The Complete and Updated Guide to the Paycheck Protection Program

  • Apr 24, 2020
  • COVID-19
  • Patrick D. Messmer

One of the programs instituted by the federal government in response to the outbreak of COVID-19 aimed at helping small businesses recover from the economic impact of the ongoing pandemic is the Paycheck Protection Program (“PPP”). The program provides funding for loans to small businesses. While lenders had stopped accepting applications for loans, Congress has decided to appropriate additional funds for use by the program.

The information provided in these FAQs is based upon the formation and guidance provided by the Treasury Department as of April 23, 2020. The CARES Act specified that regulations regarding loan forgiveness would be issued by April 26, 2020. We will update these FAQs as we receive additional guidance from the Treasury Department.

FAQ #1: What is the Paycheck Protection Program?

The Paycheck Protection Program is a new loan program included in the recently adopted CARES Act that is designed to help small businesses meet their payroll costs.

FAQ #2: Who is eligible to participate in the Paycheck Protection Program?

Eligible recipients include small businesses and 501(c)(3) nonprofits that employ less than 500 employees, or less than the normal size standard that the Small Business Administration (SBA) uses for the applicant’s primary industry (determined by NAICS number). A business can qualify for a PPP loan so long as they meet either the 500 employees standard, or the standard for their respective industry, regardless of whether it’s an employee-based or revenue-based size standard. Note, however, that non-profit organizations must meet the employee-based standard and cannot look to revenue size standards.

Employees include all persons employed on a full-time, part-time, or other basis. Sole-proprietors, independent contractors, and certain self-employed individuals are also eligible recipients. Importantly, the CARES Act waives the “credit available elsewhere” test that SBA loans normally have, so eligible businesses are not required to seek credit elsewhere before applying. The CARES Act also eliminates the personal guaranty and collateral typically required to obtain an SBA loan.

Note, however, that some small businesses are ineligible even if they satisfy the foregoing criteria. Businesses are ineligible for a PPP loan if: (i) they engaged in any activity that is illegal under federal, state, or local law; (ii) they are a household employer (individuals who employ household employees such as nannies or housekeepers); (iii) an owner of 20% 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; or (iv) they are a business deemed ineligible by 13 CFR 120.110 (e.g., among others, financial businesses, passive businesses, insurance companies, government-owned entities).

FAQ #3: How much can eligible businesses borrow?

Eligible recipients can receive loans for up to the lesser of (i) 2.5x their average monthly payroll costs over the prior twelve (12) months plus any amounts outstanding under an Economic Injury Disaster Loan, or (ii) $10 million.

FAQ #4: What counts as “payroll costs”?

“Payroll costs” are determined by the twelve (12) months prior to the application, and include the following items: (i) salary, wages, commissions, or similar compensation; (ii) payment of cash tips or equivalent, (iii) payment for vacation, parental, family, medical, or sick leave, (iv) allowance for dismissal or separation, (v) payment required for the provision of group health care benefits, including insurance premiums, (vi) payment of any retirement benefit, and (vii) payment of State and local taxes assessed on the compensation of employees. The Treasury Department has not released guidance expanding the definition of “Payroll costs” to include non-listed fringe benefits.

FAQ #5: What does “payroll costs” exclude?

“Payroll costs,” as defined in the CARES Act, specifically cannot include salary, wages, commission or similar compensation of an individual employee in excess of $100,000 annualized (but the first $100,000 of such employee’s salary would count as payroll costs). The $100,000 limitation applies only to salaries, i.e. an individual employee’s compensation for purposes of calculating payroll costs can exceed $100,000 when non-cash benefits are included, provided that no salary in excess of $100,000 is included in such calculation. Payroll costs also cannot include (i) compensation paid to employees whose principal place of residence is outside of the United States, (ii) federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020, including the employer’s share of FICA and income taxes required to be withheld from employees, and (iii) qualified sick and family leave wages for which a credit is allowed under the Families First Coronavirus Response Act.

FAQ #6: How does an applicant calculate the amount they can borrow?

Per the SBA’s Interim Final Rule, you can calculate the maximum amount you can borrow by using the following guide:

    1. Total payroll costs from the last twelve months for employees who live in the United States.
    2. Subtract any salary or wages paid to an employee in excess of an annual salary of $100,000. For example, if an employee makes $130,000 a year in salary (excluding non-cash benefits), then for these purposes, only include $100,000 for that employee.
    3. Calculate average monthly payroll costs by dividing the amount from Step 2 above by 12.
    4. Take that number and multiply it by 2.5.
    5. Finally, 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).

For example:

    1. Assume total payroll costs from the last twelve (12) months of $1,200,000 (including $100,000 of non-cash benefits like vacation, health care, and retirement benefits).
    2. If four (4) employees make $150,000, then we subtract the amount above $100,000 for each of them ($1,200,000 – $200,000 = $1,000,000) (Recall that only an employee’s salary and wages are relevant to the $100,000 cut off; non-cash benefits can exceed $100,000 when combined with salary less than $100,000.)
    3. Divide $1,000,000 by 12 = $83,333.33
    4. Multiply $83,333.33 by 2.5 = $208,333.33
    5. Add in the amount of an outstanding EIDL (but not any emergency advance), if any, and that is the total amount of money you could borrow under the PPP.

FAQ #7: What effect, if any, does qualified sick and family leave under the Families First Coronavirus Response Act have on Paycheck Protection Program loans?

Qualified sick and family leave wages for which a tax credit is allowed under the Families First Coronavirus Response Act cannot be counted as payroll costs for determining loan amounts under a Paycheck Protection Program loan.

FAQ #8: What can recipients spend loan proceeds on?

During the period from February 15, 2020 through June 20, 2020, loan recipients may spend loan proceeds on (i) payroll costs, (ii) costs associated with continuation of group healthcare benefits and insurance premiums, (iii) interest payments on mortgage debt incurred prior to February 15, 2020 (not including principal or prepayments), (iv) rent payments, (v) utility payments, and (vi) interest on any other debt obligations incurred prior to February 15, 2020. Amounts not spent within the eight (8) weeks following origination of the loan will convert into a term loan (see FAQ #16). The statute itself does not indicate whether there are limitations on what the loan proceeds can be spent on after June 30, 2020, but note that the loan application requires that borrowers certify that the funds will be used on business-related costs consistent with the PPP.

Note that 75% of the loan proceeds must be spent on payroll costs. Recall also that the definition of “payroll costs” in the CARES Act does not include employee salaries above $100,000.

Also note that only some of the above are eligible for loan forgiveness. See FAQ #10.

FAQ #9: Do recipients need to start paying back the loans right away?

No. The program allows for deferral of all payments for at least six (6) months.

FAQ #10: Are PPP loans eligible for forgiveness?

Yes. Recipients of Paycheck Protection Program loans may apply to have their loans forgiven. While there may be other things a loan recipient is permitted to spend loan proceeds on, the statute and regulations only list certain things as being eligible for loan forgiveness. Recipients are eligible for forgiveness in the amount equal to what the recipient spends on (i) payroll costs, (ii) mortgage interest, (iii) rent, and/or (iv) utilities (all of which must have been incurred or begun service prior to February 15, 2020) in the eight (8) week period after origination of the loan. Only 25% of the amount spent over the eight (8) week period can have been for non-payroll costs.

After the eight (8) week period, borrowers will be able to apply to their lenders for forgiveness. Lenders will have sixty (60) days in which to make a determination.

For example, if a PPP loan originates on April 20, 2020, then the eight (8) week period will run from April 20, 2020 until June 15, 2020. Let’s assume the borrower received $100,000. During that eight (8) weeks, if the borrower spends $80,000 on payroll costs, $10,000 on rent or mortgage interest, and $10,000 on utilities, then 100% of the loan is eligible for forgiveness because the borrower (i) only spend the funds on approved costs eligible for forgiveness, (ii) spent 75% or more of the funds on payroll costs, and (iii) spent 100% of the funds within the eight (8) week period.

FAQ #11: Is the amount of the loan that is forgiven reduced by any factors?

Yes. There are two factors that can reduce the portion of the loan that is forgiven: (i) reduction of employees, and (ii) reduction in salaries.

FAQ #12: How is the loan forgiveness reduced if a recipient has laid off employees?

The amount of the loan that is forgiven is reduced by multiplying (i) the average number of full-time equivalent employees by (ii) the quotient obtained by dividing the average number of full-time equivalent employees per month during the covered period by either, at the election of the borrower, (a) the average number of full-time equivalent employees per month employed during February 15, 2019 through June 30, 2019 or (b) the average number of full-time equivalent employees per month during January 1, 2020 through February 29, 2020. Recipients will be required to submit documentation when applying for loan forgiveness to demonstrate the amount of loan forgiveness for which they are eligible, e.g. payroll tax filings reported to the IRS, state income, payroll, and unemployment insurance filings, canceled checks for mortgage interest payments, etc.

For example, let’s assume the following:

    • A loan recipient called ABC, LLC received a loan for $100,000 and spent 100% of it on approved, forgivable costs.
    • During the eight (8) weeks following origination, ABC has an average of ten (10) full-time equivalent employees per month.
    • During January 1, 2020 through February 29, 2020, ABC had an average of twelve (12) full-time equivalent employees per month.
    • Using the formula above, ABC divides 10 by 12 = .83 and multiplies that number by the amount spent on forgivable costs ($100,000) = $83,000.

So in that example, ABC would be eligible for forgiveness of $83,000 of the loan.

FAQ #13: How is the loan forgiveness reduced if a recipient has reduced salaries?

The portion of the loan that is forgiven is also reduced by the amount of any reduction in total salary or wages of any employee in excess of 25% of the total salary or wage of such employee (excluding employee salaries in excess of $100,000 annually). As noted above, recipients will be required to submit documentation when applying for loan forgiveness to demonstrate the amount of loan forgiveness for which they are eligible, e.g. payroll tax filings reported to the IRS, state income, payroll, and unemployment insurance filings, canceled checks for mortgage interest payments, etc.

For example, if ABC, LLC had two (2) employees making $100,000 annually, and reduced their salaries to $50,000 annually, then the amount of forgiveness that ABC could receive would be reduced by $50,000 (the first 25% reduction was allowable, so only the combined reductions from $75,000 to $50,000 are penalized).

FAQ #14: What if a recipient has already laid off employees or reduced salaries? Are those recipients still eligible for loan forgiveness?

Yes. The amount of loan forgiveness is determined without regard to a reduction in the number of full-time equivalent employees of a recipient or to the reduction of one or more employees’ total salary and wages that occurred between February 15, 2020 and April 26, 2020, if the recipient eliminates the reduction in full-time equivalent employees and/or eliminates the reduction in total salary not later than June 30, 2020.

For example, if ABC, LLC laid off three (3) of its twenty (20) employees between February 15, 2020 and April 26, 2020, the law provides that the amount of loan forgiveness will be determined without regard to that reduction, so long as ABC “eliminates the reduction” in full-time equivalent employees before June 30, 2020. Likewise, if ABC had reduced two (2) employees’ salaries from $100,000 to $50,000, but then eliminated such reductions prior to June 30, 2020, then the amount of loan forgiveness ABC was eligible for would be determined without regard to that salary decrease.

How this will work in practice is a little unclear still, given that we are all still waiting on further loan forgiveness guidance from the SBA.

FAQ #15: Are forgiven loans considered taxable income?

No. Loan amounts forgiven under this program will not be considered taxable income.

FAQ #16: If any amount of the loan is not forgiven, what are the loan terms?

If any amount of the loan is not forgiven, lenders may charge a maximum of one percent (1%), and the loan matures two (2) years from the date that the borrower applies for loan forgiveness.

FAQ #17: Is there any more information or guidance coming out about this program?

Yes. The SBA stated in its Interim Final Rule that it will issue additional guidance on loan forgiveness, and that it may provide further guidance as needed. This guidance will be important to watch, as it will affect each recipient’s ability to apply for and receive loan forgiveness under the program.