COVID-19 BUSINESS RESOURCES (SPONSORED)
The Paycheck Protection Program is a business relief program providing small business loans that are generally forgivable. Despite initial issues, more than 1.5 million applicants were approved for PPP loans, reaching the Program’s entire $350 billion budget in less than two weeks. There is a consensus that the Program will receive significant additional funding this week.
Whether your organization is considering applying for a PPP loan soon, or it has already received a PPP loan, we recommend carefully considering your next steps. Many organizations have incorrectly assumed that they are not eligible or will not benefit from a PPP loan. Organizations that have already received PPP funds should closely review the Program’s forgiveness rules to build a forward-looking forgiveness model to ensure that there are no surprises when the organization applies for loan forgiveness.
- Is the organization eligible to apply?
- When is it advisable to apply?
- What if my business is closed, or operating at a reduced capacity?
PPP loan eligibility is based on the applicant’s employee count, and whether it can make required certifications. Many potential applicants have heard of a 500 employee limit, but may not be aware of industry-based exceptions for larger employers. For example, businesses in several critical industries can apply with up to 1,500 employees. Sole proprietors, independent contractors, self-employed individuals, tribal businesses, and 501(c)(3) nonprofits and 501(c)(19) veterans organizations are generally eligible to apply as long as they meet the SBA’s size standards.
It is also important to confirm whether the SBA’s affiliation rules require the organization to include the employee count of “affiliated” organizations when determining eligibility. The affiliation rules generally require companies with common ownership to be aggregated, but can be complicated to apply in more complex ownership and management situations. The organization must also make several certifications to apply, including that current uncertainty requires the PPP loan.
The Program’s benefits usually make applying advisable. In most cases, an eligible business will expect most or all of its PPP loan to be forgiven. Unforgiven portions of PPP loans carry a favorable 1% interest rate. Loan forgiveness will be reduced to the extent that the organization has fewer employees or payroll reductions in excess of 25% compared to pre-COVID-19 levels. Although the application process will involve time and effort, the organization may be able to recuperate costs for time spent or professional fees by designating an agent who assisted it in preparing its application.
Businesses that cannot operate, or are operating at a reduced capacity can benefit from a PPP loan. However, the loan forgiveness calculations incentivize businesses to rehire any laid off employees and pay them at pre-COVID-19 levels.
- How should an applicant calculate its loan amount?
- The importance of accurately completing the loan application.
Applicants should carefully complete the loan application in coordination with legal counsel to avoid delays in processing the loan application and problems that could arise when applying for loan forgiveness.
In general, the maximum loan amount is the applicant’s average monthly payroll costs multiplied by 2.5. Most applicants can aggregate payroll costs from either the previous 12 completed months, or from calendar year 2019. There are additional rules that apply to seasonal applicants and those that were not operational in 2019.
Payroll costs should generally include: (1) salaries, wages, and other compensation up to $100,000, (2) cash tips and equivalent payments, (3) vacation, parental, family, medical, and sick leave (except for qualified sick and family leave wages permitted under the Families First Coronavirus Response Act), (4) allowance for dismissal or separation, (5) payment for group health care and retirement benefits, and (6) state and local income tax payments. However, payroll costs must exclude some expenses, like certain payroll taxes, and any compensation paid to non-U.S. employees.
Each applicant should confirm that its application is completed fully and accurately. Question 3 of the application is a common source of confusion, asking whether the applicant or its owner owns any other business or has common management with any other businesses. If the answer is yes, the applicant must include a list of those businesses.
- How does loan forgiveness work?
- How can borrowers maximize their forgiveness prospects?
A PPP loan will generally be forgivable if (1) loan proceeds are spent on forgivable expenses, with at least 75% spent on payroll costs, during the 8 weeks after loan origination, (2) the borrower’s average number of full time equivalent employees during the 8 weeks after loan origination is not lower than its pre-COVID-19 average employment, and (3) the borrower has not reduced wages of any employee by more than 25% compared to pre-COVID-19 wages. Forgivable expenses generally include payroll costs, mortgage interest, rent, and certain utilities. Borrowers may use loan proceeds to pay the interest on other debt obligations incurred before loan origination, but such payments would not be forgivable unless future Treasury guidance clarifies this point.
There are many details, definitions, and ambiguities in the CARES Act that we expect to be clarified in future guidance. However, that guidance is likely to come after borrowers have already spent loan proceeds with the expectation that their loan will be forgivable.
Therefore, we strongly recommend that borrowers coordinate with legal counsel to build a model that forecasts loan forgiveness at the end of the 8 week period after the PPP loan is originated. Running this calculation as early as possible will give businesses the most flexibility in determining how to spend the loan proceeds, whether to rehire laid-off employees, and other strategic decisions that could significantly affect loan forgiveness. Loan forgiveness modeling will also minimize the amount of time spent compiling information to apply for loan forgiveness later this year.
While beneficial, the Paycheck Protection Program involves complicated and fact-specific issues. Please contact us if you have any questions.
Taylor Gast is a business attorney with Foster, Swift, Collins & Smith who has helped numerous businesses apply for PPP loans and weather the effects of COVID-19. He can be reached at [email protected].