Enacted as part of the CARES (Coronavirus Aid, Relief, and Economic Security) Act, Congress has created a new program to support small businesses and their employees during the COVID-19 crisis. The Paycheck Protection Program (PPP) authorizes almost $350 billion in forgivable small business loans that are designed to help small businesses pay their employees, keep the lights on, and help weather the crisis.
Generally, all businesses with 500 or fewer employees are eligible to apply. This includes self-employed individuals and independent contractors. There are exceptions for certain industries with more than 500 employees based on SBA size standards.
The loans are designed to be used for payroll costs, mortgage and rental obligations, and utility costs in the 8-week period after the loan is made. For non-payroll costs, the mortgage, rental, and utility obligations must have existed before February 15, 2020.
In order to have the loan forgiven, proceeds must be used for the above obligations and borrowers must not reduce their full-time employee headcount, decrease compensation by more than 25% for any employee making less than $100,000 in annualized income, and they must have restored full-time employment and salary levels by June 30, 2020.
Key things to know:
- Applications for small businesses were scheduled to open on April 3rd, 2020, although the timing may be pushed back as many banks are waiting for additional guidance from the SBA. Interested businesses can apply through any SBA lender, or any participating federally insured depository institution, federally insured credit union, or Farm Credit System institution.
- Applications for independent contractors and self-employed individuals open on April 10, 2020.
- Payroll costs are capped at $100,000 on an annualized basis for each employee. However, payroll costs include not only compensation to employees but also the cost of employee benefits and state and local payroll taxes.
- The SBA has advised that given the expected volume of applications, no more than 25% of the loan proceeds should be used on non-payroll costs if the borrower plans to seek forgiveness of the entire loan. Recent guidance has suggested even more limitations.
- The program ends on June 30, 2020 and there are limited funds available. It is crucial to apply early.
No standard list of documents required by lenders is available at this time and it is not clear whether all lenders will require documentation at the time of application or merely certification regarding prior expenses. Borrowers should expect to provide no later than at application for forgiveness documents showing payroll expenses for a 12-month period, 2019 IRS Quarterly payroll tax reports, and documentation showing benefit expenses including health insurance premium payments and retirement plan payments from the borrower. Independent contractors will likely be required to provide form 1099s for 2019.
A sample application is available on the SBA website, which may be used by lenders or lenders may create their own application.
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