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The CARES Act PPP: Frequently Asked Questions

April 01, 2020

The following is an UPDATED summary of the Paycheck Protection Program as of April 8, 2020:

On March 31, 2020, the Department of Treasury released the Paycheck Protection Program application and updated supplemental information to assist in applying for these loans. Small businesses and sole proprietorship affected by the coronavirus pandemic can apply for loans under the federal Paycheck Protection Program (PPP) beginning Friday, April 3, 2020.  

Understanding a key provision in the CARES coronavirus relief act: The Paycheck Protection Program

The Coronavirus Aid, Relief, and Economic Security (CARES) Act introduces the Paycheck Protection Program as a key provision in Title I – the Keeping American Workers Paid and Employed Act. The Paycheck Protection Program is administered by the Small Business Administration (SBA) to provide emergency lending under its 7(a) lending program. With $349 billion in new lending capacity, this program helps small businesses cover operating expenses and incentivizes employers to retain employees.

1. What is the Paycheck Protection Program?

The Paycheck Protection Program (PPP) is a significant benefit included in the CARES Act for ‘small’ business owners. The program provides $349 billion in 100% federally guaranteed loans to small businesses and 501(c)(3) nonprofit organizations, a 501(c)(19) veteran’s organization, or Tribal business concern described in section 31(b)(2)(C) of the Small Business. Because many businesses have already laid off workers as a response to the pandemic, the program can be retroactive, with the covered loan period running from Feb. 15 to June 30, 2020, which allows previously laid off or furloughed employees to be returned to payrolls. It is also forgivable based on certain criteria as indicated below.

2. Who is eligible for the Paycheck Protection Loan?

Businesses, including sole proprietorships and nonprofits, that have fewer than 500 employees (including affiliated businesses), or the employee size standard under NAICS Code 72, if larger, are eligible for this relief (food service businesses also apply if they employ fewer than 500 people per physical location). Eligible borrowers are also required to make a good-faith certification that the loan is necessary due to the uncertainty of current economic conditions caused by COVID-19.

3. How much of a Paycheck Protection Loan are you eligible for?

Under this program, lenders will generally be able to issue SBA 7(a) small business loans (*) up to a maximum of the lesser of 2.5 times the average monthly payroll costs over the twelve months prior to application date, or $10 million.

If an applicant was not in business from February 15, 2019 to June 30, 2019, the maximum loan amount is the lesser of the average total monthly payments by the applicant for payroll costs incurred from January 1, 2020 to February 29, 2020 multiplied by 2.5, or $10 million.

Payroll costs include the sum of the following:

  • Wages, commissions, salary, or similar compensation to an employee or independent contractor,
  • Payment of a cash tip or equivalent,
  • Payment for vacation, parental, family, medical or sick leave,
  • Allowance for dismissal or separation,
  • Payment for group health care benefits, including premiums,
  • Payment of any retirement benefits, and
  • Payment of state or local tax assessed on the compensation of employees.
  • Net earnings from self-employment (capped at $100,000 annualized)

Payroll costs do not include:

  • Compensation of an individual employee in excess of an annual salary of $100,000 as prorated for the covered period
  • Qualified sick leave wages for which a credit was allowed under section 7001 of the Families First Coronavirus Response Act
  • Qualified family leave wages for which a credit was allowed under section 7003 of the Families First Coronavirus Response Act

(*) The 7(a) loan program is the SBA's primary program for providing financial assistance to small businesses. The terms and conditions, like the guaranty percentage and loan amount, may vary by the type of loan.

4. What can you use the loan to pay for?

The proceeds of the PPP loans may be used to pay a variety of costs, including:

  • Payroll costs (Salary, wages, commissions)
  • Tips
  • Payments to some independent contractors
  • Group health insurance premiums and other healthcare costs
  • Rent
  • Mortgage interest (excluding amounts pre-paid)
  • Utilities
  • Other business interest incurred prior to February 15, 2020

5. What are the differences between this loan program and other loan programs with Small Business Administration (SBA)?

The single largest potential differences of a loan issued under the Paycheck Protection Program is the possibility of having all or a portion of the loan forgiven. There are other loan available through the SBA, including the Economic Injury Disaster Loans, as the entire country is declared a disaster. A recipient of an SBA economic injury disaster relief loan made between January 31, 2020 and the date covered loans are available under the CARES Act for a purpose other than paying payroll costs and other covered loan purposes described below is still eligible for a covered loan.

6. How does loan forgiveness work?

The amount eligible to be forgiven is the amount spent during the first 8 weeks after the loan is made on the following allowable expenses:

  • Payroll costs, excluding prorated amounts for individuals with compensation greater than $100,000;
  • Rent pursuant to a lease in force before February 15, 2020;
  • Electricity, gas, water, transportation, telephone, or internet access expenses for services which began before February 15, 2020; and
  • Group health insurance premiums and other healthcare costs.
  • No more than 25% of the forgiven expenses can be used for non-payroll costs

The amount of loan forgiveness will be reduced by multiplying (1) the forgivable costs by (2) the quotient obtained by dividing (a) the average number of full-time equivalent employees per month during the covered period by (b) at the election of the borrower (which is either the average number of full-time equivalent employees per month from February 15, 2019 to June 20, 2019 or the average number of full-time equivalent employees per month from January 1, 2020 to February 29, 2020).

The amount of loan forgiveness will also be reduced by the amount of any reduction in total salary or wages of any employee during the covered period that is in excess of 25% of the total salary or wages during the most recent full quarter during which the employee was employed before the covered period. There are exceptions for these reductions if, during the period beginning on February 15, 2020 and ending 30 days after enactment of the Act, there is a reduction in the number of full-time equivalent employees or salary and the reduction is eliminated no later than June 30, 2020.

Reductions in workforce, salaries and wages that occur from February 15, 2020 to April 26, 2020 will be disregarded for purposes of reducing the forgiveness amount so long as the reductions are eliminated by June 30, 2020.

Any debt forgiven pursuant to this provision is not included in taxable income for the year.

To request forgiveness, you submit a request to the lender that is servicing the loan. The request will include documents that verify the number of full-time equivalent employees and pay rates, as well as the payments on eligible mortgage, lease, and utility obligations. You must certify that the documents are true and that you used the forgiveness amount to keep employees and make eligible mortgage interest, rent, and utility payments. The lender must make a decision on the forgiveness within 60 days.

7. What are the terms and collateral associated with the Paycheck Protection Loans?

The interest rate is 1% fixed over 2 years. There are no personal guarantees or collateral required. ***However, if the proceeds are used for fraudulent purposes, the U.S. government will pursue criminal charges against you.***

Origination fees are reimbursed by the SBA.

Payments for loans made under the Paycheck Protection Program will be deferred for a period of six months, however interest will accrue over this period.

There are no prepayment penalties or fees.

8. How to apply for a new PPP loan?

Eligible entities may file applications through any existing SBA lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. Other regulated lenders will be available to make these loans once they are approved and enrolled in the program. You should consult with your local lender as to whether it is participating.

Here is a link to SBA lenders in Vermont.
https://www.sba.gov/offices/district/vt/montpelier/resources/vermont-participating-lenders

9. What information will you need to apply?

You will need to complete the Paycheck Protection Program loan application and submit the application with the required documentation to an approved lender that is available to process your application by June 30, 2020. Click here for the application.

As part of your application, you need to certify in good faith that:

  • Current economic uncertainty makes the loan necessary to support your ongoing operations. The funds will be used to retain workers and maintain payroll or to make mortgage, lease, and utility payments.
  • You have not and will not receive another loan under this program.
  • You will provide to the lender documentation that verifies the number of full-time equivalent employees on payroll and the dollar amounts of payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities for the eight weeks after getting this loan.
  • Loan forgiveness will be provided for the sum of documented payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities. Due to likely high subscription, it is anticipated that not more than 25% of the forgiven amount may be for non-payroll costs.
    All the information you provided in your application and in all supporting documents and forms is true and accurate. Knowingly making a false statement to get a loan under this program is punishable by law.
  • You acknowledge that the lender will calculate the eligible loan amount using the tax documents you submitted. You affirm that the tax documents are identical to those you submitted to the IRS. And you also understand, acknowledge, and agree that the lender can share the tax information with the SBA’s authorized representatives, including authorized representatives of the SBA Office of Inspector General, for the purpose of compliance with SBA Loan Program Requirements and all SBA reviews.

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

10. Are there other resources available?

The CARES Act expands eligibility for Economic Injury Disaster Loans (EIDL) made under section 7(b)(2) of the Small Business Act.

  • Small Business Eligibility. Expansion of eligibility for economic injury disaster loans to include any business that employs not more than 500 employees, sole proprietors, and independent contractors for the period of January 31, 2020 through December 31, 2020.
  • Waiver of Certain Requirements. During the covered period, for a loan made in response to COVID-19 the SBA will waive any personal guarantee on advances and loans not more than $200,000, the requirement that an applicant needs to have been in business for the 1-year period before the disaster, and the credit elsewhere requirement.
  • Advances. Applicants who apply for an economic injury disaster loan in response to COVID-19 may request an advance up to $10,000 from the SBA. The advance must be distributed within 3 days. Applicants are not required to repay advances, even if subsequently denied a loan. The application for this loan program can be found at https://covid19relief.sba.gov/#/
  • Use of Advances. In addition to other allowable purposes, advances may be used for providing paid sick leave to employees due to COVID-19, maintaining payroll, meeting increased costs to obtain materials, making rent or mortgage payments, and repaying obligations that cannot be met due to revenue losses.
  • Advances and PPP Loans. If you receive an advance and subsequently apply and are approved for a PPP loan, then the $10,000 will deducted from any amount of forgiveness
  • Refinancing. EIDL loans can be refinanced into PPP loans.

As a part of your documenting the use of the loan proceeds, we are recommending that you set up a separate checking account for these funds and make disbursements out of that account only for the allowable expenses above.

It is anticipated the loan process for the paycheck protection program will be complicated and may require information not normally requested in a loan process. With offices in Williston and Rutland, Davis & Hodgdon Associates CPAs is now assisting small business clients across Vermont by handling their loan application. We are providing clients with peace of mind as we navigate through this crisis and the constantly evolving business environment that is becoming our new normal. For more information about the COVID-19 business response services now available call our office at 802.878.1963 (Williston) or 802.775.7132 (Rutland) today.

Written by Aida Volpone, Tax Manager, Davis & Hodgdon Associates CPAs