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It’s been 14 days since President Trump announced the CARES Act on March 27, 2020, a $2 trillion economic stimulus bill aimed to provide relief to small business owners and individuals.
American business owners are rightfully worried, and feeling uncertain about the future of their businesses. No one knows how long it will take the economy to recover. Those who have been impacted by Covid-19 have all been left with unanswered questions. It’s still unclear when people can expect payments from unemployment insurance. There’s a great deal of confusion, about the available loan programs, the eligibility requirements, to navigating the SBA loan process.
Bottlenecks within the system
Meanwhile lending institutions are completely overwhelmed by the amount responses from small business owners who need relief. Lenders have been working diligently to create internal processes that will enable them to start taking applications, which has delayed the application intake process. Banks are just simply not ready to take applications at this time. The chaotic release of the CARES Act, has exacerbated financial systems, causing frustration and delays on both sides.
Bank of America, recently reported the small business bank portal received 85,000 applications totaling $22 billion in loans.
At the end of the day, small business owners need funding, and quickly. Small businesses are looking for financial relief to maintain their workforce and remain open. Others are looking to return back to work after shutting down due to shelter-in place. The Payment Protection Program is one of the many programs to provide financial support to business owners. For some of the business owners we’ve spoken to, the application process and eligibility requirements have been difficult to both understand and navigate the process.
Here’s what I’ve learned so far about the program, based on research and feedback. Lenders are relying heavily on borrowers to provide both documentation and accurate data to facilitate in the PPP loan process. I created a Frequently Asked Question guide to help you better understand the Payment Protection Program, including eligibility requirements.
What is a small business?
A small business is defined by many factors, from the size of the organization to the number of employees, including industries. According to the SBA the importance of defining the size of a business is as follows:
Enables small businesses the ability to participate in contracting programs and compete for contracts reserved for small businesses
Determine if the for-profit business is a legal structure
If the entity is independently owned and operated
Determine if the business is physically located and operates in the U.S. or its territories
The SBA sets numerical definitions, or “size standards,” for every non-profit small business in the United States—based on the business’s number of employees and average annual receipts.
For most industries, the SBA defines “Small Business” in terms of
Average number of employees over the past 12 months
Average annual revenue over the past 3 years
The SBA has a comprehensive table of standards, breaking down the acceptable sizes of small businesses by industry (and sub-industries, even). How does the SBA calculate number of employees. Click here for a summary of the size definition by larger industries. An example:
Research and Development in the Physical, Engineering, and Life Sciences standard employees are 1,000
Insurance Carriers 1,500, Wholesale clothing retailers 150, calculating gross receipts Water Supply and Irrigation Systems businesses with $27.5 million receipts. Beer, wine and liquor stores $7.5 million
What is Payment Protection Program?
The Payment Protection Program is an SBA loan program that helps businesses maintain their workforce during the Coronavirus (Covid-19) crisis. Congress authorized the SBA a guarantee of $349,000,000,000 to provide loans under a new SBA 7(a) program. The SBA is authorized to approve loans through June 30, 2020.
What is the CARES Act?
Coronavirus Aid Relief, and Economic Security, (CARES Act) is a $2 trillion economic stimulus bill, to provide financial relief for small businesses and individuals negatively impacted by the coronavirus pandemic. The law was enacted on Friday, March 27, 2020.
Is the Payment Protection Program a grant or a loan?
The Payment Protection Program is in fact a loan that may be forgiven up to the full principal amount on qualifying loans guaranteed under PPP.
What is the covered period for PPP?
February 15, 2020 to June 30, 2020
Who qualifies for the PPP?
Independent contractors, micro businesses, small businesses with 500 or less employees. Small businesses with more than 500 employees must meet the SBA employee-based or revenue based sized standard corresponding to its primary industry.
You are eligible for PPP if your employee’s primary place of residence is in the United States
A tax-exempt nonprofit organization described in section 501 ( c ) (3) of the Internal Revenue Code (IRC), a tax-exempt veterans organization described in section 501 ( c ) (19) of the IRC, Tribal business concern described in section 31 (b) (2) ( c ) of the Small Business Act or any other business
You were in operation on February 15, 2020 and either had employees for whom you paid salaries and payroll taxes or paid contractors, as reported on a Form 1099-MISC
You operated under a sole proprietorship as an independent contractor or eligible self-employed individual
You are ineligible for a PPP loan if:
You engaged in any activity that is illegal under federal, state or local law
An owner of 20 percent or more of the equity of the applicant is incarcerated, on probation, on parole; presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction; or has been convicted of a felony within the last five years
If you were delinquent on a direct or guaranteed loan from SBA or any other Federal agency within the last seven years and caused the government a “loss”.
PPP loans are “first-come, first-served”
Who is eligible to make PPP loans?
All SBA 7(a) lenders are automatically approved to make PPP loans on a delegated basis
Do I have to make payments on the PPP loan?
You will not have to make any payments for six months following the date of the disbursement of the loan. However, PLEASE NOTE: interest will accrue on PPP loans during the six-month deferment!
How much can I borrow?
Under the PPP, the maximum loan amount is the lesser of $10 million or the calculated amount using a payroll-based formula.
How can PPP loans be used?
The proceeds of a PPP can be used for:
Payroll costs defined here
Costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums
Mortgage interest payments (but not mortgage prepayments or principal payments)
Interest payments on any other debt obligations that were incurred before February 15, 2020; and/or refinancing an SBA EIDL loan made between January 31, 2020 and April 3, 2020. If you received an SBA loan from January 31, 2020 through April 3, 2020, you can apply for a PPP loan. If your EIDL loan was not used for payroll costs, it does not affect your eligibility for a PPP loan. If your EIDL loan was used for payroll costs, your PPP loan must be used to refinance your EIDL loan. Proceeds from any advance up to $10,000 on the EIDL will be deducted from the loan forgiveness amount on the PPP loan. However, at least 75 percent of the PPP loan proceeds shall be used for payroll costs.
How is the monthly payroll calculated? Click here for an illustration
How do I calculate the maximum amount I can borrow?
Step 1: Aggregate payroll costs (payroll costs consist of compensation to employees), salary, wages, commissions, or similar compensation; cash tips, past tips, payment for vacation, parental, family, medical or sick leave; allowance for separation or dismissal; payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, and retirement; payment of state and local taxes assessed on compensation of employees; and for independent contractor or sole proprietor, wage, commissions, income, or net earnings from self-employment or similar compensation.
Step 2: Subtract any compensation paid to an employee in excess of an annual salary of $100,000 and/or any amounts paid to an independent contractor in excess of $100,000 per year.
Step 3: Calculate average monthly payroll costs (divide the amount from step 2 by 12)
Step 4: Multiply the average monthly payroll costs from Step 3 by 2.5
Step 5: Add the outstanding amount of an Economic Injury Disaster Loan (EIDL) made between January 31, 2020 and April 3, 2020, less the amount of any “advance” under an EIDL COVID-19 loan (the reason: it does not have to be repaid)
Businesses where employees do not make more than $100,000
Annual payroll: $120,000
Average monthly payroll: $10,000
Multiply by 2.5 = $25,000
Maximum loan amount is $25,000
Read more info here
Do Independent Contractors counts as employees?
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.
Something to keep in mind when applying for the PPP loan
It is the borrower’s responsibility to provide a complete breakdown of payroll costs to the lender. Lenders are expected to review and calculate the borrower’s supporting documents. Lenders may ask for a payroll report recognized by a third-party payroll processor.
What time period should borrowers use to determine the number of employees and payroll costs to calculate the maximum loan amounts?
Calculate your aggregate payroll costs using the date from either the previous 12 months, or from the calendar year of 2019. For seasonal businesses, you may use the monthly payroll for the period between February 15, 2019 or March 1, 2019, and June 30, 2019.
What if I was not in business from February 15, 2019 to June 30, 2019?
You may use the average monthly payroll costs for the period January 1, 2020 through February 29, 2020. For more info click here
What employee benefits are excluded as compensation?
Non-cash benefits such as defined-benefit or defined-contribution retirement plans
Employee benefits consisting of group health care coverage, including insurance premiums
Payment state and local taxes assessed on compensation of employees are excluded compensation
What does that mean exactly?
All employee benefits do not have the same monetary value. The IRS defines compensation benefits here
What if independent contractors or sole proprietors are on my payroll? Can I include those payments into the payroll costs?
No. According to the SBA, any amount paid to an independent contractor or sole proprietor will be excluded from the business’s payroll costs. The reason: Per the SBA PPP FAQ, independent contractors or sole proprietors are eligible for the PPP and should apply to the program for financial support.
What loan payroll documentation is acceptable to submit to the lender?
SBA recognizes that many business owners use third-party payroll providers or Professional Employer Organizations to process payroll and report payroll taxes. In this case, payroll documentation provided by the payroll provider that indicates the wages and payroll taxes report to the IRS, by the payroll provider on behalf of the business owner’s employees are acceptable PPP loan payroll documentation.
Do PPP loans cover sick paid leave?
Yes. PPP loans covers payroll costs, including costs for employee vacation, parental, family, and medical and sick leave. The CARES Act excludes qualified sick and family leave wages for which a refundable credit is allowed.
How do I account for federal taxes when determining payroll costs for employees?
Under the CARES Act, payroll costs are calculated on a gross basis (not including subtractions or additions based on) federal taxes imposed or withheld, such as the employee’s and employer’s share of Federal Insurance Contributions Act (FICA) and income taxes required to be withheld from employees. What exactly does this mean? It means payroll costs are not reduced by taxes imposed on an employee and required to be withheld by the employer, but payroll costs do not include the employer’s share of payroll tax.
Employee earned $4,000.00 per month gross wages
Federal taxes withheld $500.00
Employee receives: $3,500.00
Total payroll costs: $4,000.00
In other words, under the CARES Act, 15 U.S.C. 636(a)(36)(A)(viii) employee-side taxes are classified as a reduction in employee take-home pay. Payroll costs should not be reduced based on taxes imposed on the employee or withheld from employee wages.
What if my business is a “seasonal business” am I still eligible for the PPP loan program?
If for example your business usually increases from April to June, although the PPP eligibility requirements states that your business operations had to being on or prior to February 15, 2020, the lender may evaluate your eligibility based on the following terms:
Determine whether you’re business was in operation on February 15, 2020
Determine if your business was operating for an 8-week period between February 15, 2019 and June 30, 2019.
How much of the PPP loan is actually “forgiven”?
The amount loan forgiveness can be up to the full principal amount of the loan and any accrued interest. The amount of the PPP loan that is forgiven is based on an eight-week period which begins on the date the lender makes the first disbursement to the borrower. The borrower will not be responsible for any loan payment if the borrower uses all of the loan proceeds for forgivable purposes.
What is a “forgivable purpose”?
The borrower will not be responsible for any loan payment if the borrower uses all of the loan proceeds for forgivable purposes, this include employee and compensation levels as well as the following:
Total amount of payroll costs
Payment interest on mortgage obligations incurred before February 15, 2020
Rent payments on leases dated before February 15, 2020
Utility payments under service agreements dated before February 15, 2020
Important note: No more than 25 percent of the loan forgiveness amount may be attributed to non-payroll costs. The Administrator and Secretary has determined that 75 percent should be devoted primarily to payroll, the focus of the program is to keep workers paid and employed. The SBA will issue additional guidance on loan forgiveness.
When can I expect to receive the PPP payment?
The lender must make the disbursement no later than 10 calendar days after the loan approval.
What forms do I need to submit the application?
SBA Form 2483 (Paycheck Protection Program Application Form)
The lender must submit SBA form 2484 (Paycheck Protection Program Lender’s Application for 7 (a) Loan Guaranty electronically