Paycheck Protection Program Explained

Over the past few days, I have received several questions regarding the various loan programs offered under the CARES Act. One program that has commanded lots attention due to its forgivable nature is the Paycheck Protection Program (PPP). Since there has been so much confusion regarding the details of the program, I've put together this short guide to explain. Feel free to share with others who can benefit from the information.
 
Paycheck Protection Program Overview 
Under this program, small businesses, self-employed individuals, and independent contractors can apply for forgivable loans through the Small Business Association. The program allows eligible borrowers to borrow up to 2.5 times their average payroll cost over the past year, up to $10 million dollars. The deadline to apply is June 30, 2020 and funds will be distributed on a first come, first serve basis.
 
Funds may be used for the following:

• Payroll costs,
• Mortgage interest payments (not mortgage prepayments or principal)
• Rent and utility payments (i.e. electricity, gas, water, telephone, and/or internet expense)
• Employee benefits, including the cost for health insurance, vacation, sick leave, and retirement benefits (this includes contributions to Simple IRA, SEP IRA, and Solo 401(k)’s).

Not surprisingly, you are ineligible for the PPP Loan if you engage in any illegal activity. However, business that are more than 20% owned by an individual who is incarcerated, on probation/parole, been convicted of a felony in the last 5 years, or currently subject to any criminal proceedings cannot apply. Household employers – individuals who employ nannies and housekeepers also cannot apply.

When can you apply?
To apply for a loan, you must go through an existing SBA lender or participating bank. Many large banks such as Chase, Wells Fargo, and Bank of America have decided to only lend to businesses that had an existing relationship with them prior to Feb 15th. However, don’t let this deter you from applying, as several regional and community banks are available to work with you. For a list of approved lenders, click here.
 
Depending on your business type, you can begin applying for the loan on the following dates:

• Starting April 3, 2020, small business and sole proprietorship can apply.
• Starting April 10, 2020, independent contractors and self-employed individuals can apply.

If you would like to review the loan application, you may view it here. It’s only four pages and a fairly simple application. When you go to the bank, be sure to have your payroll information on hand.
 
How do you calculate your loan amount?
 
Step 1: Total payroll costs over the last 12 months
Step 2: Subtract any compensation paid to employees in excess of $100,000
Step 3: Calculate average monthly payroll costs (divide the amount from Step 2 by 12).
Step 4: Add monthly cost for other allowable expenses (rent, utilities, employee benefits, etc.).
Step 5: Multiply the average monthly payroll costs from Step 4 by 2.5.
 
According to the Interim Rules released last week, “payroll costs” consist of compensation to employees in the form of salary, wages, commissions, and cash tips. Do not include payments to freelancers or independent contractors since they have the ability to apply for the PPP loan on their own. If income data for the past 12 months is not available, applicants are allowed to make a reasonable good-faith estimate of income.
 
Note: If you’re an independent contractor or sole proprietor with no employees, the calculation is pretty straight forward. Payroll costs will be your net self-employment income (i.e. your income after you deduct your business expenses).

How much of your loan will be forgiven?
The actual amount of the loan forgiven will depend on how you use the funds over the eight-week period following the date of disbursement. Borrowers are eligible for forgiveness in an amount equal to the sum of payroll costs and any payments of mortgage interest, rent, and utilities. However, no more than 25% of the forgiven loan can be attributed to non-payroll costs.
 
What are the Loan Terms?
The loan’s interest rate is 1%. All payments are deferred for 6 months; however, interest will continue to accrue over this period. The unforgiven portion of the loan must be paid back in 2 years. There are no prepayment penalties or fees, so you can pay off the loan as early as you would like.
 
Can I apply for both PPP and EIDL?
You can get both a PPP loan and an Economic Injury Disaster Loan, but you can't double-dip and use both loans for the same purpose, the guidance states. According to the U.S. Chamber of Commerce, “if you are able to secure a PPP loan, the $10,000 grant will be subtracted from the forgiveness amount.

What happens if PPP loan funds are misused?
If you use PPP funds for unauthorized purposes, the SBA will direct you to repay those amounts. If you knowingly use the funds for unauthorized purposes, you can be prosecuted for fraud.
 
Final Thoughts
As of last Friday, more than 13,000 business owners have received over $4.5 billion in loans through the Paycheck Protection Program. Don’t leave any money on the table. If you are a business owner, I encourage you to apply and take advantage of all the programs you qualify for.
 
Based on my understanding of the law, I do not believe you can get unemployment and qualify for Paycheck Protection Payment at the same time. So, think about your individual needs and determine which program(s) to apply for. If you are self-employed or an independent contractor, it might make sense for you to exhaust the unemployment benefits prior to applying for the Paycheck Protection Loan – or vice versa.