or other professionals to assemble and submit the application. 

What about collateral? Nope.

Personal guaranty? Nope.

So, long story short, I have struggled with getting a loan before because I got into a little legal trouble years ago. Does that disqualify me? Not necessarily. But the business would be excluded from the program if one of the owners who holds at least 20% of the equity of the company is currently incarcerated, on probation, on parole; subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction; or, has within the last FIVE years, been convicted or pleaded guilty or nolo contendere (no contest) to a felony, or been placed on pretrial diversion, parole or probation (including probation before judgment) for a felony. When looking at ownership, affiliation rules apply (downloads as a PDF).

What is the interest rate? The interest rate is 1%, and loan payments for any non-forgivable bits will be deferred for six months. 

Wait, what’s that part about it being forgiven? Does this mean I don’t have to pay it back? The loan can be forgiven if all employees are kept on the payroll for eight weeks, AND the loan proceeds are used as intended – that means payroll, rent, mortgage interest, or utilities. 

For real? Yes. That’s the best part.

With no strings? Of course, there are strings. For example, no more than 25% of the loan forgiveness can be related to non-payroll costs. And since the whole point is to encourage businesses to hold onto employees, the amount of the loan available for forgiveness will be decreased if full-time headcount declines, or if salaries and wages fall. You’ll want to pay attention to the details.

What happens when the loan is forgiven? Is that income? A loan that is forgiven is typically treated as taxable income, but this is not the case for the PPP. The amount of any forgiven PPP loan will be excluded from gross income.

How long is the program available? Lenders may begin processing loan applications as soon as April 3, 2020. The Paycheck Protection Program will be available through June 30, 2020. There is some talk that it could be extended (since the money – $349 billion – is going quickly), but that’s the scoop for now.

So can I apply now? It depends on who you are. Small businesses and sole proprietors could apply as of April 3, 2020. Starting April 10, 2020, independent contractors and self-employed individuals can apply.

Can I apply for two PPP loans? No.

Let’s say that my business is healthy, but I need to prop up my shore home. Can I say that my business is failing and just use the money for something else? Like a new boat dock?  No, if you’re caught using loan proceeds for things not related to payroll costs, you’ll have to pay it back. And if the behavior is willful, you could be on the hook for bigger problems, like fraud charges. 

Okay, I’m totally using the money for the right reasons. Where can I sign up? Officially, you can sign up for a PPP loan at any lending institution that is approved to participate through the existing SBA 7(a) lending program, or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. However, rumor has it that some banks aren’t excited about issuing loans to new customers: consider one that you have an existing relationship with – or a local bank.

This doesn’t sound that bad… but I’ve been hearing horror stories about the applications. What gives? I’m just serving up the best bits. The devil is in the details. This is a real loan, so there are some restrictions, and you must provide supporting documentation. Check with your lender or tax professional for more information.

And you knew I was going to ask this, but where can I find the official details in writing? Check the SBA website for the application and details. You can also find the text of the PPP Interim Final Rule here (downloads as a PDF).

I’m not sure about a loan. What else can I do to keep my employees on the payroll? If a loan doesn’t appeal to you, other options are available. One of those provisions is the Employee Retention Credit or ERC, which is designed to help businesses keep employees on the payroll. You can read more here.

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