The U.S. Treasury Department published an Interim Final Rule on April 2, 2020, that clarified many of the outstanding questions regarding the Paycheck Protection Program (PPP) loans envisioned in the CARES Act. If you don’t know what a PPP loan is, read “17 things to Know about the Paycheck Protection Program Loan” first.
In theory, applications for Paycheck Protection Program loans are supposed to be available starting Friday, April 3. In practice, no one seems to actually be ready. Many lenders are indicating that they’re going to limit applications to their existing customers, so we recommend getting in touch with your lender to learn more about their participation and processes.
Who is eligible for the Paycheck Protection Program?
- Small businesses:
- With 500 or fewer employees whose principal place of residence is in the United States.
- In operation on February 15, 2020, and either had employees for whom you paid salaries and payroll taxes or paid independent contractors, as reported on a Form 1099-MISC
- Individuals who operate under a sole proprietorship or as an independent contractor:
- In operation on February 15, 2020. You must also submit such documentation as is necessary to establish eligibility such as payroll processor records, payroll tax filings, or Form 1099- MISC
- Income and expenses from a sole proprietorship
- For borrowers that do not have any such documentation, the borrower must provide other supporting documentation, such as bank records, sufficient to demonstrate the qualifying payroll amount.
Who is ineligible for the Paycheck Protection Program?
- Individual/businesses who are engaged in any activity that is illegal under federal, state, or local law
- Household employer (individuals who employ household employees such as nannies or housekeepers)
- An owner of 20 percent or more of the equity of the applicant is incarcerated, on probation, on parole; presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction; or has been convicted of a felony within the last five years
- You, or any business owned or controlled by you or any of your owners, have ever obtained a direct or guaranteed loan from SBA or any other Federal agency that is currently delinquent or has defaulted within the last seven years and caused a loss to the government.
How do I calculate the maximum amount I can borrow for the Paycheck Protection Program?
Step 1: Aggregate payroll costs from the last twelve months for employees whose principal place of residence is in the USA.
Step 2: Subtract any compensation paid to an employee in excess of an annual salary of $100,000 and/or any amounts paid to an independent contractor or sole proprietor in excess of $100,000 per year.
Step 3: Calculate average monthly payroll costs (divide the amount from Step 2 by 12)
Step 4: Multiply the average monthly payroll costs from Step 3 by 2.5.
Step 5: Add the outstanding amount of an Economic Injury Disaster Loan (EIDL) made between January 31, 2020, and April 3, 2020, less the amount of any “advance” under an EIDL COVID-19 loan (because it does not have to be repaid).
What qualifies as “payroll costs”?
- Compensation to employees (whose principal place of residence is in the USA) in the form of salary, wages, commissions, or similar compensation; cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips)
- Payment for vacation, parental, family, medical, or sick leave
- Allowance for separation or dismissal
- Payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, and retirement;
- Payment of state and local taxes assessed on the compensation of employees
For an independent contractor or sole proprietor:
- Wage, commissions, income, or net earnings from self-employment or similar compensation.
What items are excluded from “payroll cost”?
- The compensation of an individual employee in excess of an annual salary of $100,000, prorated as necessary
- Federal employment taxes imposed or withheld between February 15, 2020, and June 30, 2020, including the employee’s and employer’s share of FICA (Federal Insurance Contributions Act) and Railroad Retirement Act taxes, and income taxes required to be withheld from employees
- Qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act
Do independent contractors count as employees for purposes of PPP loan calculations?
No, independent contractors can apply for a PPP loan on their own, so they do not count for purposes of a borrower’s PPP loan calculation.
What is the interest rate on a PPP loan?
The interest rate will be 100 basis points or one percent.
What will be the maturity date on a PPP loan?
The maturity is two years. While the Act provides that a loan will have a maximum maturity of up to ten years from the date the borrower applies for loan forgiveness.
When will I have to begin paying the principal and interest on my PPP loan?
You will not have to make any payments for six months following the date of disbursement of the loan. However, interest will continue to accrue on PPP loans during this six-month deferment.
Can my PPP loan be forgiven in whole or in part?
Yes. The amount of loan forgiveness can be up to the full principal amount of the loan and any accrued interest.
Do independent contractors count as employees for purposes of PPP loan forgiveness?
No, independent contractors can apply for a PPP loan on their own, so they do not count for purposes of a borrower’s PPP loan forgiveness.