A Small Business Owner’s Guide to the Paycheck Protection Program | hioscar Blog | Oscar
A Small Business Owner’s Guide to the Paycheck Protection Program
Learn about the new loan program under the Small Business Association.
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Our friends at Gusto (opens in new tab) have curated content for small businesses that are navigating challenges during the COVID-19 pandemic. We're bringing you some of their articles so you can stay informed.
Article Updates
April 8, 7:30pm PT The latest update from the Small Business Administration and the Treasury Department addressed a critical issue: timing. Specifically, the start of the eight weeks when the loan proceeds spent by a business will be eligible for loan forgiveness. The clock starts ticking on that eight weeks from the date the lender makes the first disbursement of PPP funds to the borrower. That first disbursement must occur within ten calendar days of the date of the loan approval.
April 7, 3:30pm PT New guidance from the Small Business Administration and the Treasury Department has answered common questions (opens in new tab) from both lenders, borrowers, and their business advisors. Most notably, the FAQ clarifies issues like compensation that exceeds $100,000, and how to account for federal taxes when determining payroll costs for calculating the maximum allowable loan.
April 6, 9:20am PT Accountants, banks, tax think tanks and numerous other observers have different interpretations of how the PPP loan amounts are calculated. To allow for flexibility in preparing Gusto’s PPP reports, we’ve updated our reporting tool to give our users the option of including or excluding the federal income, FICA, and FUTA taxes when calculating the loan amount. We have also removed the illustrative example that excluded FICA tax for calculating the loan amount from this piece.
We have included a new example that illustrates the exclusion of amounts paid to independent contractors. Guidance from the Small Business Administration has made clear that independent contractors should not be treated as employees for the purposes of calculating a business’s loan amount. Independent contractors are eligible to apply for their PPP loan under the CARES Act.
April 3, 4:15pm PT We’ve heard questions regarding our calculation methodology for PPP reports, specifically around FICA and the order of operations. We stand by our calculation and believe it aligns with the CARES legislation.
April 3, 2:20pm PT All Gusto customers can now find a draft of Form 941 for Q1 2020 in “Documents” in their Gusto account (opens in new tab). Note: This draft can only be used for PPP. The form will still have to be finalized for other tax purposes.
While some banks are accepting applications from their customers and/or non-customers today, other banks may delay accepting applications until Monday, April 6, or later. Our spreadsheet will be updated in real time with the latest information we have.
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With cash flows ebbing due to the declaration of a public health emergency, many small businesses have been unable to make payroll in recent weeks.
The CARES Act attempts to address this problem with the Paycheck Protection Program, which is intended to ensure the survival of small and medium enterprises by making loans and conditional grants quickly available to them.
What is the Paycheck Protection Program?
The Paycheck Protection Program (PPP) is a new loan program under the Small Business Association (SBA). It will allow certain businesses such as banks and current SBA lenders, in addition to new or nontraditional lenders approved by the Treasury Department, to provide PPP loans on behalf of the SBA to small businesses affected by COVID-19. These loans can be used for:
The loans will be available to all businesses with fewer than 500 employees (i.e., full-time, part-time, or seasonal). Sole proprietors, independent contractors, and folks who are self-employed are also eligible to apply for a PPP loan on their own. Businesses with more than 500 employees are eligible in certain industries.
Businesses that have defaulted on SBA or other federal loans in the past
Businesses whose owners (including partial owners) are currently indicted or arraigned, are on parole for a criminal charge, or were convicted of a felony within the last five years
Businesses dealing in cannabis or are otherwise illegal at the federal level
Businesses that engage in a pyramid scheme
Household employers (e.g., nannies or housekeepers)
Venture-backed companies that are deemed to have more than 500 affiliated employees (refer to the SBA guidance for details on affiliations)
Timing
These loans can be made from February 15, 2020 through June 30, 2020, which is known as the “covered period.”
What are the terms of the loans?
Bear with us, there’s a lot to cover here.
Loan maximums
For starters, there will be limits to what a business can borrow.
For the Paycheck Protection Program, the maximum amount that can be borrowed is the lesser of:
2.5 times the average monthly payroll costs[3]; or
$10 million
Example: If Widgets, Inc. has an average monthly payroll cost of $1 million, the most they could borrow would be the lesser of: $2.5 million ($1,000,000 x 2.5) or $10 million. Ergo, Widgets, Inc. could borrow $2.5 million under the Paycheck Protection Program.
If a business has an outstanding SBA loan from January 31, 2020 through the origination of this new loan, that balance will be added to the 2.5x average monthly payroll costs, and refinanced through the new loan.
Using the same example: If Widgets, Inc. has an outstanding SBA loan of $1 million, and an average monthly payroll of $1 million, the most they could borrow would be the lesser of: $3.5 million [$1,000,000 + ($1,000,000 x 2.5)] or $10 million. Ergo, Widgets could borrow $3.5 million under the program.
It’s important to note that there are certain things that cannot be included when calculating the loan maximum. Those things include:
Salaries of non-residents
Salary amounts that exceed $100,000 (Per SBA’s guidance (opens in new tab), this applies to cash compensation ONLY. non-cash compensation like employer-paid health insurance premiums, retirement contributions, etc. are excluded from this exception)
Amounts paid to independent contractors (i.e. those who receive a 1099)
Credits received as a result of the Families First Act for sick leave or FMLA
Going back to our original example: Let’s say Widgets, Inc’s $1 million average monthly payroll costs consisted of two employees who earned $150,000 each. The most Widgets could borrow would be the lesser of: $2,479,167 [($1,000,000 – [$100,000/12]) x 2.5] or $10 million. Ergo, Widget’s maximum loan amount would be $2,479,167.
And a slightly different scenario: Widgets, Inc. has an average monthly payroll of $1 million: $800,000 paid to full-time employees, and $200,000 to independent contractors. The maximum amount of Widgets’s loan would be $2 million ([$1,000,000–$200,000]*2.5) or $10 million. Ergo, Widgets, Inc. could borrow $2 million under the Paycheck Protection Program.
One final item about amounts: if a business wants to borrow funds under the SBA’s Express Loan terms, that maximum has been increased from $350,000 to $1 million.
Payment terms
Payment terms for Paycheck Protection Program loans are as follows:
Interest rates for these loans will have a fixed rate interest of .5%
The lender cannot charge a guarantee fee, a yearly fee, a prepayment penalty, or request a personal guarantee or collateral for the loan.
Also, the requirement that the business cannot obtain credit from another lender doesn’t apply.
Finally, the lender has to provide payment deferment for at least six months (but not more than one year) for borrowers who were:
in operation as of Feb 15, 2020,
approved or pending approval for a SBA loan, and
adversely affected by COVID-19 (which is presumed).
Loan forgiveness for PPP
Under the CARES Act, Paycheck Protection loans are eligible for “forgiveness”—which means that the lender can release the borrower from the obligation of repaying the balance. The amount that can be forgiven is limited to the amount the lender reasonably expects the borrower to spend during the covered period[4] on:
Payroll costs (capped at $100,000 on an annualized basis per employee)
Interest for mortgages signed prior to February 15, 2020
Rent obligations from a lease agreement signed prior to February 15, 2020
Utility payments
Additional wages to account for the reduction in tips for tipped employees
A couple other things:
The amount forgiven cannot be greater than the loan principal;
It will be proportionately reduced by a decrease in headcount or wages compared to an earlier lookback period[5], unless the employer reverses that reduction of headcount or wages by June 30, 2020.
The Treasury Department has said that it anticipates non-payroll costs will make up less than 25% of the forgiven amount.
Applying for loan forgiveness
In its application for loan forgiveness, a borrower must document:
The number of full-time employees and pay rates for the lookback period including Payroll tax filings with the IRS, State income, payroll, and unemployment insurance filings,
Proof of payment, including cancelled checks, receipts, and other documentation that verifies payments for mortgage and lease obligations, as well as utility payments.
A certification by the borrower that all the above information is accurate and that the amounts were used to retain employees, make rent, mortgage, or utility payments.
All lenders have 60 days to decide on the loan forgiveness, and any portion that is not forgiven must be repaid within two years. Any forgiven loans will be excluded from gross income for tax purposes.
Adjustments to the amount of loan forgiveness
If a borrower lays people off between February 15, 2020, and April 26, 2020, the amount of the loan forgiveness will be reduced by:
(Avg. monthly FTE during covered period / Avg. monthly FTE during the lookback period) x Total amount of loan forgiveness = New loan forgiveness
Using the same example: Widgets, Inc. wants $1 million in loan forgiveness under the Paycheck Protection Program. During the covered period, Widgets has 25 average monthly full-time employees. During the lookback period, Widgets had 50 average monthly full-time employees. Widgets is eligible for $500,000 in loan forgiveness [(25 / 50) x $1,000,000].
If a borrower cuts its employees’ wages between February 15, 2020, and April 26, 2020, the amount of loan forgiveness will be reduced by:
The amount of any salary or wage reduction of employees whose annualized rate of pay during any pay period in 2019 was less than $100,000; and
whose salary or wage reduction was in excess of 25% of the total salary or wages they received during the most recent full quarter before the covered period.
Example: Widgets, Inc. wants $2.5 million in loan forgiveness under the Paycheck Protection Program. During the covered period, Widgets cut its employees wages from $2 million in the previous quarter to $1 million. None of their employees earned more than $100,000. Widgets would be eligible for $1.5 million in loan forgiveness ($2,500,000 – $1,000,000).
How to apply for the Paycheck Protection Program
The SBA allows lenders to start accepting applications from most entities on April 3, and has made an application form (opens in new tab) available. Contractors and self-employed individuals can apply starting April 10.
A prospective borrower can apply directly (opens in new tab) with any current SBA lender, federally insured depository institution, federally insured credit union, Farm Credit System institution, or any other non-traditional lender that is participating in the program. Other regulated lenders will be available to make these loans once they are approved and enrolled in the program.
[1] Under the CARES Act, “payroll costs” are: salary, wages, cash tips or equivalents, payment for regular leaves of absence, dismissal or separation compensation, group health insurance payments, retirement benefits payments, and some state/local payroll taxes. Whew.
[2] For a sole proprietor or independent contractor, “payroll costs” are: wages, commissions, or similar compensation that is less than $100,000 in 1 year, as prorated for the “covered period,” which is Feb. 15, 2020 through June 30, 2020. Double whew.
[3] “Average monthly payroll” means the average monthly payroll in the 12 months prior to the loan, excluding seasonal employers. Seasonal employers use the 12 weeks prior to the covered period, or the amount between March 1, 2019 and June 30, 2019, or, if they were not in business from Feb 15, 2019 through June 30, 2019, the average monthly payments from Jan 1, 2020 to Feb 29, 2020.
[4] Eight weeks from the origination of the loan. Per guidance from the SBA and Treasury (opens in new tab), the eight weeks starts the date the lender makes the first disbursement of PPP funds to the borrower. The first disbursement must be made within ten days of loan approval.
[5] A lookback period, in this context, is used to compare the expenses in the covered period to what is normal for a typical business, and determine if it is a reasonable amount. Under the CARES Act, employers can choose between two lookback periods: either February 15, 2019 to June 30, 2019; or January 1, 2020 to February 29, 2020. For seasonal employers, the lookback period is February 15, 2019 to June 30, 2019.
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