The U.S. government has extended The Paycheck Protection Program (PPP). Here’s a brief overview of what you need to know.
Paycheck Program Basics
Authorized by the CARES Act and administered by the Small Business Administration, the PPP helps employers cover the cost of their payroll so more people can remain employed during the COVID-19 pandemic. The new deadline to apply is August 8, 2020, with applications reopened on July 6.
Eligible companies have fewer than 500 employees, or meet a revenue-based size standard for their industry, or have a tangible net worth of $15 million or less AND the average net income (excluding carry-forward losses) for the preceding two years was $5 million or less.
Independent contractors and sole proprietors are eligible. Seasonal businesses are as well, as long as they were either operating on 2/15/20 or in 8 weeks from 2/15/19 to 6/30/19. And therefore would be presumed to have done the same in 2020, absent the coronavirus.
PPP comes in the form of a loan, which may be forgiven as long as the employer meets specific criteria. Loans are offered through existing SBA lenders and additional participating institutions such as banks, credit unions, and Farm Credit Systems.
Loans of up to $10 million are available, and businesses must spend the funds by the end of this calendar year.
If you’re interested in applying, click here for the SBA page on PPP.
Paycheck Protection Program Eligibility
For lenders to forgive the loan, businesses must spend at least 60% of it on payroll. Other costs that you can use the money to cover include mortgage interest, rent, and utilities. It’s available for the first 24 weeks of these costs.
The new loans will have a 5-year maturity. Those issued before 6/5/20 have a 2-year maturity. The interest rate is 1%, and you can defer payments for six months.
You don’t need collateral or guarantors for the loan. Neither the government nor the banks charge additional fees for small businesses.
Details on Paycheck Protection Program Forgiveness
You’ll need to submit an application to the lender to request loan forgiveness. In addition, you must meet the following criteria.
The 24-week timeframe
Fortunately, since not all payroll cycles sync up with the first day of loan disbursement, the SBA has an alternative payroll covered period. It begins on the first day of the pay period after the loan has been disbursed.
However, payments outside this timeframe are not eligible for loan forgiveness.
Payment of payroll (not just payroll incurred)
The business needs to pay their employees from the loan to be eligible for forgiveness, not just incur the payroll costs. Payments incurred during the last two weeks of the 24-week timeframe must be paid no later than the next pay period to qualify for forgiveness.
As a reminder, 60% of the loan proceeds must be used for payroll expenses in order for the loan to be forgiven. Sick leave and family leave costs are included in payroll. Payments to independent contractors and sole proprietors are excluded from payroll, as they can apply for PPP themselves.
Payment of non-payroll costs
Similarly, these types of expenses must be incurred and paid during the 24-week timeframe in order to be eligible for forgiveness. If they are incurred inside the timeframe but not paid until later, they must be paid no later than the next billing date to qualify.
The SBA has made clear that it will not forgive advance payments of mortgage interest, but as of yet has made no statement regarding such payments for rent or utilities. Double tax breaks are not allowed.
Continuation of the same number of full time equivalent (FTE) employees
Since the CARES Act did not define what a FTE is, the SBA ruled that it’s an employee who works an average of at least 40 hours per week. The loan forgiveness will be reduced, but not necessarily eliminated, if the employer doesn’t follow the rule of having the same number of FTEs during the 24-week period as it had at the beginning.
For part-time employees, the employer can choose one of two methods of calculating their FTE. They must apply this method to all employees.
One is to calculate their average number of hours worked during the 24 weeks and divide by 40. The other is to assume that all part-timers who worked less than 40 hours on average is 0.5 FTE.
Allowable exceptions to the FTE rule
There are several exceptions to the maintenance of FTEs that will not reduce the loan forgiveness.
If an employee voluntarily resigns or asks to reduce hours, or if they’re fired for cause, the FTE reduction rule does not apply.
If the employer reduced FTE between February 15 and April 26 of this year, but restores the FTE before the end of the year, that temporary reduction doesn’t count against them.
Another exemption is based on employee availability and must be documented by the employer to avoid a reduction in forgiveness on the PPP loan. One factor is if the employer is unable to rehire former employees who are qualified or hire qualified ones for unfilled positions by 12/31/20.
The other is if the business can’t return to its activity level as measured on 2/15/20 due to guidance from OSHA, CDC, or HHS during the period from 3/1/20 to 12/31/20.
Maintaining same rate of pay for salaries and wages
A reduction in salaries and wages of 25% or more results in a loan forgiveness reduction.
However, if that reduction occurred between February 15 and April 26 of this year and pay was restored to its previous levels by the end of the year, there is no forgiveness reduction.
Eligibility of bonus and hazard pay
The CARES Act includes salary, wages, commissions and similar compensation in its definition of “payroll costs”. Therefore, hazard payments and bonuses (as supplements to wages) are eligible for loan forgiveness as long as the employee’s total compensation is equal to or less than $100,000 annually.
The $100,000 limit on employee compensation is limited to “cash” compensation and does not include benefits such as employer retirement contributions.
Retain loan documents for six years
After the loan is either paid in full or forgiven, the SBA retains the right to examine the loan documents for the following six years.
If you’d like to discuss your business finances, give us a call at 619.255.9554 or send us an email. We’d love to hear from you.