Paycheck Protection Program

Overview

Summary

The $2 trillion stimulus package allocated $350B to provide forgivable loans and tax credits to businesses who keep their employees during the crisis or restore their payrolls before December 31, 2020. Known as the Paycheck Protection Program, the purpose is to incentivize small businesses to not lay off workers and to rehire laid off workers that lost jobs due to COVID-19 disruptions. Government guaranteed loans are offered up to $10M per business. They do not require a personal guarantee or collateral, and will be processed by a network of banks, credit unions and other lenders across the U.S.

Highlights:

  • Fast Funding

    Businesses can borrow up to $10M to fund payroll, rent, utilities and mortgage interest

  • Fully Forgiven

    The loan can be fully forgiven if employers maintain employee payrolls

  • Great Terms

    No cost to apply. No personal guarantees. No collateral. No recourse.

  • Easy Eligibility

    If you were in business on or before Feb 15th, 2020, with less than 500 employees on payroll, per location. (Some exceptions for more than 500 employees are available)

  • Easy Approval Process

    Apply at your local FDIC bank, federally insured credit union, Farm Credit System or SBA lender.

Am I

Eligible?

You are eligible if you are:

  • A small business with fewer than 500 employees per location (some exceptions allow up to 1500)
  • A 501(c)(3) with fewer than 500 employees
  • An individual who operates as a sole proprietor
  • An individual who operates as an independent contractor
  • An individual who is self-employed who regularly carries on any trade or business
  • A Tribal business concern that meets the SBA size standard
  • A small business that otherwise meets the SBA’s size standard
  • A 501(c)(19) Veterans Organization that meets the SBA size standard

In addition, some special rules may make you eligible:

  • If you are in the accommodation and food services sector (NAICS 72), the 500-employee rule is applied on a per physical location basis
  • If you are operating as a franchise or receive financial assistance from an approved Small Business Investment Company the normal affiliation rules do not apply

Note: The 500-employee threshold includes all employees: full-time, part-time, and any other status.

Eligible borrowers must make a good faith certification that:

  • The loan is necessary due to the uncertainty of current economic conditions caused by COVID-19
  • Funds will be used for a permitted purpose
  • They are not receiving funds from another SBA program for the same uses

ELIGIBLE

  • Business must have been in operation on February 15, 2020

  • 500 or less employees

How much can I

Borrow?

Loans can be up to 2.5 x the borrower’s average monthly payroll costs, not to exceed $10 million

Starting April 3, 2020 until August 8, 2020 (to the extent funding is still available) you can apply for and receive loans through existing SBA lenders and FDIC banks.

Can I increase my maximum loan amount?

The only way to increase your maximum loan amount is if your payroll is increased, and the only way to increase your payroll, according to the rules, is to include all eligible expenses allowed under the program rules that define “payroll.”  Below you will find a list of the items that you can include in payroll, and the items that you cannot.

Payroll Can Include:

  1. For Employers: The sum of payments of any compensation with respect to employees that is a:
  • Salary, wage, commission, or similar compensation
  • Payment of cash tip or equivalent
  • Payment for vacation, parental, family, medical, or sick leave
  • Allowance for dismissal or separation
  • Payment required for the provisions of group health care benefits, including insurance premiums
  • Payment of any retirement benefit
  • Payment of state or local tax assessed on the compensation of the employee

For Sole Proprietors, Independent Contractors, & Self-Employed Individuals: The sum of payments of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment, or similar compensation and that is in an amount that is not more than $100,000 in one year, as pro-rated for the covered period.

Payroll Cannot Include:

  • Compensation of an individual employee in excess of an annual salary of $100,000
  • Federal payroll taxes, railroad retirement taxes and income taxes
  • Any compensation of an employee whose principal place of residence is outside of the United States
  • Qualified sick leave wages for which a credit is allowed under section 7001 of the Families First Coronavirus Response Act (Public Law 1165 127); or qualified family leave wages for which a credit is allowed under section 7003 of the Families First Coronavirus Response Act

2.5 x Average total monthly payments for payroll costs incurred during the previous year

NEW COMPANIES

For businesses not operational in 2019: 2.5 x Average total monthly payroll costs incurred for January and February 2020

SEASONAL EMPLOYERS:

Maximum loan = 2.5 x Average total monthly payments for payroll costs for the 12-week period beginning February 15, 2019 or March 1, 2019 (decided by the loan recipient) and ending June 30, 2019

Will this loan be

Forgiven?

Borrowers are eligible to have their loans forgiven, if they follow all the rules.

How Much?

A borrower is eligible for loan forgiveness equal to the amount the borrower spent on the following items during the 24-week period beginning on the date of loan disbursement. At least 60% must be used for payroll costs.

  • Any amount forgiven will not be included in your taxable income.
  • Payroll costs (using the same definition of payroll costs used to determine loan eligibility)
  • Rent on a leasing agreement
  • Payments on utilities (electricity, gas, water, transportation, telephone, or internet)
  • For borrowers with tipped employees, additional wages paid to those employees
  • Interest on the mortgage obligation incurred in the ordinary course of business
  • The loan forgiveness cannot exceed the principal.

How could the forgiveness be reduced?

The amount of loan forgiveness calculated above is reduced if there is a reduction in the number of employees or a reduction of greater than 25% in wages paid to employees. Specifically:

Reduction based on reduction of number of employees

PAYROLL COST x Average Number of Full-Time Equivalent Employees (FTEs) Per Month for the 24-Weeks Beginning on Loan Disbursement divided by;

  • Option 1: Average number of FTEs per month from February 15, 2019 to June 30, 2019
  • Option 2: Average number of FTEs per month from January 1, 2020 to February 29, 2020
  • For Seasonal Employers: Average number of FTEs per month from February 15, 2019 to June 30, 2019

Reduction based on reduction in salaries

PAYROLL COST For any employee who did not earn during any pay period in 2019 wages at an annualized rate more than $100,000, the amount of any reduction in wages that is greater than 25% compared to their most recent full quarter.

What if I bring back employees or restore wages?

Reductions in employment or wages that occur during the period beginning on February 15, 2020, and ending 30 days after enactment of the CARES Act, (April 26, 2020) shall not reduce the amount of loan forgiveness IF by December 31, 2020 the borrower eliminates the reduction in employees or reduction in wages.

What do I give the bank when applying for loan

forgiveness?

  • Documentation verifying the number of full-time equivalent employees on payroll, and pay rates for the loan period and the year preceding the loan: payroll tax filings reported to the IRS and State income, payroll, and unemployment insurance filings
  • Documentation to prove your mortgage, lease, or utility payments; cancelled checks, payment receipts, account statements
  • Certification from a business representative that the documentation is true and correct and that forgiveness amounts requested were used to retain employees and make other forgiveness-eligible payments
  • All records relating to PPP loan and loan forgiveness must be retained for 6 years after the date the loan is forgiven or repaid in full.

The lender must make a decision within 60 days of your forgiveness application submission.

Guide to Loan Forgiveness

What will lenders be

Looking for?

In evaluating eligibility, lenders are directed to consider whether the borrower was in operation before February 15, 2020 and had employees for whom they paid salaries and payroll taxes. Lenders will also ask you for a good faith certification that:

  1. The uncertainty of current economic conditions makes the loan request necessary to support ongoing operations
  2. The borrower will use the loan proceeds to retain workers and maintain payroll or make mortgage, lease, and utility payments
  3. Borrower does not have an application pending for a loan duplicative of the purpose and amounts applied for here. From Feb. 15, 2020 to Dec. 31, 2020, the borrower has not received a loan duplicative of the purpose and amounts applied for here

Note: There is an opportunity to fold emergency loans made between Jan. 31, 2020 and the date this loan program becomes available into a new loan. If you are a sole proprietor, or self-employed individual, lenders will also be looking for certain documents (final requirements will be announced by the government) such as payroll tax filings, Forms 1099-MISC, Schedule C from tax return and income and expenses from the sole proprietorship.

What documents DO I NEED TO APPLY?

These are the documents you are likely to need so ask your financial advisor or accountant to start gathering these forms.

Preliminary Checklist for Paycheck Protection Program:

  • 2019 Payroll Cost
  • Number of employees as of December 31, 2019
  • Number of employees as of February 15, 2020
  • What industry does the business fall under?
  • IRS Form 940 Employers Annual Federal Unemployment Tax Return (FUTA)
  • IRS Form 941 Employer’s QUARTERLY Federal Tax Return
  • Payroll Summary Report 2019 
  • Breakdown of payroll benefits (vacation, allowance for dismissal, group healthcare benefits, retirement benefits, etc.)

Guide to Applying for PPP Loan

What lenders will

NOT LOOK FOR

  • That the borrower sought and was unable to obtain credit elsewhere.
  • A personal guarantee is not required for the loan.
  • No collateral is required for the loan.

Urgent Actions

Below are the urgent actions you need to ensure you get funding for your business as soon as possible. Next, you’ll find additional actions for the application process, and tools that will make it easier and faster to get the forgivable funding sooner.

  • Review the Paycheck Protection Plan with your leadership team and advisors
  • Send the Guide to Applying for PPP Loan to your leadership team and financial advisors and ask them to gather all loan documentation now so you can save time later
  • Complete the loan application and deliver to your local FDIC lender who is participating in the program (contact your bank to ask them if they are participating the PPP)
  • Use the paycheck protection calculator to determine the maximum amount you can borrow and learn how you can get the entire loan forgiven
  • Review the Corona Crisis Playbook with your leadership team to discover best practices to survive during the crisis and thrive through the recovery

FAQ

You are eligible if you are:

  • A small business with fewer than 500 employees per location (some exceptions allow up to 1500)
  • A 501(c)(3) with fewer than 500 employees
  • An individual who operates as a sole proprietor
  • An individual who operates as an independent contractor
  • An individual who is self-employed who regularly carries on any trade or business
  • A Tribal business concern that meets the SBA size standard
  • A small business that otherwise meets the SBA’s size standard
  • A 501(c)(19) Veterans Organization that meets the SBA size standard

In addition, some special rules may make you eligible:

  • If you are in the accommodation and food services sector (NAICS 72), the 500-employee rule is applied on a per physical location basis
  • If you are operating as a franchise or receive financial assistance from an approved Small Business Investment Company the normal affiliation rules do not apply

Note: The 500-employee threshold includes all employees: full-time, part-time, and any other status.

  • If you need an example of how this should look, refer to how this is done in the ‘What criteria will lenders be looking for?’ section

Question: To determine borrower eligibility under the 500-employee or other applicable threshold established by the CARES Act, must a borrower count all employees or only full-time equivalent employees? 

Answer: For purposes of loan eligibility, the CARES Act defines the term employee to include “individuals employed on a full-time, part-time, or other basis.” A borrower must therefore calculate the total number of employees, including part-time employees, when determining their employee headcount for purposes of the eligibility threshold. For example, if a borrower has 200 full-time employees and 50 part-time employees each working 10 hours per week, the borrower has a total of 250 employees. 

By contrast, for purposes of loan forgiveness, the CARES Act uses the standard of “full-time equivalent employees” to determine the extent to which the loan forgiveness amount will be reduced in the event of workforce reductions.

Question: Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?

Answer: In addition to reviewing applicable affiliation rules to determine eligibility, all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application. Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification. 

Lenders may rely on a borrower’s certification regarding the necessity of the loan request. Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith.

Question: How will SBA review borrowers’ required good-faith certification concerning the necessity of their loan request?

Answer: When submitting a PPP application, all borrowers must certify in good faith that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” SBA, in consultation with the Department of the Treasury, has determined that the following safe harbor will apply to SBA’s review of PPP loans with respect to this issue: Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.

SBA has determined that this safe harbor is appropriate because borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans. This safe harbor will also promote economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees. In addition, given the large volume of PPP loans, this approach will enable SBA to conserve its finite audit resources and focus its reviews on larger loans, where the compliance effort may yield higher returns.

Importantly, borrowers with loans greater than $2 million that do not satisfy this safe harbor may still have an adequate basis for making the required good-faith certification, based on their individual circumstances in light of the language of the certification and SBA guidance. SBA has previously stated that all PPP loans in excess of $2 million, and other PPP loans as appropriate, will be subject to review by SBA for compliance with program requirements set forth in the PPP Interim Final Rules and in the Borrower Application Form. If SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request. SBA’s determination concerning the certification regarding the necessity of the loan request will not affect SBA’s loan guarantee.

Loans can be up to 2.5 x the borrower’s average monthly payroll costs, not to exceed $10 million

How do I calculate my average monthly PAYROLL COSTS and how can increase my maximum loan amount?

The only way to increase your maximum amount is if your payroll is increased, and the only way to increase your payroll, according to the rules, is to include all eligible expenses allowed under the program rules that define “payroll.”  Below you will find a list of the items that you can include in payroll, and the items that you cannot.

Payroll Can Include:

  1. For Employers: The sum of payments of any compensation with respect to employees that is a:
  • Salary, wage, commission, or similar compensation
  • Payment of cash tip or equivalent
  • Payment for vacation, parental, family, medical, or sick leave
  • Allowance for dismissal or separation
  • Payment required for the provisions of group health care benefits, including insurance premiums
  • Payment of any retirement benefit
  • Payment of state or local tax assessed on the compensation of the employee

For Sole Proprietors, Independent Contractors, & Self-Employed Individuals: The sum of payments of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment, or similar compensation and that is in an amount that is not more than $100,000 in one year, as pro-rated for the covered period.

Payroll Cannot Include:

  • Compensation of an individual employee in excess of an annual salary of $100,000, as prorated for the period February 15, to June 30, 2020
  • Federal payroll taxes, railroad retirement taxes and income taxes
  • Any compensation of an employee whose principal place of residence is outside of the United States
  • Qualified sick leave wages for which a credit is allowed under section 7001 of the Families First Coronavirus Response Act (Public Law 1165 127); or qualified family leave wages for which a credit is allowed under section 7003 of the Families First Coronavirus Response Act

Borrowers are eligible to have their loans forgiven, if they follow all the rules.

How Much?

A borrower is eligible for loan forgiveness equal to the amount the borrower spent on the following items during the 24-week period beginning on the date of the loan disbursement:

  • Payroll costs (using the same definition of payroll costs used to determine loan eligibility)
  • Rent on a leasing agreement
  • Payments on utilities (electricity, gas, water, transportation, telephone, or internet)
  • For borrowers with tipped employees, additional wages paid to those employees
  • Interest on the mortgage obligation incurred in the ordinary course of business
  • The loan forgiveness cannot exceed the principal.

How could the forgiveness be reduced?

The amount of loan forgiveness calculated above is reduced if there is a reduction in the number of employees or a reduction of greater than 25% in wages paid to employees. Specifically:

Reduction based on reduction of number of employees

PAYROLL COST x Average Number of Full-Time Equivalent Employees (FTEs) Per Month for the 24-Weeks Beginning on Loan Disbursement divided by;

  • Option 1: Average number of FTEs per month from February 15, 2019 to June 30, 2019
  • Option 2: Average number of FTEs per month from January 1, 2020 to February 29, 2020
  • For Seasonal Employers: Average number of FTEs per month from February 15, 2019 to June 30, 2019

Reduction based on reduction in salaries

PAYROLL COST For any employee who did not earn during any pay period in 2019 wages at an annualized rate more than $100,000, the amount of any reduction in wages that is greater than 25% compared to their most recent full quarter.

What if I bring back employees or restore wages?

Reductions in employment or wages that occur during the period beginning on February 15, 2020, and ending 30 days after enactment of the CARES Act, (April 26, 2020) shall not reduce the amount of loan forgiveness IF by December 31, 2020 the borrower eliminates the reduction in employees or reduction in wages.

What do I give the bank when applying for loan forgiveness?

  • Loan forgiveness application
  • Documentation verifying the number of full-time equivalent employees on payroll, and pay rates for the loan period and the year preceding the loan: payroll tax filings reported to the IRS and State income, payroll, and unemployment insurance filings
  • Documentation to prove your mortgage, lease, or utility payments; cancelled checks, payment receipts, account statements
  • Certification from a business representative that the documentation is true and correct and that forgiveness amounts requested were used to retain employees and make other forgiveness-eligible payments

The lender must make a decision within 60 days of your forgiveness application submission.

Funding to be distributed using the existing framework of SBA lenders, working with and through national and local banks, who will take your application and deliver the loans.

Note: Contact your local bank to ask them if they are participating in the program.

In evaluating eligibility, lenders are directed to consider whether the borrower was in operation before February 15, 2020 and had employees for whom they paid salaries and payroll taxes. Lenders will also ask you for a good faith certification that:

  1. The uncertainty of current economic conditions makes the loan request necessary to support ongoing operations
  2. The borrower will use the loan proceeds to retain workers and maintain payroll or make mortgage, lease, and utility payments
  3. Borrower does not have an application pending for a loan duplicative of the purpose and amounts applied for here. From Feb. 15, 2020 to Dec. 31, 2020, the borrower has not received a loan duplicative of the purpose and amounts applied for here

Note: There is an opportunity to fold emergency loans made between Jan. 31, 2020 and the date this loan program becomes available into a new loan. If you are a sole proprietor, or self-employed individual, lenders will also be looking for certain documents (final requirements will be announced by the government) such as payroll tax filings, Forms 1099-MISC, Schedule C from tax return and income and expenses from the sole proprietorship.

Question: May lenders accept signatures from a single individual who is authorized to sign on behalf of the borrower?

Answer: Yes. However, the borrower should bear in mind that, as the Borrower Application Form indicates, only an authorized representative of the business seeking a loan may sign on behalf of the business. An individual’s signature as an “Authorized Representative of Applicant” is a representation to the lender and to the U.S. government that the signer is authorized to make the certifications, including with respect to the applicant and each owner of 20% or more of the applicant’s equity, contained in the Borrower Application Form. Lenders may rely on that representation and accept a single individual’s signature on that basis.

  • The government is guaranteeing 100% of the loans provided to businesses as part of the program. The bank has no risk because the government is guaranteeing 100% of the loans delivered through the program.
  • For these loans the Government has waived personal guarantee, collateral and credit elsewhere requirements.
  • Lenders are directed to prioritize small businesses, entities in under-served and rural markets, veterans and members of the military community, small business concerns owned by socially and economically disadvantaged individuals, women, and businesses in operation for less than 2 years.

Question: Does the information lenders are required to collect from PPP applicants regarding every owner who has a 20% or greater ownership stake in the applicant business (i.e., owner name, title, ownership %, TIN, and address) satisfy a lender’s obligation to collect beneficial ownership information (which has a 25% ownership threshold) under the Bank Secrecy Act?

Answer: For lenders with existing customers: With respect to collecting beneficial ownership information for owners holding a 20% or greater ownership interest, if the PPP loan is being made to an existing customer and the lender previously verified the necessary information, the lender does not need to re-verify the information. Furthermore, if federally insured depository institutions and federally insured credit unions eligible to participate in the PPP program have not yet collected such beneficial ownership information on existing customers, such institutions do not need to collect and verify beneficial ownership information for those customers applying for new PPP loans, unless otherwise indicated by the lender’s risk-based approach to Bank Secrecy Act (BSA) compliance.

For lenders with new customers: For new customers, the lender’s collection of the following information from all natural persons with a 20% or greater ownership stake in the applicant business will be deemed to satisfy applicable BSA requirements and FinCEN regulations governing the collection of beneficial ownership information: owner name, title, ownership %, TIN, address, and date of birth. If any ownership interest of 20% or greater in the applicant business belongs to a business or other legal entity, lenders will need to collect appropriate beneficial ownership information for that entity. If you have questions about requirements related to beneficial ownership, go to https://www.fincen.gov/resources/statutes-and-regulations/cdd-final-rule. Decisions regarding further verification of beneficial ownership information collected from new customers should be made pursuant to the lender’s risk-based approach to BSA compliance.

Program rule updates published by SBA and Treasury Department

The Small Business Administration (SBA), in consultation with the Department of the Treasury, intends to provide timely additional guidance to address borrower and lender questions concerning the implementation of the Paycheck Protection Program (PPP), established by section 1102 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act or the Act). FAQs on program rules will be updated by SBA and Treasury on regular basis on Treasury website.

For-profit businesses, not-for-profit organizations, veterans organizations, and Tribal business concerns that meet the following 3 criteria:

  • Are either
    a) Entities with fewer than 500 employees or small entities as defined by the SBA; certain industries may have higher maximum employee levels OR
    b) sole proprietors, independent contractors and self-employed individuals
  • Were in operation on February 15, 2020
  • Will certify, among other things, that the uncertainty of current economic conditions makes the loan necessary to support ongoing operations

With the exception of businesses with a NAICS industry code beginning with 72 (primarily hospitality and food service industries), certain franchise businesses, and businesses that have received investment from an SBIC, a business’s employee count will include the employees of its affiliates as defined by the SBA.

Affiliation rules become important when SBA is deciding whether a business’s affiliations preclude them from being considered “small.” Generally, affiliation exists when one business controls or has the power to control another or when a third party (or parties) controls or has the power to control both businesses. Please see this resource for more on these rules and how they can impact your business’s eligibility.

Question: Are lenders required to make an independent determination regarding applicability of affiliation rules under 13 C.F.R. 121.301(f) to borrowers?

Answer: No. It is the responsibility of the borrower to determine which entities (if any) are its affiliates and determine the employee headcount of the borrower and its affiliates. Lenders are permitted to rely on borrowers’ certifications.

Question: Are borrowers required to apply SBA’s affiliation rules under 13 C.F.R. 121.301(f)?

Answer: Yes. Borrowers must apply the affiliation rules set forth in SBA’s Interim Final Rule on Affiliation. A borrower must certify on the Borrower Application Form that the borrower is eligible to receive a PPP loan, and that certification means that the borrower is a small business concern as defined in section 3 of the Small Business Act (15 U.S.C. 632), meets the applicable SBA employee-based or revenue-based size standard, or meets the tests in SBA’s alternative size standard, after applying the affiliation rules, if applicable. SBA’s existing affiliation exclusions apply to the PPP, including, for example the exclusions under 13 CFR 121.103(b)(2).

Question: The affiliation rule based on ownership (13 C.F.R. 121.301(f)(1)) states that SBA will deem a minority shareholder in a business to control the business if the shareholder has the right to prevent a quorum or otherwise block action by the board of directors or shareholders. If a minority shareholder irrevocably gives up those rights, is it still considered to be an affiliate of the business?

Answer: No. If a minority shareholder in a business irrevocably waives or relinquishes any existing rights specified in 13 C.F.R. 121.301(f)(1), the minority shareholder would no longer be an affiliate of the business (assuming no other relationship that triggers the affiliation rules).

Question: How do the $10 million cap and affiliation rules work for franchises?

Answer: If a franchise brand is listed on the SBA Franchise Directory, each of its franchisees that meets the applicable size standard can apply for a PPP loan. (The franchisor does not apply on behalf of its franchisees.) The $10 million cap on PPP loans is a limit per franchisee entity, and each franchisee is limited to one PPP loan.

Franchise brands that have been denied listing on the Directory because of affiliation between franchisor and franchisee may request listing to receive PPP loans. SBA will not apply affiliation rules to a franchise brand requesting listing on the Directory to participate in the PPP, but SBA will confirm that the brand is otherwise eligible for listing on the Directory.

Question: How do the $10 million cap and affiliation rules work for hotels and restaurants (and any business assigned a North American Industry Classification System (NAICS) code beginning with 72)?

Answer: Under the CARES Act, any single business entity that is assigned a NAICS code beginning with 72 (including hotels and restaurants) and that employs not more than 500 employees per physical location is eligible to receive a PPP loan.

In addition, SBA’s affiliation rules (13 CFR 121.103 and 13 CFR 121.301) do not apply to any business entity that is assigned a NAICS code beginning with 72 and that employs not more than a total of 500 employees. As a result, if each hotel or restaurant location owned by a parent business is a separate legal business entity, each hotel or restaurant location that employs not more than 500 employees is permitted to apply for a separate PPP loan provided it uses its unique EIN.

The $10 million maximum loan amount limitation applies to each eligible business entity, because individual business entities cannot apply for more than one loan. The following examples illustrate how these principles apply.

Example 1. Company X directly owns multiple restaurants and has no affiliates.

  • Company X may apply for a PPP loan if it employs 500 or fewer employees per location (including at its headquarters), even if the total number of employees employed across all locations is over 500.

Example 2. Company X wholly owns Company Y and Company Z (as a result, Companies X, Y, and Z are all affiliates of one another). Company Y and Company Z each own a single restaurant with 500 or fewer employees.

  • Company Y and Company Z can each apply for a separate PPP loan, because each has 500 or fewer employees. The affiliation rules do not apply, because Company Y and Company Z each has 500 or fewer employees and is in the food services business (with a NAICS code beginning with 72).

Example 3. Company X wholly owns Company Y and Company Z (as a result, Companies X, Y, and Z are all affiliates of one another). Company Y owns a restaurant with 400 employees. Company Z is a construction company with 400 employees.

  • Company Y is eligible for a PPP loan because it has 500 or fewer employees. The affiliation rules do not apply to Company Y, because it has 500 or fewer employees and is in the food services business (with a NAICS code beginning with 72).
  • The waiver of the affiliation rules does not apply to Company Z, because Company Z is in the construction industry. Under SBA’s affiliation rules, 13 CFR 121.301(f)(1) and (3), Company Y and Company Z are affiliates of one another because they are under the common control of Company X, which wholly owns both companies. This means that the size of Company Z is determined by adding its employees to those of Companies X and Y. Therefore, Company Z is deemed to have more than 500 employees, together with its affiliates. However, Company Z may be eligible to receive a PPP loan as a small business concern if it, together with Companies X and Y, meets SBA’s other applicable size standards,”.

The maximum loan size is the lesser of (i) $10 million or (ii) 2.5x average total monthly “payroll costs”

If the business has already received an SBA Economic Injury Disaster Loan (EIDL) and chooses to refinance that loan with an SBA PPP Loan, the outstanding EIDL loan amount can be added to the loan amount, subject to the $10 million cap.

  • Payroll costs for businesses include salaries, wages, cash tips, state or local tax assessed on the compensation of employees payments for vacation, parental, family, medical, or sick leave, and group health care benefits
  • Payroll costs for sole proprietors and independent contractors includes wages and net earnings from self-employment
  • Compensation for an individual employee, sole proprietor or independent contractor above $100,000 annually (pro-rated for the period) is excluded
  • The average payroll will be calculated over (i) the previous year, (ii) for seasonal employers, the period between February 15, 2019 through June 30, 2019 or, at the election of the borrower, March 1, 2019 through June 30, 2019, or (iii) the period between January 1, 2020 and February 29, 2020 for businesses not in operation during the period between February 15, 2019 and June 30, 2019.
  • Borrowers may use their average employment over the same time periods to determine their number of employees, for the purposes of applying an employee-based size standard. Alternatively, borrowers may elect to use SBA’s usual calculation: the average number of employees per pay period in the 12 completed calendar months prior to the date of the loan application (or the average number of employees for each of the pay periods that the business has been operational, if it has not been operational for 12 months).
  •  Below are taken from the SBA & Treasury Department FAQs

    Question: The CARES Act excludes from the definition of payroll costs any employee compensation in excess of an annual salary of $100,000. Does that exclusion apply to all employee benefits of monetary value?
    Answer: No. The exclusion of compensation in excess of $100,000 annually applies only to cash compensation, not to non-cash benefits, including:

    • employer contributions to defined-benefit or defined-contribution retirement plans;
    • payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums; and
    • payment of state and local taxes assessed on compensation of employees.

     Question: How should a borrower account for federal taxes when determining its payroll costs for purposes of the maximum loan amount, allowable uses of a PPP loan, and the amount of a loan that may be forgiven?

    Answer: Under the Act, payroll costs are calculated on a gross basis without regard to (i.e., not including subtractions or additions based on) federal taxes imposed or withheld, such as the employee’s and employer’s share of Federal Insurance Contributions Act (FICA) and income taxes required to be withheld from employees. As a result, payroll costs are not reduced by taxes imposed on an employee and required to be withheld by the employer, but payroll costs do not include the employer’s share of payroll tax. For example, an employee who earned $4,000 per month in gross wages, from which $500 in federal taxes was withheld, would count as $4,000 in payroll costs. The employee would receive $3,500, and $500 would be paid to the federal government. However, the employer-side federal payroll taxes imposed on the $4,000 in wages are excluded from payroll costs under the statute.

     Question: Should payments that an eligible borrower made to an independent contractor or sole proprietor be included in calculations of the eligible borrower’s payroll costs?

    Answer: No. Any amounts that an eligible borrower has paid to an independent contractor or sole proprietor should be excluded from the eligible business’s payroll costs. However, an independent contractor or sole proprietor will itself be eligible for a loan under the PPP, if it satisfies the applicable requirements.

     Question: Do PPP loans cover paid sick leave?

    Answer: Yes. PPP loans covers payroll costs, including costs for employee vacation, parental, family, medical, and sick leave. However, the CARES Act excludes qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act (Public Law 116–127). Learn more about the Paid Sick Leave Refundable Credit here.

     Question: Paragraph 3.b.iii of the PPP Interim Final Rule states that lenders must “[c]onfirm the dollar amount of average monthly payroll costs for the preceding calendar year by reviewing the payroll documentation submitted with the borrower’s application.” Does that require the lender to replicate every borrower’s calculations?

    Answer: No. Providing an accurate calculation of payroll costs is the responsibility of the borrower, and the borrower attests to the accuracy of those calculations on the Borrower Application Form. Lenders are expected to perform a good faith review, in a reasonable time, of the borrower’s calculations and supporting documents concerning average monthly payroll cost. For example, minimal review of calculations based on a payroll report by a recognized third-party payroll processor would be reasonable. In addition, as the PPP Interim Final Rule indicates, lenders may rely on borrower representations, including with respect to amounts required to be excluded from payroll costs.

    If the lender identifies errors in the borrower’s calculation or material lack of substantiation in the borrower’s supporting documents, the lender should work with the borrower to remedy the issue.

    Question: What if an eligible borrower contracts with a third-party payer such as a payroll provider or a Professional Employer Organization (PEO) to process payroll and report payroll taxes?

    Answer: SBA recognizes that eligible borrowers that use PEOs or similar payroll providers are required under some state registration laws to report wage and other data on the Employer Identification Number (EIN) of the PEO or other payroll provider. In these cases, payroll documentation provided by the payroll provider that indicates the amount of wages and payroll taxes reported to the IRS by the payroll provider for the borrower’s employees will be considered acceptable PPP loan payroll documentation. Relevant information from a Schedule R (Form 941), Allocation Schedule for Aggregate Form 941 Filers, attached to the PEO’s or other payroll provider’s Form 941, Employer’s Quarterly Federal Tax Return, should be used if it is available; otherwise, the eligible borrower should obtain a statement from the payroll provider documenting the amount of wages and payroll taxes. In addition, employees of the eligible borrower will not be considered employees of the eligible borrower’s payroll provider or PEO.

    Question: What time period should borrowers use to determine their number of employees and payroll costs to calculate their maximum loan amounts?

    Answer: In general, borrowers can calculate their aggregate payroll costs using data either from the previous 12 months or from calendar year 2019. For seasonal businesses, the applicant may use average monthly payroll for the period between February 15, 2019, or March 1, 2019, and June 30, 2019. An applicant that was not in business from February 15, 2019 to June 30, 2019 may use the average monthly payroll costs for the period January 1, 2020 through February 29, 2020.

Borrowers will be required to make a good faith certification that the loan proceeds will be used for:

  • Payroll costs
  • Costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums
  • Employee compensation
  • Rent or lease payments, utility payments, business related mortgage interest payments (not principal) incurred prior to February 15, 2020
  • Interest on any other business debt obligations that were incurred prior to February 15, 2020

Borrowers are eligible for loan forgiveness for 24 weeks from funding date of loan of payroll costs and rent payments, utility payments, or mortgage interest payments. Forgiveness may also include additional wages paid to tipped workers. Eligible payroll costs do not include annual compensation greater than $100,000 for individual employees.

The amount of loan forgiveness may be reduced if the employer reduces the number of employees as compared to the prior year, or if the employer reduces the pay of any employee by more than 25% as of the last calendar quarter. Employers who re-hire workers previously laid off as a result of the COVID-19 crisis will not be penalized for having a reduced payroll for the beginning of the relevant period if by December 31, 2020 the borrower eliminates the reduction in employees or reduction in wages. Click here for Guide to Loan Forgiveness.

Borrowers must apply for loan forgiveness to their lenders by submitting required documentation (as discussed in further detail below) and will receive a decision within 60 days.

If a balance remains after the borrower receives loan forgiveness, the outstanding loan will have a fixed interest rate of 1% for 5 years after the application for loan forgiveness.

Question: The amount of forgiveness of a PPP loan depends on the borrower’s payroll costs over a “covered period”; when does that “covered period” begin?
Answer: The “covered period” begins on the date the lender makes the first disbursement of the PPP loan to the borrower. The lender must make the first disbursement of the loan no later than ten calendar days from the date of loan approval.

Question: Will a borrower’s PPP loan forgiveness amount (pursuant to section 1106 of the CARES Act and SBA’s implementing rules and guidance) be reduced if the borrower laid off an employee, offered to rehire the same employee, but the employee declined the offer?
Answer: No. As an exercise of the Administrator’s and the Secretary’s authority under Section 1106(d)(6) of the CARES Act to prescribe regulations granting de minimis exemptions from the Act’s limits on loan forgiveness, SBA and Treasury intend to issue an interim final rule excluding laid-off employees whom the borrower offered to rehire (for the same salary/wages and same number of hours) from the CARES Act’s loan forgiveness reduction calculation. The interim final rule will specify that, to qualify for this exception, the borrower must have made a good faith, written offer of rehire, and the employee’s rejection of that offer must be documented by the borrower. Employees and employers should be aware that employees who reject offers of re-employment may forfeit eligibility for continued unemployment compensation.

The SBA guarantees the loans, so borrowers will need to apply through banks, credit unions and other lenders. Approximately 1,800 private lenders are already approved to issue 7(a) loans, so the best way to begin is to approach your lender and inquire about applying for a 7(a) small business loan. If your lender doesn’t offer it, try another one.

Eligible lenders currently include those already authorized to issue loans under the existing SBA 7(a) program.  SBA 7(a) loans are typically made by banks, non-bank lenders, and Community Development Financial Institutions (CDFIs). Additional lenders with sufficient qualifications are expected to be added on a rolling basis by SBA and the US Department of the Treasury.

Click here for Guide to Apply for PPP Loan

Gather payroll documentation. You will need documents such as payroll tax filings verifying the number of full-time employees on payroll and how much they were paid during the applicable time period. If necessary, contact your accountant, bookkeeper or payroll processing firm to make sure you have the documents you need. Click here for Guide to Apply for PPP Loan

The main underwriting standards for eligibility will be proof of payroll costs and proof in business on February 15, 2020. SBA PPP Loans do not require a personal guarantee or collateral.

The Paycheck Protection Program is retroactive to February 15, 2020. This means employers can use the funds to re-hire employees and still benefit from loan forgiveness.

If a borrower fails to repay a Paycheck Protection Program loan and the lender receives payment from the SBA under the guarantee, the SBA will have a claim by subrogation against the business. Nevertheless, the SBA will not have recourse against a shareholder, member, or partner of a loan recipient for nonpayment except to the extent the loan was not used for the authorized purposes.

An employer who receives a Paycheck Protection Program loan is ineligible for the employee retention credit in Section 2301 of the CARES Act. In addition, employers whose loans are forgiven are not eligible for deferral of payroll taxes as provided under Section 2302 of the Cares Act.

There is a payroll tax credit of up to 50% of qualified wages for certain businesses whose operations have been fully or partially suspended by a government order or whose gross receipts in a quarter have fallen by at least half compared to a similar quarter the year before.Your business cannot receive both the Employee Retention Payroll Tax Credit and a Paycheck Protection Loan, so if you are considering both make sure you consult with your legal or financial advisor.

No, an entity is limited to one PPP loan. Each loan will be registered under a Taxpayer Identification Number at SBA to prevent multiple loans to the same entity.

No. The $10,000 advance is part of the Economic Injury Disaster Loan (EIDL) program, not Paycheck Protection Loans. Go to sba.gov for more information on EIDL program.

Yes, you can take out a state bridge loan and are still be eligible for the PPP loan.

Unlike traditional SBA 7(a) loans, no personal guarantee will be required to receive funds and no collateral needs to be pledged. Similarly, the CARES Act waives the requirement that a business show that it cannot obtain credit elsewhere. In lieu of these requirements, borrowers must certify that the loan is necessary due to the uncertainty of current economic conditions; that they will use the funds to retain workers, maintain payroll, or make lease, mortgage, and utility payments; and that they are not receiving duplicative funds for the same uses.

Payments of principal, interest, and fees will be deferred for at least 6 months. Interest rates are fixed at 1.0%. The SBA will not collect any yearly or guarantee fees for the loan, and all prepayment penalties are waived.

The SBA has no recourse against any borrower for non-payment of the loan, except where the borrower has used the loan proceeds for a non-allowable purpose.

Yes. The SBA will pay the principal, interest, and associated fees on certain pre-existing SBA loans for 6 months.

Borrowers may apply for PPP loans and other SBA financial assistance, including Economic Injury Disaster Loans (EIDLs), 7(a) loans, 504 loans, and microloans, and also receive investment capital from Small Business Investment Corporations (SBICs). However, you cannot use your PPP loan for the same purpose as your other SBA loan(s). For example, if you use your PPP to cover payroll for the 8-week covered period, you cannot use a different SBA loan product for payroll for those same costs in that period, although you could use it for payroll not during that period or for different workers.

Yes. The maximum loan amount for an Express Loan is increased from $350,000 to $1 million.

The CARES Act also expands eligibility for borrowers applying for an Emergency Economic Injury Disaster Loan (EIDL) grant. Under the Act, emergency EIDLs are available for businesses or cooperatives with fewer than 500 employees, sole proprietors or independent contractors, or Employee Stock Ownership Plans (ESOPs) with fewer than 500 employees. Additionally, the Act waives requirements that (1) the borrower provide a personal guarantee for loans up to $200,000, (2) that the eligible business be in operation for one year prior to the disaster, and (3) that the borrower be unable to obtain credit elsewhere. The SBA is also empowered to approve applicants for small-dollar loans solely on the basis of their credit score or “alternative appropriate methods to determine an applicant’s ability to repay.”

Most significantly for borrowers seeking an immediate influx of funds, borrowers may receive a $10,000 emergency advance within three days after applying for an EIDL grant. If the application is denied, the applicant is not required to repay the $10,000 advance. Emergency advance funds can be used for payroll costs, increased material costs, rent or mortgage payments, or for repaying obligations that cannot be met due to revenue losses.

Borrowers may apply for an EIDL grant in addition to a loan under the Paycheck Protection Program, provided the loans are not used for the same purpose. If a borrower received a loan under 7(b)(2) after January 31, 2020, the borrower may refinance the outstanding balance as part of a loan under the Program.

Title IV of the CARES Act creates funding for loan programs that can apply to medium and large size businesses. A summary of those programs can be found in this alert.

If you work as a 1099 independent contractor, you are by default considered to be a sole proprietor in the eyes of the IRS. This means your freelance income gets reported annually on a Schedule C within your personal tax return. You will have a Schedule C even if you pick up odd jobs or do freelance work, and this Schedule is based on the 1099-MISC forms you collect from the companies or individuals who have hired you as a contractor.

Your salary is most easily determined by looking at the net profit listed on your Schedule C. If you have already filed your 2019 taxes, or prepared a 2019 return, this will be reported on line 31 of the Schedule C. If you have not filed your 2019 taxes, you will still need to fill out a Schedule C in order to qualify for the PPP.

Here is a good resource for self-employment and 1099s and the PPP

The U.S. Small Business Administration issued a new interim final rule on April 14, 2020 that supplements the guidance for the Paycheck Protection Program (PPP) included in the first interim final rule for the PPP issued on April 2 and FAQs that are being updated periodically.

The additional guidance provides specific information on calculating the maximum loan amount for individuals with self-employment income who file a Form 1040, Schedule C, Profit or Loss From Business. The 2019 Form 1040 Schedule C is required to be provided with the PPP loan application, according to the interim rule, which notes that detailed documentation guidelines are also required. Guidance is also provided on how PPP loans may be used and how loan forgiveness will be calculated.

The SBA stated it will issue additional guidance for those individuals with self-employment income who: (1) were not in operation in 2019 but who were in operation on Feb. 15, 2020, and (2) will file a Form 1040 Schedule C for 2020.

Additionally, the new guidance directs that the self-employment income of partners in a partnership may be reported as a payroll cost, up to $100,000 annualized, on a PPP loan application filed by or on behalf of the partnership (or LLC filing taxes as a partnership). Individual partners may not submit a separate PPP loan application as a self-employed individual.

Small businesses in all 50 states and the District of Columbia are eligible to apply for a separate SBA program that provides disaster loans. These are low-interest loans issued directly from the agency. This option may make sense for businesses that need a smaller amount of loan money, since the program’s maximum loan amount is $2 million. The loans carry a 3.75% interest rate for businesses and a 2.75% rate for nonprofits. Businesses that are interested in this program should apply directly with the SBA.

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