On April 2, 2020, the U.S. Small Business Administration (SBA), released its final rules (Rules) applicable to the Payroll Protection Program (PPP), which is the $349 Billion Small Business forgivable loan program created in the Coronavirus, Aid, Relief and Economic Security Act (CARES Act).
Under the PPP, Borrowers will seek loans from third party lenders (Lenders) who have been approved by the SBA to issue SBA 7(a) loans. Lenders may begin making application for these loans through an online portal system on April 3, 2020. The deadline for filing applications will be June 30, 2020. However, small businesses are encouraged to get their application filed sooner, as the funds available through this program are available on a “first come, first served” basis. And while there are ongoing negotiations between Congress and the Presidency about a Fourth Phase of stimulus legislation, there is no guarantee that any additional funds will be made available for this program if all funds are distributed before the June 30, 2020 deadline.
The loans are available to small businesses – defined as those under 500 employees (an exception for restaurants, hotels, caterers, and other with an NAISC code beginning with 72 will allow multi-location borrowers with no more than 500 employees per location to also qualify). Also eligible are tax exempt organizations under 501(c)(3), 501(c)(19) of the Internal Revenue Code, along with individuals who operate under a sole proprietorship or as an independent contractor or eligible self-employed individual. A second requirement for eligibility is that the business was in business as of February 15, 2020, and either had employees, or independent contractors as reported on Form 1099-MISC. Sole Proprietors, independent contractors and self-employed individuals will be required to submit documentation to establish eligibility, such as payroll processor records, payroll tax filings, Form 109-MISC, or income and expenses from a sole proprietorship. Bank records demonstrating the qualifying payroll amount will be accepted.
The maximum loan amount to borrowers will be 2.5x the average monthly payroll costs from the last twelve months for employees residing in the U.S., less any compensation paid to an employee in excess of $100,000.00 total. If any Economic Impact Disaster Loans (EIDL) have been taken out between January 31, 2020 and April 3, 2020, less the amount of any EIDL grants received, those amounts can be included in the PPP Loan amount. Excluded from the application from loan amount calculations are any amounts paid to independent contractors, because those parties have the ability to apply for their own PPP loans, and the government wants to avoid “double dipping.”
The CARES Act provides that the PPP loans will be for a term of not more than ten years, and will accrue interest at not more than 4%. The PPP Rules have clarified that the term of the PPP Loans will be for two (2) years, and will accrue interest at one (1%) percent. The loans include a base deferment for payments of six (6) months. The unpaid/unforgiven portions of the loan will accrue interest during the term of the loan. There is no prepayment penalty for early prepayment.
After being awarded the loans, the funds received will be used to pay for payroll expenses, costs related to the continuation of group health care benefits, rent, mortgage interest payments, utilities, interest payments on any other debt obligations that were incurred before February 15, 2020, and on refinancing an SBA EIDL loan taken out from January 31, 2020 to April 3, 2020 (less any EIDL advances received). At least 75 percent of the PPP Loan proceeds must be used for payroll purposes. Any amounts above 25% used for non-payroll allowable expenses will not be forgiven.
In the event that PPP loan funds are misused, the amounts will not qualify for forgiveness, and must be repaid. Further, if a borrower knowingly uses the funds for unauthorized purposes, they will be subject to additional liability such as charges for fraud. If a shareholder, member or partner uses PPP funds for unauthorized purposes, SBA will have recourse against the shareholder, member or partner for the unauthorized use. There will be no tax liability associated with the forgiveness, as the forgiven portion will be excluded from gross income for federal income tax purposes.
Once the eight-week period for use of the PPP Loan funds has passed, the borrower can make an application to the Lender for forgiveness, by demonstrating the source of the use of the funds in compliance with the requirements described in the PPP and the Rules. Lenders will have sixty (60) days to approve or deny the forgiveness.