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Paycheck Protection Program (PPP)
Who is eligible?In general the requirements for eligibility for a PPP Loan are as follows:
- Less than 500 employees
- The uncertainty of the current economic conditions make the loan necessary to support the ongoing operations of the business
- The funds will be used to retain workers, maintain payroll, make mortgage payments, lease payments, or utility payments.
- The business has not already received a loan under the PPP program.
How Do I Determine the Number of Employees?The number of employees includes, for purposes of loan eligibility, all full time or part time employees. This number is limited to 500.
How Do I Calculate the Amount of the Loan?The maximum PPP loan is 2.5x the businesses average monthly payroll for the year 2019. The salary, wage, commissions, or similar compensation is capped at a maximum of $100,000 per employee. To calculate the maximum amount of the loan you would take the total payroll for 2019 (less amounts over $100,000 to any one employee) and multiply that number by 2.5. For Example: If Company A has 5 employees 4 of which make $50,000 per year and 1 individual who makes $120,000 per year the maximum PPP loan calculation will be as follows:
- 2019 Total Payroll = $320,000.00 ((4 x $50,000) + $120,000)
- Less amount over $100k to any one individual: ($20,000)
- 2019 Total Payroll for PPP = $300,000
- Average Monthly Payroll = $25,000
- Maximum Loan Amount (Avg. Monthly Payroll x 2.5) = $62,500.00
Do I Have to Repay This Loan?The short answer is that it depends. If you meet the following criteria and you use the entire amount of the loan for qualifying expenses the loan will be forgiven. Qualifying expenses include:
- Payroll Costs
- Interest on Mortgage Payments
Other requirements for forgiveness:The other requirements for forgiveness is that at least 75% of the loan must be used for payroll related expenses (more on that in a moment). Also, if you decrease the amount of employees a portion of the loan that may be forgiven will also decrease. Lastly, if you cut an employee’s salary by more than 25% the amount of permitted forgiveness will be decreased. The loan is intended to cover the above permitted expenses within an eight week period commencing on the date that the loan funds. Some of what is required for loan forgiveness is clear and other issues remain unsettled. What is clear is that the government and lenders were focused on getting the money into the hands of businesses that needed the funds to survive. Now that a majority of the earmarked funds have been exhausted or earmarked, the treasury and the SBA seem to be shifting their focus to what will be required to qualify for loan forgiveness.
What Is Included in Payroll Costs?Payroll costs include the following:
- salary, wage, commission, or similar compensation
- payment of cash tip or the equivalent
- payment for vacation, parental, family, medical or sick leave
- severance pay
- payment for group healthcare benefits including insurance premiums
- payment for retirement benefits
- payment of state or local tax assessed on the compensation of employees (unemployment tax)
- compensation in excess of $100,000
- payroll taxes (employer portion)
- compensation to an employee whose principal residence is outside of the United States
What Happens If the Loan Is Not Forgiven?If the loan is not forgiven the non-forgiven portion must be repaid within two (2) years at an interest rate of one percent (1%) per annum. There is no prepayment penalty for early prepayment for the loan. As a practical matter it likely makes sense to use the funds only for permissible expenses with the intent of repaying the unused portion after the 8-week period ends. Also, it is worth noting that to the extent there is a need for funds for expenses other than the enumerated “forgiveness” category expenses that a loan bearing one percent (1%) interest is a very attractive loan. Other information about PPP loans not mentioned above:
- The loan is non-recourse with no personal guarantees.
- No collateral is required
- The business does not need to certify that it cannot obtain credit elsewhere.
- The maximum amount a business can borrow is the lesser of A) $10,000,000 or B) 2.5x the average monthly payroll (as outlined above).
Economic Injury Disaster Loan (“Eidl”)Another loan that is available to companies experiencing hardships due to COVID-19 is the EIDL program. The EIDL program is available to businesses with less than 500 employees that have suffered a substantial economic injury as a result of COVID-19. Below are some facts regarding an EIDL loan:
- There are no personal guarantees for loans less than $200,000.
- The maximum EIDL loan is $2,000,000
- The application may be approved solely on the basis of the credit score of the applicant and no submission of tax returns is required.
- Paid sick leave for employees unable to work due to COVID-19
- Maintaining payroll during business interruptions or substantial slowdowns
- Meeting increased costs to obtain materials unavailable from the applicants original source due to interrupted supply chains
- Making rent or mortgage payments
- Repaying obligations that cannot be met due to revenue losses.