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New SBA Payroll Protection Program under the CARES Act

Published: April 2nd, 2020

By: Denise D. Dell-Powell

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Relief for Small Business and Non-Profits

A well-known part of the CARES Act is the Payroll Protection Program (PPP), which establishes a new SBA loan that can be forgiven if done properly.  Generally, businesses with less than 500 employees are eligible, also certain businesses with less than 500 employees per location – no collateral or personal guarantees are required.  The loan is designed to be processed very quickly, so that small businesses can retain employees. The SBA has now put together a loan application package that includes a Borrower Fact Sheet, Overview of the Program, the Lender Information Sheet and the Application. 

We recommend those businesses that want to take advantage of the loan program apply early, as funds are limited.  Small businesses should get in touch with their lending institution now. Do not delay.

Loan Eligibility Requirements and Forgiveness under the PPP:

Maximum Loan Amount

The maximum loan amount is the lesser of:

  • The average total monthly payroll payments made in the one-year period before the loan is made multiplied by 2.5;
  • PLUS the outstanding amount of a loan made under the SBA’s Disaster Loan Program between January 31, 2020 and the date on which such loan may be refinanced as part of this new SBA loan program;

OR

Upon request, and only for businesses that were not in business during the period from February 15, 2019 to June 30, 2019:

  • The average total monthly payroll payments from January 1, 2020 to February 29, 2020 multiplied by 2.5;
  • PLUS the outstanding amount of a loan made under the SBA’s Disaster Loan Program between January 31, 2020 and the date on which such loan may be refinanced as part of this new SBA loan program;

OR

$10 million.

Use of Loan Proceeds

The Loan Proceeds can be used for the following:

  1. Payroll costs, including employee salaries, commissions or similar compensation, allowance for separation or dismissal; vacation and other paid leave, group health benefits (including insurance premiums), retirement benefits, state and local payroll taxes and compensation to sole proprietors or independent contractors (including commission-based compensation) up to $100,000 in 1 year, prorated for the covered period. Payroll costs under this program specifically exclude individual employee compensation above $100,000 per year, as prorated for the covered period; taxes under chapters 21, 22 and 23 of the Internal Revenue Code; compensation to employees whose principal place of residence is outside of the US; and qualified sick leave wages and family leave wages for which a credit is allowed under the Families First Coronavirus Act;
  2. Payments of interest (not principal) on mortgage obligations;
  3. Rent/lease agreement payments (for real and personal property);
  4. Utilities; and
  5. Interest on any other debt obligations incurred before the covered period.

Forgiveness and how it Works

Under the SBA loan forgiveness, the “maximum forgiveness amounts” includes: (i) payroll costs; (ii) payment of interest (not principal) on a mortgage that was in place before 2/15/2020; (iii) rent under a lease agreement (real or personal property) in force before 2/15/2020; and (iv), utility payments (electric, gas, water, transportation, telephone or internet) for service that was in place before 2/15/2020, each for the “covered period”. The “covered period” is defined as the “8-week period beginning on the date of the origination of a covered loan.” The maximum forgiveness amount cannot be more than the loan. This maximum forgiveness amount can be reduced if the employer lays off employees or cuts an employee’s salary by more than 25%, as set forth below. This forgiveness does not include payments of interest on debt obligations that are not mortgage obligations.

Reduction in Number of Employees

The reduction formula for employee layoffs is: Multiplying the maximum available forgiveness as described above by the quotient obtained by dividing: the average number of full-time equivalent employees per month by, at the election of the borrower, either:

  • The average number of full time equivalent employees per month employed from February 15, 2019 to June 30, 2019; or
  • The average number of full time equivalent employees per month employed from January 1, 2020 until February 29, 2020.

The average number of full time equivalent employees is determined by calculating the average number of full-time equivalent employees for each pay period falling within a month.

Reduction in Employee Wages

The forgiveness reduction is a straight reduction 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 employee’s salary/wages during the employee’s most recent full quarter of employment before the covered period. “Employee” for this section does not include any employee who received, during any single pay period during 2019, a salary or wages at an annualized rate of pay over $100,000.

Exemption for Rehiring/Reinstating Wages

If an employer rehires employees or makes up for wage reductions by June 30, 2020, the forgiveness reductions outlined above will not apply.

Our team is readily available to assist and explain how this PPP works in the areas of tax, employment issues, general provisions and more. For further assistance, we encourage you to reach out directly:

TaxDana Apfelbaum, Jane Callahan, Brad Gould and Steve Looney

Employment IssuesNicky Mooney and Daryl Krauza.

General Provisions of the PPP and how it worksDennis Corrick and Denise Dell-Powell.