Paycheck Protection Program: What You Need to Know

I was up until midnight last night poring over the Treasury Department’s Interim Final Rule for the PPP loans, and I’m going to share with you what I learned.

Here’s what I’m going to do in this article:

• First, I will briefly give some context to the CARES Act as it relates to small business owners.
• Second, I will briefly discuss the SBA EIDL Disaster Loans.
• Third, I will discuss in detail the Paycheck Protection Program loan.

The CARES Act

March 13: The Emergency Declaration

On March 13, Trump deemed the current crisis of sufficient severity and magnitude to warrant an emergency declaration for all states, territories, and the District of Columbia.

March 27: The Legislation

Exactly two weeks later, on March 27, the president signed the CARES Act to provide emergency assistance to individuals and businesses affected by the crisis.

The SBA’s Authority

As a part of this legislation, the SBA — in order to assist small businesses during this troubled time — was given $349 billion worth of funding and authority to:

• Modify existing loan programs, i.e. the EIDL disaster loan program, and
• Establish a new loan program — i.e. the PPP Paycheck Protection Program.

Economic Injury Disaster Loans (EIDL)

Now I will briefly discuss the EIDL Disaster Loans.

EIDL Basics

Here are the basics of the EIDL Disaster Loans:

• Direct federal loans of up to $2,000,000
• Terms up to 30 years
• 3.75% interest rate for for-profit businesses
• Personal guarantee required for loans more than $200,000
• $10,000 forgivable advance

The point of this loan is to sustain your business for six month to cover costs like payroll, rent, mortgage, material costs, and preexisting debt.

If there is a need to extend that six-month period, it will be communicated by the government going forward.

$10,000 Forgivable Advance

Of course, what everyone’s talking about with respect to the disaster loans is the immediately forgivable $10,000 advance that supposedly hits your bank account within three days of applying for EIDL on the SBA’s website.

That said, this grant is up to $10,000.  The disaster loan officer will determine how much you actually should get based on your application.

Also, even if you are found to be ineligible for the full EIDL loan, you can still keep the forgivable advance.

The EIDL disaster loan is made directly by the SBA, and it has a very simple application right on the SBA’s website.

Earlier this week I made a 10-minute video walking through the EIDL application step-by-step.  You can check it out below.

Paycheck Protection Program (PPP) Loans

The first thing you need to know about PPP loans is that they are not direct loans from the feds.  They’re more like an SBA 7(a) loan.

SBA is guaranteeing 100% percent of these loans, but they will be made through SBA-approved lenders.

And your SBA lender will service your loan

Also, PPP loans are in fact “first-come, first-served” — that is the phrase used by the Treasury Department in its interim final rule.

PPP Basics

• Terms of up to 2 years
• 1% interest rate.  0.5% was thrown around earlier this week, but Treasury came out with this and said 1%.
• No payments for six months.  The Act said the deferment period could go up to a year, but SBA said look we think six months is appropriate for now.
• Interest accrues during this six-month deferment.
• Forgivable in whole or in part

Can You Get Both EIDL and PPP?

You can get both EIDL disaster loan and PPP paycheck protection program loans, but their proceeds can’t be used for the same purpose, and you can refinance your EIDL loan into a PPP loan.

Forgiveness

The best part of the PPP loans?  Forgiveness.

The CARES Act said that the the full principal amount of the loan and any accrued interest can be forgiven if you use all of the loan proceeds for forgivable purposes and employee and compensation levels are maintained, that is, you don’t apply for this loan based on your previous 12 months’ payroll and then fire everybody.

Remember, payroll is the priority here — it’s called the Paycheck Protection Program.  The whole point of these loans is to keep the lights on in your business and to keep people working.

In light of this, the SBA and the Treasury Department have said that no more than 25% of the loan forgiveness amount may be attributable to non-payroll costs.

When the Program Starts

The first day to apply for a PPP is today, April 3, and this program is running through June 30 or until funds are exhausted, that’s what they’re saying right now.

Now although today is the official “start date” for PPP, most SBA lender banks are not ready, especially the old school brick and mortar banks.

There is a lending platform that I am sending clients to that matches borrowers with SBA lenders for PPP loans for free.

Eligibility for PPP Loans

Here are the eligibility requirements for PPP Loans:

• You must be a small business, meaning 500 or fewer employees whose principal residence is in the United States.  There are exceptions for some businesses in certain industries with greater than 500 employees, but if you own such a business, I assume you have in-house legal and/or financial counsel to consult with about this.
• You had to be in operation on February 15, 2020, and you either had employees to whom you paid salaries and payroll taxes, or you paid independent contractors, reporting their income on Form 1099-MISC.  If you yourself are a sole proprietor or independent contractor, meaning even if you’re a one-man or one-woman show and you file Schedule C, you’re eligible, as long as you were in operation on February 15, 2020.
• You cannot be incarcerated, on probation, or parole, or have been formally charged with a crime or been convicted of a felony within the last five years.
• You or your business cannot have ever been delinquent or defaulted on an SBA loan or any other government-backed loan.

Loan Amount Calculation

1. Take your payroll costs from the last twelve months for employees whose principal place of residence is the United States.
2. Subtract any compensation paid to an employee in excess of an annual salary of $100,000.  If you’re a one-man or one-woman show who doesn’t have payroll but just has self-employment income, subtract any of your earnings that are in excess of $100,000 for the last twelve months.
3. Then you have that number, those total payroll costs less amounts greater than $100,000.  Divided that number by 12.
4. Multiply that new number by 2.5.
5. Add the outstanding amount of any EIDL disaster loan that you received between January 31, 2020 — that’s when the “disaster” began — and April 3, 2020.  This is EIDL received, not applied for.  I doubt many of you have actually received an EIDL right now.

What Are Payroll Costs?

The definition of payroll costs for PPP purposes is broad and includes:

• W-2 wages paid to employees whose principal place of residence is within the United States, including wages paid to yourself
• Tips
• Severance
• Benefits, including health insurance coverage, insurance premiums, retirement contributions
• State and local taxes assessed on compensation of employees (but note that FICA taxes — Social Security and Medicare taxes you pay for your employee — do not count)

Of course, if you’re a one-man or one-woman show, your payroll costs are your net income from self-employment.

Are Independent Contractors Included in Payroll for PPP Purposes?

Payroll costs do not include payments to independent contractors on pay on 1099.

I am reading verbatim from the Treasury Interim Rules published yesterday: “Do independent contractors count as employees for purposes of PPP loan calculations?  No, independent contractors have the ability to apply for a PPP loan on their own so they do not count for purposes of a borrower’s PPP loan calculation.”

That’s what Treasury said.  You can take it or leave it.

I know some advisors right now telling people to just screw it, put the independent contractors on there, and let them tell us we’re wrong.

I’m not going to tell you what to do here, but Treasury has explicitly stated that you can’t include payments to independent contractors.

Use of PPP Proceeds

Treasury has said that PPP loan proceeds can be used for:

1. Payroll costs as defined previously, and at least 75% of the PPP loan proceeds must be used for payroll costs
2. Costs related to the continuation of group health insurance
3. Mortgage interest payments.  Note that I was on an SBA webinar yesterday, and they said if you work from home and you get a home office deduction on your taxes, part of your home mortgage interest could apply.  Note that this is not from Treasury; it is simply what my local SBA told me in a webinar yesterday.
4. Rent payments
5. Utility payments
6. Interest payments on pre-existing debt (pre-existing meaning incurred before February 15, 2020)
7. Refinancing an EIDL loan into a PPP loan

If you use PPP loan proceeds for other things, you’re in trouble.

You’ll have to repay those amounts, and you may be in even bigger trouble if you really tried to game the system here.

How to Apply

So today, April 3, is the day when small businesses and sole proprietorships can theoretically apply for SBA loans, but very few if any banks are ready for this.  A week from today April 10 is when independent contractors and self-employed individuals can apply.

Now, if you have an existing relationship with an SBA lender, reach out to them.  See what they say, but keep in mind that most banks are not ready today.

Also, most big banks are requiring that you have a pre-existing commercial relationship with them.  I got an email from a big bank where I have my business checking account, and they said I must have already had a relationship with them as of February 15.

But, like I mentioned earlier, there is a lending platform that I am sending clients to that matches borrowers with SBA lenders for PPP loans, and it’s free for you to use.

Unless you’re already buddy-buddy with an SBA lender, I really think this is the way to go, because unless you already have a great relationship with an SBA lender, you could end up waiting for weeks for your app to be considered by one single lender.

Good luck, small business owners of America!