Paycheck Protection Program (PPP) Overview
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Einar Vollset, co-founder of TinySeed, waded through hundreds of pages of U.S. government documents to compile this overview. Einar is not a lawyer and this should not be considered legal advice. Be sure to do your own research to evaluate these programs as they relate to your specific situation.
Last Updated: April 15th 2020
Requirements
US business started prior to February 15th, 2020
No more than 500 employees
Includes sole-proprietors, independent contractors, and other self-employed individuals
Must make a good faith certification that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations, and that the funds will be used to retain workers and maintain payroll or to make mortgage, lease, and utility payments.
The SBA moved the goal posts for eligibility on Thursday April 23rd. It now specifically says: “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.” This is in the answer to Q31 available here.
On May 13th, the SBA issued guidance saying: “Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.” Guidance available here.
How Much Can I borrow?
2.5x Average Monthly Payroll over the last 12 months.
(Note: we mistakenly had rent/interest/utilities here as well)
If your business was not in operation between 15th Feb and 30th June 2019, you can elect to use the average for Jan 1st - Feb 29th 2020.
Max Loan Amount is $10m
There are 2 parts of whom qualifies as on payroll: “full-time equivalent employees” and “sole proprietor or independent contractors”
Regarding “full-time equivalent employees”:
Must have primary residence in the US.
Allowable payments include:
Salaries, wages, commissions, cash tips, or similar up to an annual salary of $100k/year
Salaries > $100k counts too, but max countable is $100k/year.
Vacation, parental, family, medical and sick leave
Healthcare benefits including insurance premiums
State and Local employment taxes
Regarding “sole proprietor or independent contractors”:
Must have primary residence in the US.
Must have been in operation on 2/15/2020
Have/will file Form 1040 Schedule C for 2019
Still waiting on guidance if you were not in operation on 2/15/2020 and will file a 2020 Form 1040 Schedule C
How to calculate amount if you have no employees:
Find 2019 Schedule C, line 31, net profit amount.
If > $100k, set to $100k
If = $0, you are not eligible for PPP
Divide above by 12
Multiply above by 2.5
How to calculate amount if you have employees:
Calculate net profit as above.
Add 2019 gross wages/tips paid to employees as per 2019 IRS Form 941 (line 5c, column 1) for every quarter, but:
Subtract any amounts paid to employees over $100k
Subtract any amounts paid to employees with principle residence outside the US.
Add any benefits such as:
Employer Health Insurance contributions (Schedule C, line 14)
Retirement contributions (Schedule C, line 19)
State/local taxes assess on employee compensation
Divide above by 12
Multiple above by 2.5
Required documentation:
2019 Form 1040 Schedule C
Form 941 for all quarters of 2019
Evidence of benefits paid for all quarters of 2019
Latest Treasury Guidance document in full here.
If you’re paying “sole proprietors or independent contractors”:
The latest Treasury/SBA Guidance says:
”Do independent contractors count as employees for purposes of PPP loan forgiveness?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 forgiveness. “
Loan Conditions
Allowable Uses:
Payroll
Healthcare benefits
Interest on existing mortgages
Rent
Utilities
Interest on existing debt.
1% interest rate (note: original guidance said 0.5%)
2 Year Term
Unsecured, does not require personal guarantees
Payments are deferred for the first 6 months.
Loan must be made during Covered Period (i.e. before June 30th 2020), but we encourage you to apply as quickly as you can because there is a funding cap.
Loan Forgiveness
Loan amounts spent on the below in the 8 week period after the loan was originated is forgiven:
Payroll (see Payroll Exceptions below)
Interest on existing mortgages
Rent already agreed to
Utilities
Payroll Limits on Forgiveness:
Salaries in excess of $100k/year (but you can deduct up to $8,333/month for salaries that are in excess of $100k/year).
If you cut headcount the forgiveness will be reduced by the difference in average headcount. The comparison is with headcount between 2/15/19 and 6/30/19 OR 1/1/2020 and 2/29/2020 (at your choosing).
If you cut salaries > 25%, the forgiveness will be reduced by the amount in excess of the 25%.
Exemption for Re-Hires/Salary Reductions:
If you already fired people or reduced salaries below 25%, you have until 30 days after the bill is enacted to undo those to still get the forgiveness credit
EIDL Grant: If you are given the $10k EIDL grant, this amount is deducted from your loan forgiveness.
The US Treasury has said: “No more than 25% of the forgiven amount may be for non-payroll costs.”
Exclusions
Business cannot have used the Refundable Employee Retention Credit (CARES Act Section 2301)
Language seems to suggest that you can apply for both the EIDL and the PPP (this loan), but cannot use the funds for the same expenses.
How To Apply
Starting April 3, 2020, small businesses and sole proprietorships can apply for and receive loans to cover their payroll and other certain expenses through existing SBA lenders.
Starting April 10, 2020, independent contractors and self-employed individuals can apply for and receive loans to cover their payroll and other certain expenses through existing SBA lenders.
Other regulated lenders will be available to make these loans as soon as they are approved.
You can find a lender through Lender Match, but the word is that most SBA banks will service their existing customers first, so if you have a banking relationship that is likely to be most effective.
You’re likely to need:
Payroll data for 2019-2020.
Specifically: Form 940, 941 or Schedule C
FAQ
Once again this is not legal advice. I am not a lawyer. I am a sole proprietor/own an LLC and pay myself through an owner draw. Do I still qualify for this loan?
Yes, but we believe current guidance requires you to document the “salary” piece of your draw through the Schedule C on your Tax Return (see “How Much Can I Borrow” above).
My team are independent contractors, nobody is on W2. Can I count payments to independent contractors as part of payroll?
The latest guidance from Treasury/SBA says that independent contractors are eligible for their own PPP, so do not count as part of payroll.
I’ve seen a lot of Twitter noise about “affiliation rules” and that anyone who has taken investment may not qualify. Is that true?
This would likely only apply to situations where you no longer have control over your business (aka you sold so much of it someone else controls it). The intent of that rule is to avoid scenarios where a huge company claims all its wholly owned subsidiaries as “small businesses”.
How long until I see any cash from this?
Hopefully very quickly, but unknown, as these are administered through banks that are able to issue SBA 7(a) loans. We would expect anyone who has an existing relationship with an SBA lender to get cash first. However, it is definitely worth reaching out to your existing bank now, even if they don’t traditionally do SBA loans.
If you are in dire straits for immediate cash, please pay attention to the “Emergency EIDL Grants”. We’ll add an overview here soon, but in general that should be the fastest way to get up to $10k (Note: This seems very slow and apparently is capped at $1k/employee max).
I am a new business and haven’t been operating for 12 months. Am I screwed?
No. If you were not in business between February 15th, 2019 and June 30th, 2019, then you can elect to use the average between January 1st, 2020 and February 29th, 2020.
I just fired someone/cut salaries, did I lose out on the loan forgiveness?
No, the headcount and salary reduction items only start counting 30 days after the enactment of the CARES Act, so you can re-instate salaries/re-hire until then.
I just fired someone because they were useless. I definitely don’t want to re-hire them. Did I lose out on the loan forgiveness?
It seems it’s the average headcount that is looked at, so you don’t need to have the same people working for you, just average headcount needs to be the same. The calculation is done by comparing your average head count during the Covered Period and either (at your choosing: a) February 15th - June 30th, 2019 or b) January 1st - February 29th, 2020.
If I hired a bunch of people throughout the last 12 months, can I let them go just so long as my average headcount is higher than it was last spring?
Well... The loan forgiveness looks at the headcount in the period Feb 15th - June 30th, 2019, and if it’s more than that during the Covered Period, then you can cut. However, keep in mind that the loan can only be used to cover specific expenses, so there’s probably no benefit to doing this.
I keep hearing the term “Covered Period”. What does that mean?
The Covered Period is February 15th - June 30th 2020.
Can I take out a new loan/mortgage and have interest payments be covered by this?
No, loans must have been originated before February 15th, 2020.
Can I hire a bunch new people and have the loan cover that?
Kinda? The maximum loan amount is specified as “the average total monthly payments by the applicant for payroll costs incurred during the 1-year period before the date on which the loan is made”, so adding to payroll right before applying could add somewhat to that maximum, but keep in mind a) it’s the average over the last 12 months and b) the loan must be made before June 30th 2020.
So I can cut salaries 24.99% and still get loan forgiveness?
Probably, but keep in mind that the loan cannot be used for things other than the specified expenses (payroll, etc), so not clear there’s a benefit.
When will this program become available? How long can I apply for?
Starting April 3, 2020, small businesses and sole proprietorships can apply for and receive loans to cover their payroll and other certain expenses through existing SBA lenders.
Starting April 10, 2020, independent contractors and self-employed individuals can apply for and receive loans to cover their payroll and other certain expenses through existing SBA lenders.
Other regulated lenders will be available to make these loans as soon as they are
The loan must be made (originated) in the Covered Period (so before June 30th 2020).