Paycheck Protection Program (PPP) and Forgivable Loans Summary (Small Business Loan Program)

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By Pooja Srivastava and Kislay Banka

What are Paycheck Protection Program Loans (PPP)?

The Keeping American Workers Paid and Employed Act provides relief in the form of Paycheck Protection Program (PPP) loans for small businesses and their employees who are adversely affected by the outbreak of COVID-19 (Title I of the Coronavirus Aid, Relief, and Economic Security (CARES) Act). Businesses, nonprofits, tribal businesses, and veterans’ organizations with 500 employees or fewer are generally eligible for federally insured, partially-forgivable PPP loans. PPP loans can be used to cover short-term operating expenses during the economic crisis, and they are available during the covered period of February 15, 2020 through June 30, 2020.

Eligibility Requirements for PPP Loans:

  • Businesses, nonprofit organizations, veterans’ organizations, or tribal businesses with fewer than 500 employees or standard industry size for such a business
  • Sole proprietors, independent contractors, and eligible self-employed individuals who regularly carry on any trade or business, and would be entitled to receive paid leave if they were an employee of an employer
  • The borrower must seek and be unable to obtain credit elsewhere
  • Eligible businesses and organizations should be operational on February 15, 2020, and meet one of the following additional conditions on that date to qualify for PPP loans:
    • Had employees for whom the borrower paid salaries and payroll taxes, or
    • Paid independent contractors, as reported on Form 1099-MISC
  • Businesses with more than 500 employees may qualify for PPP loans if they are in the accommodation and food services sector (NAICS 72), on a per physical location basis
  • Franchises or recipients of financial assistance from an approved Small Business Investment Company (SBIC) are exempt from the regarding stock ownership
  • The term “veterans’ organization” means an organization that is described in section 501©(19)

Additional PPP Loan Features:

  • Interest rates are less than 4%
  • No pre-payment penalty
  • Loan payment deferral available from six months to one year
  • Loans must be issued before December 31, 2020
  • Loan duration: 10 years

Eligible Expenses:

Businesses and organizations may use PPP loans to cover:

  • Payroll costs: salary, wages, commission, or similar compensation
  • Sole-proprietors and independent contractors: loans are in the form of wages, commission, income, net earnings from self-employment, or similar compensation, and do not exceed $100,000 in one year, as prorated for the covered period
  • Rent
  • Utilities
  • Interest on any debt obligation

Loan Qualifications Waived:

PPP loans do not require either of the following to qualify for a loan:

  • Collateral
  • Personal guarantee

How an SBA Loan Amount is Determined1:

The maximum amount of SBA loans is calculated based on the lesser of:

  • Average payroll costs over the previous year (excluding annual compensation of amounts over $100,000 per person) during the first year period, multiplied by 2.5, or
  • $10 million

Good Standing Certificate Required:

Borrowers must be able to demonstrate:

  • The impact of economic conditions that make a loan necessary for ongoing operations
  • They retain workers, maintain payroll, or make mortgage/lease/utility payments
  • They have not duplicated their application

Ineligible Organizations and PPP Loan Uses:

Small businesses and organizations are not eligible if they:

  1. Compensate an individual employee with an annual salary of more than $100,000
  2. Compensate an employee who primarily resides outside of the United States
  3. Use the loan to pay for:
    1. Qualified sick leave wages for which a credit is allowed
    2. Qualified family leave wages for which a credit is allowed

Forgiveness of Debt2:

PPP loans are eligible for forgiveness in the amount spent during the first eight weeks after the loan is made if businesses maintain the same number of employees (or equivalent) from February 15, 2020 through June 30, 2020 as they did either:

  • During the same period in 2019, or
  • From January 1, 2020 through February 15, 2020

The loan amount eligible for forgiveness will be reduced ratably if the above conditions are not met. Additional reductions are made if employers cut compensation by 25% for employees receiving less than $100,000 in annual compensation compared to the most recent quarter.

Conclusion:

Contact a trusted Chugh CPAs, LLP professional for assistance in applying for a Paycheck Protection Program (PPP) loan.

[1] NON SEASONAL EMPLOYERS: Maximum loan = 2.5 x Average total monthly payroll costs incurred during the year prior to the loan date For businesses not operational in 2019: 2.5 x Average total monthly payroll costs incurred for January and February 2020 SEASONAL EMPLOYERS: Maximum loan = 2.5 x Average total monthly payments for payroll costs for the 12-week period beginning February 15, 2019 or March 1, 2019 (decided by the loan recipient) and ending June 30, 2019

[2] Reductions in employment or wages that occur during the period beginning on February 15, 2020, and ending 30 days after enactment of the CARES Act, (as compared to February 15, 2020) shall not reduce the amount of loan forgiveness IF by June 30, 2020 the borrower eliminates the reduction in employees or reduction in wages.