Paycheck Protection Program for business owners
What is the Paycheck Protection Program?
The Paycheck Protection Program is part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. This is a nearly $350-billion program intended to provide American small businesses with eight weeks of cash-flow assistance through 100 percent federally guaranteed loans. You can read the bill in its entirety here.
Paycheck Protection Program highlights
All small businesses (<500 employees) are eligible.
The amount of loan is 2.5x average monthly payroll in 2019
The loan will be forgiven (tax-free) on funds used for qualifying expenses (e.g. payroll, rent, etc.) between Feb 15 and June 30 2020
The first 6 months of payments are deferred
The loan has an interest rate of 1%
No collateral or personal guarantees required
No fees for the loan
Do I qualify for the program?
Small businesses, sole proprietorships, independent contractors, and self-employed individuals that were in business prior to Feb 15, 2020 can all qualify.
Sole proprietorships will need to submit schedules from their tax return filed (or to be filed) showing income and expenses from the sole proprietorship.
Independent contractors will need to submit Form 1099-MISC.
Self-employed individuals (owners of an LLC, S Corp, C Corp, or partnership) will need to submit payroll tax filings reported to the Internal Revenue Service.
How does PPP differ from the SBA disaster loan?
The SBA also offers a Economic Injury Disaster Loan (EIDL) - also known as an SBA disaster loan. Here’s how they differ:
No personal or business collateral is required. The SBA disaster loan may require collateral for loan amounts over $25,000.
It’s ok if you also have access to credit elsewhere. To receive a SBA disaster loan you generally need to have no other source of credit.
The funding covers a more restrictive set of purposes (details below). The SBA disaster loan can cover most operating expenses.
Your loan can be forgiven if you follow the terms. The SBA disaster loan requires repayment.
Can I apply for paycheck protection and an SBA disaster loan?
Yes, you can. However, you can’t apply for an SBA disaster loan for the same purpose as the Paycheck Protection Program. That being said, when you apply for the SBA disaster loan, you can also request a $10,000 emergency grant, interest-free. If approved, the SBA will provide the grant within three days.
You can apply for the loan and grant here. Don’t forget to check the box for the $10,000 advanced grant!
What can I use the funds for?
You must acknowledge that the funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments. Funds you use for other purposes will not be eligible for forgiveness.
The funds can be used for:
Payroll and commission payments
Group health care benefits/insurance premiums
Mortgage interest payments
Rent and lease payments
Utilities
Interest on any other debt obligations that were incurred before the covered period.
What counts as “payroll costs”?
Payroll costs under the PPP program include:
Salary, wages, commissions, or tips (capped at $100,000 on an annualized basis for each employee)
Employee benefits including costs for vacation, parental, family, medical, or sick leave allowance for separation or dismissal; payments required for the provisions of group health care benefits including insurance premiums; and payment of any retirement benefit
State and local taxes assessed on compensation
For a sole proprietor or independent contractor: wages, commissions, income, or net earnings from self-employment, capped at $100,000 on an annualized basis for each employee.
In other words, most payroll costs are covered. However, the following scenarios are not covered:
Payments made to independent contractors
S corps and C corps owners who aren’t on payroll (shareholders distributions don’t count as payroll under this program)
How much funding can I receive?
The maximum amount you can receive from your SBA-approved lender is your monthly average payroll cost in 2019, multiplied by 2.5, up to a maximum of $10 million.
If you are a seasonal employer, the monthly average cost will be calculated differently. The lender will use a 12-week period beginning either February 15, 2019 or March 1, 2019, and ending June 30, 2019.
If your business did not exist before June 30, 2019, the lender will look at your costs in January and February 2020.
How do I apply?
You can apply for the Paycheck Protection Program through any SBA-approved lender (i.e. your bank). Reach out to them directly, or you can search the SBA’s Lender Match tool to find a lender.
Sole proprietorships can apply starting April 3. Independent contractors and self-employed individuals can apply starting April 10. You are encouraged to apply early as there is a funding cap for this program. You have until June 30 to submit an application.
As part of your application, you’ll be asked to verify:
That the uncertainty of current economic conditions makes it necessary for your business to continue operating
That funds will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments
That the business does not have a SBA loan pending for the same purpose and uses of the Paycheck Protection Program loan
That during the period beginning on February 15, 2020 and ending on December 31, 2020, the business has not received amounts under the Paycheck Protection Program for the same purpose or duplicative amounts applied for or received under a covered loan.
Here is a sample of the Paycheck Protection application form, indicating the type of information you’ll need to provide.
How can I get my loan forgiven?
In the 8 weeks following your loan signing date, all expenses related to the following (up to your loan amount) can be forgiven:
Payroll—salary, wage, vacation, parental, family, medical, or sick leave, health benefits
Mortgage interest—as long as the mortgage was signed before February 15, 2020
Rent—as long as the lease agreement was in effect before February 15, 2020
Utilities—as long as service began before February 15, 2020
You’ll need to keep your records and have accurate bookkeeping to prove your expenses during the loan period.
The lender must make a decision within 60 days of your forgiveness application submission.
What are the conditions for loan forgiveness?
You must commit to maintaining an average monthly number of full-time equivalent employees equal or above the average monthly number of full-time equivalent employees during the previous 1-year period.
The amount that can be forgiven will be reduced…
In proportion to any reduction in the number of employees retained.
If any wages were reduced by more than 25%.
If you rehire employees that were previously laid off at the beginning of the period, or restore any decreases in wage or salary that were made at the beginning of the period, you will not be penalized for having a reduction in employees or wages, as long as you do this by June 30, 2020.
Note: These guidelines are based on the official 880-page bill. The SBA has been given 30 days to issue official guidance regarding loan forgiveness. We’ll share updates as soon as we learn of them.
