UPDATE June 05: On June 4, the Senate passed the PPP Flexibility Act which:
- Provides borrowers the option of extending the covered period from 8 to 24 weeks.
- Reduces the amount that must be spent on payroll in order to qualify for loan forgiveness from 75% to 60%.
- Requires that lenders defer repayment until 10 months after the last day of the covered period. If borrowers seek loan forgiveness by this date, repayments commence on the date that any forgiveness is remitted by the SBA.
- Extends minimum loan maturity from 2 years to 5 years.
- Extends the deferral period on interest from 6 months to 1 year.
- Prolongs the Safe Harbor period in which businesses can rehire employees without jeopardizing loan forgiveness from June 30 to December 31.
- Permits recipients of PPP loans to take advantage of deferring Social Security Payments as granted by the CARES act.
UPDATE April 24: After the initial $349 billion assigned to the program was exhausted, Congress has approved a further funding package of $310 billion. This includes $60 billion set aside for businesses who lack established banking relationships and so were shut out from the first round of applications.
You need payroll protection. The federal government wants to help. Here’s what you need to know.
The Paycheck Protection Program (PPP)
As part of the $2 trillion aid package unveiled in the Coronavirus Aid Relief & Economic Security (CARES) Act, $349 billion was dedicated to the Payment Protection Program (PPP). This offers federal guaranteed loans to businesses with fewer than 500 employees to cover payroll and other essential costs.
The federal government is focused on releasing funds quickly and with as little red tape as possible, giving small businesses a big boost right when they need it. And here’s the best part—if you use the funds to retain (or rehire) your employees, the loans don’t need to be repaid.
Who Qualifies for the Paycheck Protection Program?
The program is designed for employers with 500 employees or less—this includes sole proprietorships, independent contractors and the self-employed, private non-profits and 501(c)(19) veterans organizations. For those in the food service or hospitality industries (with a NAICS 72 code), the limit of 500 employees applies per location.
Companies must have already been in business as of February 15, 2020, and need to loan to “support ongoing operations” due to the current economic uncertainty.
Per treasury guidance issued on April 3, many companies funded by private equity or venture capital may be ineligible for loans due to SBA affiliation rules.
Who Doesn’t Qualify for the Paycheck Protection Program?
Businesses in certain industries can’t apply for a PPP loan. These include:
- Multi-level marketers
- Businesses who lend, invest or speculate (e.g. banks and investment companies)
- Political and policy lobbyists
- Passive businesses (e.g. landlords or businesses who do not manage their own operations)
- Businesses who promote religion
- Those which restrict patronage (e.g. men’s only health clubs)
- Gambling and marijuana businesses
- Household employers (e.g. those employing housekeepers and nannies)
- Businesses dealing in prurient sexual material
Businesses are also ineligible for a PPP loan if any owner (with a stake of 20% or more) is not US citizen or a Lawful Permanent Resident, has been convicted of a felony in the past 5 years or is presently indicted on formal criminal charges.
How Much Can A Company Receive?
Loans can be for up to 2.5x an employer’s average monthly payroll, with a limit of $10 million. The average monthly payroll amount is calculated as the monthly average for the previous year, (either up to the date the loan is made or, if employers choose, from January 2019 to December 2019), or of January and February 2020 for new businesses.
There will be no loan fees charged by the federal government or lenders.
What Can the Loans Be Used For?
Loans are primarily intended to cover payroll cost (including employee benefits), rent or mortgage interest and utilities.
Payroll cost includes:
- Salary, wage, commission or similar up to $100,000
- Cash tips or equivalent
- Payment for vacation, parental, family, medical or sick leave
- Dismissal or separation allowance
- Group health care benefit payments (including insurance premiums)
- Retirement benefits
- State and local taxes (based on employee compensation)
Payroll cost doesn’t include:
- Any salary in excess of $100,000
- Income tax, payroll tax or railroad retirement tax
- Compensation for employees not based in the U.S.
- Sick leave or FMLA leave for which a credit is available under the FFRCA
What’s the Interest Rate?
The CARES act caps interest rates at 4%, but the initial rate has been set much lower: 1.0%.
What is the Payment Schedule?
The first payment is due 10 months after the last day of the covered period, while the loan must be fully repaid within 2 years if it isn’t forgiven. If borrowers seek loan forgiveness by this date, repayments commence on the date that any forgiveness is remitted by the SBA.
Interest is deferred for 1 year. Loan maturity is prolonged from 2 to 5 years for all PPP loans made on or after the date of the enactment of the Flexibility Act.
What Do Businesses Need to Ensure the Loans Are Forgivable?
Loans will be fully forgiven if all employees remain on payroll for the covered period, and the loan is used only for:
- Payroll costs (up to $100,000 per employee)
- Additional wages for tipped employees
- Mortgage interest
- Rent on lease
Per the Coronavirus Flexibility Act, at least 60% of loans must be spent on payroll to qualify for forgiveness.
Read our in-depth article on PPP Loan Forgiveness.
What if Some Employees Are Laid-Off?
If not all employees are kept on payroll, the possible forgivable amount will be reduced. Forgiveness will also be reduced if you lower by more than 25% the salary of any employee (who earned less than $100,000 in 2019).
However, for reductions in payroll from the period of February 15 through April 26, the forgiveness will not be reduced if the reduction is eliminated by December 31.
What is the Application Process for a PPP Loan?
First, collect the information you need (see below.)
Here’s the application form—the good news is that compared to some federal forms, this one’s very simple.
Then, you can apply directly to whichever any approved lender with whom you already have an established partnership. It is the lender, not the federal government, who will approve a loan application.
Your lender will need to be a lender approved by the Small Business Association—if not, the SBA provide a tool to help you find a lender close to wherever you are. What Do Qualifying Businesses Need to Provide?
To complete a PPP loan application, you will need to provide:
- Basic identifying information about your business
- Business TIN number
- Average monthly payroll cost
- Documentation relating to headcount over time
- Information on owners (with stakes of at least 20%)
- How the money will be used
This list is not exhaustive; your lender may require other information to process your application.
Important: It’s your responsibility to calculate the amount of your loan. While banks are required to check this, the borrower remains legally liable for any miscalculation.
When Are The Loans Available?
Friday, April 3.
However, this date is limited to small businesses, nonprofits and sole proprietors. Independent contractors and the self-employed can apply as of Friday, April 10.
When an application is accepted, funds should be available instantly.
Are There a Limited Number of Loans to Go Around?
First time agreements with lenders are treated as first-come-first-serve, so it’s important to get your application in as early as possible. All applications must be processed by June, 30. This is an unprecedented program, and lenders have to balance speed with due diligence, so delays are possible why the process is worked out.
UPDATE April 24: After the initial $349 billion assigned to the program was exhausted, congress has approved $320 billion of further funding. This includes $60 billion dedicated to businesses who lack established banking partnerships. These businesses struggled to apply for the first batch of funding.
How Is This Different than an Emergency Impact Disaster Loan?
As part of the federal government response to the current pandemic, small businesses are also able to apply for Economic Injury Disaster Loans. (Read more on how to apply for an EIDL loan.) These loans are limited to $2 million and are non-forgivable, with interest rates of 3.75%.
It is possible to apply for both an EIDL and a PPP loan; however, they cannot be used for the same purpose. If you have previously applied for an Economic Impact Disaster Loan to cover payroll costs, you must use you Paycheck Protection Loan to refinance this.
Paycor is not a legal, tax, benefit, accounting or investment advisor. All communication from Paycor should be confirmed by your company’s legal, tax, benefit, accounting or investment advisor before making any decisions. For more information on the PPP visit the Small Business Association website.
How Paycor Helps
Paycor’s Payroll solution now features a custom report allowing you to collect all the data you need for your Payment Protection Program loan application at the click of a button. Paycor customers can also track their loan spending on our new PPP dashboard.
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