Following the signing of the Coronavirus Aid, Relief, and Economic Security (CARES) Act on Friday, March 27, 2020, the Small Business Administration (SBA) and the U.S. Department of Treasury announced a mobilization effort of lending institutions — including banks and credit unions — to provide small businesses with the capital they need in these times of living under the Federal government’s Slow the Spread guidelines, which are now in effect until April 30, 2020.

The CARES Act establishes the new Paycheck Protection Program (PPP) to help businesses with 500 or fewer employees stay afloat and keep their workers employed and paid for up to eight (8) weeks. The program, which was announced earlier this week and includes access to $349 billion in funds, is expected to be up and running by April 3 (this Friday), at which time small-business owners can go to a participating SBA 7(a) lender, bank, or credit union, apply for a loan, and be approved the same day. Perhaps best of all, the SBA will forgive the portion of the loan proceeds that are used to cover the first eight (8) weeks of payroll costs, rent, utilities, and mortgage interest.

Paycheck Protection Program

The Paycheck Protection Program will be available retroactive from Saturday, Feb. 15, 2020, so employers can rehire their recently laid-off employees through Tuesday, June 30, 2020.

This program’s intent is to help small businesses like those we work with here at Stees, Walker & Company, LLP, stay afloat and retain employees until the social distancing rules are relaxed and business owners can quickly ramp up businesses to pre-COVID-19 levels. To do that, we all need to retain our most valuable assets — our employees.

Below, starting with loan terms and conditions, is a rundown of how the Paycheck Protection Program works, and other thoughts on how to prepare yourself now to tap into this important business resource.

Loan Terms and Conditions

Following are the loan terms and conditions:

  • All businesses are eligible — including sole proprietorships, self-employed individuals, and independent contractors; non-profits, veterans’ organizations, tribal concerns — with 500 or fewer employees, or no greater than the number of employees set by the Small Business Administration as the size standard for certain industries.
  • At this time, each business is eligible for only one loan. (Note: We will let you know if this changes, as rumblings out of the nation’s capital suggest may occur sooner than elected officials and regulators thought.)
  • The maximum loan amount is currently set at $10 million.
  • The portion of the loan used for payroll and other designated business operating expenses (see list below) in the eight (8) weeks following the date of loan origination will be forgiven. (Due to likely high use of the program, it is anticipated that not more than 25 percent of the forgiven amount may be used for non-payroll costs.) Designated expenses include:
    • Payroll costs, including benefits
    • Interest on mortgage obligations, incurred before Saturday, Feb. 15, 2020
    • Rent, under lease agreements in force before Saturday, Feb. 15, 2020
    • Utilities, for which service began before Saturday, Feb. 15, 2020
  • Payroll costs are capped at $100,000 on an annualized basis for each employee.
  • Employee and compensation levels must be maintained.
  • All loans under the Paycheck Protection Program will have the following identical features:
    • Interest rate of 0.5 percent
    • Maturity of two years (no prepayment penalties apply)
    • First payment deferred for six months (interest accrues over this period)
    • 100 percent guarantee by SBA
    • No collateral required to secure the loan
    • No personal guarantees required
    • No borrower or lender fees payable to SBA are to be charged.

When to Apply

  • Starting Friday, April 3, 2020, for small businesses and sole proprietorships
  • Starting Friday, April 10, 2020, for independent contractors and the self-employed

Note that the Paycheck Protection Program ends June 30, 2020.

Where to Apply

You can apply through any existing Small Business Administration lender or participating federally insured depository institution, federally insured credit union, or Farm Credit System institution. According to the information we’re receiving, other regulated lenders will be available to make these loans once they are approved and enrolled in the program. If you’re not sure where to start, consult with your area’s local lenders to find a participating organization, or visit www.sba.gov for a list of SBA lenders.

Eligibility

All businesses are eligible — including nonprofits, veterans’ organizations, tribal business concerns, sole proprietorships, self-employed individuals, and independent contractors — with 500 or fewer employees. Businesses in certain industries can have more than 500 employees if they meet applicable SBA employee-based size standards for those industries.

For the Paycheck Protection Program, the SBA’s affiliation standards are waived for the following business types:

  • Businesses in the hotel and food services industries
  • Franchises in the SBA’s Franchise Directory
  • Businesses that receive financial assistance from small business investment companies licensed by the SBA.

What You Need to Apply

This is important. You will need to complete the Paycheck Protection Program loan application (available from participating lenders) and submit the application with the required documentation to an approved lender that is available to process your application by Tuesday, June 30, 2020.

While you can download a sample Paycheck Protection Program loan application form to see the information being requested, you will need to complete the specific form provided by your lender.

While a final list of required documentation hasn’t been released, we here at Stees, Walker & Company, LLP — a San Diego tax planning firm —  recommend that you gather the following documents and organize them in a way where you can access them easily once the loan application program is up and running on Friday, April 3, 2020:

  • Your 2019 payroll tax returns
  • Your 2020 payroll records including a list of your employees; their salaries, wages, commissions, tips, and vacation pay; parental, family, and sick leave; group health benefits; and retirement benefits
  • At least two years of your business tax returns
  • A list of the following monthly expenses for services that began before Friday, Feb. 15, 2020:
    • Rent
    • Utilities
    • Mortgage interest
    • Telephone
    • Internet
  • Sole proprietors or independent contractors will need income records.

Waiver of the Credit Elsewhere Requirement

Under the SBA’s Credit Elsewhere requirement, businesses are required to obtain some or all of the capital required from other sources before applying for an SBA loan. The SBA is waiving that requirement for the Paycheck Protection Program.

Payroll Costs

Eligible payroll costs include:

  • Salary, wages, commissions, or tips (capped at $100,000 on an annualized basis for each employee)
  • Employee benefits including costs for parental, family, medical, or sick leave; vacation, allowance for dismissal or separation; payment of any retirement benefit; and, payments required for the provisions of group health care benefits including insurance premiums
  • Local and state taxes assessed on compensation
  • For an independent contractor or sole proprietor: income, commissions, wages, or net earnings from self-employment (capped at $100,000 on an annualized basis for each employee)

Maximum Loan Amount

Loans can be for up to two (2) months (eight weeks) of your average monthly payroll costs from the last year plus an additional 25 percent of that amount to cover any mortgage interest, rent, and utility costs to keep the business afloat. The amount is capped at $10 million. Seasonal or new businesses must use different applicable time periods for their calculation. Payroll costs are capped at $100,000 annualized for each employee.

Loan Payback Amount and the Employee Retention Requirement

Assuming you use the proceeds from the loan to cover only payroll and qualified business expenses for only up to eight (8) weeks, your entire loan amount is forgiven — your business pays back nothing.

If you use any portion of the loan proceeds for anything other than payroll or qualified business expenses, you will be required to pay back that portion with interest when the loan comes due.

You will also owe money if you don’t maintain staff and payroll levels. Specifically:

  • Number of Staff: Your businesses loan forgiveness will be reduced if you decrease your full-time employee headcount.
  • Level of Payroll: Your businesses loan forgiveness will be reduced if you decrease salaries and wages by more than 25 percent for any employee who made less than $100,000 annualized in 2019.
  • Re-Hiring: Your business will have until June 30, 2020, to restore your full-time employment and salary levels for any changes made between Friday, Feb. 15, 2020, and Sunday, April 26, 2020.

Requesting Loan Forgiveness

At the end of the eight (8) weeks, you can submit a request for loan forgiveness to the lender servicing your business’ loan. The request must 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. The lender has 60 days to respond to your request.

Certifications Required

As part of your application, your business needs to certify in good faith that:

  1. Current economic uncertainty makes the loan necessary to support your ongoing business operations.
  2. The funds will be used to retain employees and maintain payroll or to make lease, mortgage, and utility payments.
  3. You have not received — and will not receive — another loan under the Paycheck Protection Program.
  4. You will provide to the lender documentation that verifies the number of full-time equivalent (FTE) employees on payroll and the dollar amounts of payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities for the eight (8) weeks after receiving your loan.
  5. Loan forgiveness will be provided for the sum of documented payroll costs, covered rent payments, covered mortgage interest payments, , and covered utilities. (Note: Due to likely high participation in the Paycheck Protection Program, it is anticipated that no more than 25 percent of the forgiven amount may be for non-payroll costs.)
  6. All the information you provided in your application and in all supporting documents and forms is accurate and true. (Note: Knowingly making a false statement to receive a loan under the Paycheck Protection Program will punishable by law.)
  7. You acknowledge that the lender will calculate the eligible loan amount using the tax documents you submitted. You’ll also be asked to affirm that the tax documents are identical to those you submitted previously to the Internal Revenue Service (IRS).
  8. Finally, your business will also need to understand, acknowledge, and agree that the lender can share the tax-related 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.

Warning: If any proceeds from a loan authorized by the Paycheck Protection Program are used for fraudulent purposes, the U.S. government will pursue criminal charges.

Get Ready NOW!

Although the Paycheck Protection Program is open until Tuesday, June 30, 2020, we here at Stees, Walker & Company, LLP strongly urged your business to apply as soon as possible, because there is a funding cap, and lenders need time to process your loan. Get ready now by taking the following steps:

  1. Download the sample Paycheck Protection Program application form and review it, so you know what information will be required.
  2. Gather the documents you’ll need, as explained earlier in this post, so you’ll be able to hit the ground running on Friday, April 3, 2020.
  3. Get in touch with your banker right away, if you haven’t done so already, to find out what they need to facilitate the process.

By getting ready for this program now, yours should be among the first small businesses to receive the help you need to make it through these challenging times and help your employees.

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About the Author: Laura Stees, CPA is a Partner and Business Strategist with Stees, Walker & Company LLP — a San Diego, Calif.-based boutique tax consulting firm focused on personalized tax and financial guidance to individuals and businesses.

Disclaimer: The information in this blog post about the Paycheck Protection Program is provided for general informational purposes only and may not reflect current financial thinking or practices. No information contained in this post should be construed as financial advice from the staff at Stees, Walker & Company LLP, nor is this the information contained in this post intended to be a substitute for financial counsel on any subject matter or intended to take the place of hiring a Certified Public Accountant in your jurisdiction. No reader of this post should act or refrain from acting on the basis of any information included in, or accessible through, this post without seeking the appropriate financial planning advice on the particular facts and circumstances at issue from a licensed financial professional in the recipient’s state, country or other appropriate licensing jurisdiction.