The Paycheck Protection Program, enacted under the Coronavirus Aid, Relief and Economic Security Act (CARES Act), is an extension of the Small Business Administration (SBA) 7(a) loan program, allowing financial institutions to provide federally backed, forgivable loans to eligible businesses.  The Paycheck Protection Program and loan forgiveness are intended to provide economic relief to small businesses adversely impacted by the COVID-19 pandemic.

Paycheck Protection Program highlights:

At least 75 percent of the PPP loan is supposed to be used to fund payroll and employee benefits costs:

1. Payroll costs, including benefits;

• Salary, wages, commissions, or tips (capped at $100,000 on an annualized basis for each employee).
• Employee benefits including costs for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payments required for the provisions of group health care benefits including insurance premiums; and payment of any retirement benefit.
• State and local taxes assessed on compensation.
• For a sole proprietor or independent contractor: wages, commissions, income, or net earnings from self-employment, capped at $100,000 on an annualized basis for each employee.

2. The remaining 25 percent can be spent on:

• Interest on mortgage obligations, incurred before February 15, 2020.
• Rent, under lease agreements in force before February 15, 2020.
• Utilities, for which service began before February 15, 2020.

The maximum amount eligible employers can borrow is 250 percent (or 2.5 times) the borrower’s average monthly payroll cost in 2019, up to a maximum of $10 million.

• If you are a seasonal employer, the lender will use a 12-week period beginning either February 15, 2019 or March 1, 2019 and ending June 30, 2019.
• If your business did not exist before June 30, 2019, the lender will look at your costs in January and February 2020.

The SBA wants borrowers to certify that the loan is “necessary” to support ongoing operations.

• Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers should carefully review the required certification that “current economic uncertainty” makes this loan request necessary to support the ongoing operations of the Applicant.” Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.
• Lenders may rely on a borrower’s certification regarding the necessity of the loan request. Any borrower that applied for a PPP loan prior to the issuance of the guidance issued on April 23, 2020 and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith.

As loans under the Paycheck Protection Program are distributed, the eight-week “covered period” is beginning for many small businesses.  The “covered period” begins on the date the lender makes the first disbursement of the PPP loan to the borrower. The lender must make the first disbursement of the loan no later than 10 calendar days from the date of loan approval.

Although the SBA is expected to publish additional guidance on loan forgiveness, here is what we know so far:

• The CARES Act requires the SBA to issue guidance on the loan-forgiveness provisions of the PPP within 30 days from enactment, or April 26, 2020.
• The CARES Act states that the forgiveness of debt under the PPP program will not be taxable to the borrower for federal income tax purposes (but not necessarily for state and local income tax purposes).
• The CARES Act itself does not require any specific allocation of proceeds. However, the SBA’s Interim Rule (and all subsequent SBA guidance) requires borrowers to spend at least 75 percent of the loan proceeds on “payroll costs,” with any balance going towards covered mortgage interest payments, covered lease payments or covered utilities.
• The borrower is responsible for documenting use of proceeds for payroll costs in order to determine the amount of forgiveness.
• If a borrower uses loan proceeds for unauthorized purposes, the borrower will be required to repay those amounts and could be subject to additional charges from the SBA for knowing violations or misappropriations.

Below are some of the many questions AIM members have been asking:

What expenses may be paid from the PPP loan amount?

The loan may fund “payroll costs,” including the employer cost of group health insurance and retirement; mortgage interest payments (but not prepayments or principal payments); rent payments; utility payments; interest payments on any other debt obligations that were incurred before February 15, 2020; and refinancing an SBA EIDL loan made between January 31, 2020 and April 3, 2020.

How are full-time equivalents (FTEs) computed?

The CARES Act Sections 1102 and 1106 do not define FTEs. Guidance has not yet been provided with respect to defining an FTE.

CARES Act Section 2301(c)(3), which pertains to the employee retention credits, defines a full-time person by referencing Internal Revenue Code, Section 4980H. A full-time employee is an individual who works an average of at least 30 hours per week. A full-time equivalent employee is determined by adding the hours of part-time employees on a monthly basis and dividing by 120 [IRC Section 4980H(c)(2)(E)].

How do you determine loan forgiveness?

The maximum forgiveness amount, which must be substantiated by documentation, is the sum of expenses you incur or pay during the eight-week period following loan origination (when the company receives its first disbursement of PPP funds) to cover payroll costs and mortgage interest, rent and utilities payments; provided, however, that not more than 25 percent of the forgiven amount may be for non-payroll costs.

How do you calculate loan forgiveness?

Once your business has determined the payments are eligible for forgiveness, you will need to complete two additional calculations to determine if such amount is ultimately forgivable. Both calculations are based on your payroll: the first is a measurement of your number of Full Time Equivalents (“FTEs”), and the second is a measurement of your actual salary expense.

If a business reduces its full-time employees during the “covered period” (defined as the eight-week period after the company receives its first disbursement of PPP funds), the forgiveness amount is reduced by a ratio defined as:

• The average number of FTEs during the covered period (numerator) divided by the average number of FTEs during the base period (denominator).
• For the purposes of the calculation, the current thinking is that one FTE equals one employee that worked at least 30 hours in a week.

There are three different options to determine the base period, and borrowers can select the one most favorable to them:

• Using 2019 Information –the average number of FTEs per month from February 15, 2019, through June 30, 2019
• Using 2020 Information –the average number of FTEs per month from January 1, 2020, to February 29, 2020
• Seasonal Businesses –the average number of FTEs per month from February 15, 2019, through June 30, 2019.

The CARES Act excludes from the definition of payroll costs any employee compensation in excess of an annual salary of $100,000. Does that exclusion apply to all employee benefits of monetary value?

No. The exclusion of compensation in excess of $100,000 annually applies only to cash compensation, not to non-cash benefits, including:

• employer contributions to defined-benefit or defined-contribution retirement plans.
• payment for the provision of employee benefits consisting of group-health care coverage, including insurance premiums.
• payment of state and local taxes assessed on compensation of employee.

What happens if I need to reduce the pay for some of my employees?

To ensure that companies were hiring back employees at a wage rate that was similar to pre-Covid-19 levels, the amount of loan forgiveness is further reduced if employees who made less than $100,000 in annualized wages in 2019 receive a reduction in pay of more than 25 percent during the “covered period.”

The SBA will issue additional guidance on the loan-forgiveness element of the PPP, and specific guidance on this provision is warranted to determine how this dollar-for-dollar calculation will work in practice.

As a result of Governor Baker’s Stay-at-Home Advisory, I furloughed my employees. Will the amount of my loan forgiveness be reduced?

Businesses that re-hire laid off workers by June 30, 2020 and restore any reductions in employment that occurred between Feb. 15, 2020 and April 26, 2020 will not be penalized and are still entitled to full forgiveness.

This is a simple quantitative test—the SBA will look at the number of employees on February 15, on a full time equivalent (FTE) basis and compare that number to the number of full-time equivalent employees at June 30, 2020

There is no requirement that the borrower rehire the same employees; restoring the number of full-time equivalent employees is sufficient.

How do employers persuade employees making more money on unemployment to return to work and make less money?

Because of the enhanced unemployment provisions in the CARES Act, many employees are making more money collecting Unemployment Insurance (UI) benefits, than they were making pre-pandemic.  As a result, many employers are considering providing furloughed employees a bonus, increasing salary levels, offering extra vacation time or flexible work schedules to incentivize them to forego their unemployment benefits and return to work.  It is unclear, however, whether these additional payments will be considered payroll costs eligible for forgiveness.

What happens to the remainder of the loan that is not forgiven and what are the key loan terms?

The loan has a maturity of two years and an interest rate of 1 percent. There will be no prepayment penalty, meaning you will be able to repay the loan at any time before the maturity date. There is no collateral or personal guarantee required. All loans will be processed by third-party lenders under delegated authority of the SBA, and the lenders are permitted to rely on the certifications of the borrowers in order to determine eligibility of the borrower and the use of loan proceeds.

How do the retention credits interact with the PPP?

The retention credit of CARES Act Section 2301 is not available if the taxpayer receives a covered SBA loan under SBA Section 7(a)(36) (i.e., a PPP loan).

How does the deferral of payroll taxes provision of the CARES Act interact with the PPP?

Employers that received a Paycheck Protection Program loan may not defer the deposit and payment of the employer’s share of Social Security tax that is otherwise due once  the employer receives a decision from the lender that the loan was forgiven. The amount of the deposit and payment of the employer’s share of Social Security tax that was deferred through the date the PPP loan is forgiven continues to be deferred and will be due on the “applicable dates”:

• On December 31, 2021, 50 percent of the deferred amount; and
• On December 31, 2022, the remaining amount.