Coronavirus Pandemic Spurs Massive Program for Small Businesses

PPP Loan Program

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The small business of all stripes cheered when the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law. The CARES Act provides some relief to small businesses through providing economic injury disaster loans; easing payments on current SBA loans; and then the Mother lode, the Paycheck Protection Program (PPP). The PPP provides huge incentives to small businesses to keep workers on their payroll.

Related article: Coronavirus and Small Businesses: Contract Issues

The race for PPP loans begins

Small businesses and sole proprietorships were able to able starting April 3, 2020. Independent contractors and self-employed individuals have to wait a week longer. Most of the categories are self-evident such as partnership, S-corp, C-Corp, LLC. But they add into the cast of characters sole proprietors, independent contractors, and “eligible self-employed individual.”

In general, a small business is defined as a business with no more than 500 employees. A non-profit organization under 501(c)(3) and veterans organizations under 501(c)(19) are eligible to apply regardless of size.

The Program is administered through the Small Business Administration (SBA) and applicants need to apply through SBA lenders. The PPP loan application is available on SBA’s website.

The PPP is supposed to be available through June 30, 2020, but based on the first few days, the demand is massive and unless Congress allocates further funding, the money may run out.

Terms of the loan are favorable to small businesses

The terms of a PPP loan are the same for everyone; there are no negotiations. The loan is for 2 years with a favorable interest rate of 1%. Loan payments are deferred for six months following disbursement of the loan. And, importantly, the government does not require collateral or personal guarantees.

User-friendly PPP loan application

You need to submit a loan application to start the process. The four-page PPP loan application is a relatively easy form to complete. The major issue is the average monthly payroll. Accounting professionals have already weighed in that there may be some leeway in the bookkeeping to come up with an accurate number for the monthly payroll.

The maximum loan a small business can obtain through the PPP program is derived by using this formula: the sum of the business’ 2019 total gross payroll and employer paid taxes and benefits and divide by 12. Then multiply by 2.5. The payroll costs are capped at $100,000 on an annualized basis for each employee. Payroll costs include employee benefits such as vacation and sick leave and state and local taxes assessed on compensation.

The business owner needs to make several certifications on the application, including that the uncertainty of current economic conditions makes the loan request necessary to support the ongoing operations of the business; and that the funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments or utility payments.

Proceeds of a PPP loan

The loan proceeds may be used for payroll, rent, mortgage interest or utilities, with specific caps for each category. The target of the PPP loan program is maintaining employees.

The owner needs to include the number of employees on the application and needs to indicate whether the principal place of residence is the U.S. for all employees of the business in the payroll calculation.

The proceeds of the loan may also be used for interest on mortgage obligations incurred before February 15, 2020, rent for lease agreements in effect before February 15, 2020, and utilities for the business when service began before February 15, 2020. The maximum loan is $10 million.

Forgiveness: small businesses may not need to repay a PPP loan

SBA has provided the following guidance that due to likely high subscription, at least 75% of the forgiven amount must have been used for payroll. If the loan proceeds are used for any expenses other than those permitted under the program, then that portion will not be forgiven.

The amount forgiven will be reduced if the number of full-time employees drops. The loan forgiveness will also be reduced if the business decreases salaries and wages by more than 25% for any employee whose salary was less than $100,000 in 2019. And the business has until June 30, 2020 to restore full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020.

The maximum forgiveness is 8 weeks of approved costs. After the business submits a request to forgive all or a portion of the loan, then the lender must make a decision within 60 days.

Sticking points

The government rolled out this program in record time, piggybacking on the SBA’s 7(a) loan programs. There will undoubtedly be challenges along the way. These are some of the anticipated issues that will undoubtedly arise. The calculation of payroll cost as mentioned above may be an issue of some contention.

If you are a government contractor, you undoubtedly are familiar with the rules regarding affiliates. With respect to the PPP loans, a small business has to be, well, small, which generally means any small business that meets SBA’s size standards. If there are two related businesses, the combined total of which is over 500 employees, they may not qualify as a small business. It will depend on whether the businesses are “affiliated” under the technical regulations administered by the SBA.

Hassle worth it: apply now

There are undoubtedly many government programs in which the bureaucratic obstacles overwhelm the efficacy of the program. The PPP loan program does not appear to be one of them, although the jury is still out. Nevertheless, all small businesses should apply for a PPP loan as soon as possible.