Among the various stimulant packages passed by the federal government amid the COVID-19 pandemic, the Paycheck Protection Program ("PPP") is designed to help struggling businesses amid the COVID-19 crisis.
What is the PPP?
The PPP is a program whereby an applicant may receive a loan designed to provide a direct incentive for small businesses to keep their workers on their payroll. Qualifying businesses may receive federally backed loans to operate certain payroll expenses through June 30, 2020. Additionally, small businesses may be eligible to receive up to eight weeks' worth of loan forgiveness to help get through these unprecedented times. All loans incur interest at one percent (1%) and are differed for six months after distribution; although interest will accrue during the deferment period.
How Does the PPP Act Work?
Loans are categorized by the amount of time the small business remains operable from February 15, 2020, through June 30, 2020. From now until June 30, 2020, businesses may apply for one single loan to cover payroll costs. As such, borrowers should expect to present all necessary payroll documentation. An applicant may apply for a loan for up to two months of the applicant's average monthly payroll costs from the last year, plus an additional 25% of that amount. Payroll costs are capped at $100,000 annualized for each employee.
The loan may be used to pay payroll costs. Payroll costs in this context means benefits; interest on mortgage obligations incurred before February 15, 2020; rent under any lease agreements in force before February 15, 2020; and utilities or which service began before February 15, 2020.
The following is expressly excluded from the definition of payroll costs: Any compensation of an employee whose principal place of residence is outside of the United States; The compensation of an individual employee in excess of an annual salary of $100,000.00, prorated as necessary; Federal employment taxes imposed or withheld between February 14, 2020, and June 30, 2020, including the employee's and employer's share of FICA (Federal Insurance Contributions Act), Railroad Retirement Act taxes, and income taxes required to be withheld from employees; and Qualified sick and family leave wages for which a credit is allowed under the Families First Coronavirus Response Act.
How Does Loan Forgiveness Work?
The PPP loan, along with any accrued interest, may be forgiven in full if certain conditions are satisfied. No more than 25% of the loan forgiveness may be attributable to non-payroll costs. Meaning, 75% of the loan must be used to keep workers employed to qualify for loan forgiveness. Up to eight weeks of the amount of the loan will be forgiven if three conditions are met:
- Loans are used exclusively for their intended purpose (see above for intended uses of the loan);
- Loans are used to offset no more than eight weeks (the maximum amount of time payroll expenses would be fully offset) of eligible payroll expenses;
- The business retains employees at salary levels comparable to before the crisis.
The applicant will also owe money if the applicant does not maintain its staff and payroll. Specifically, any loan forgiveness will be decreased if the applicant decreases its number of full-time employees. Loans forgiveness will also be reduced if the applicant decreases salaries and wages by more than 25% for any employee that made less than $100,000.00 annualized in 2019. Finally, applicants may also have loan forgiveness reduced for failing to re-hire or restore full-time employees and salary levels for any changes made between February 15, 2020, and April 26, 2020. Loan amounts that are not forgiven are due in two years with no prepayment penalties or fees.
A PPP loan may be a viable option for small businesses that are forced to cut payroll as a result of the COVID-19 pandemic. Small businesses should be cautious to keep all necessary documentation to ensure maximum loan forgiveness after the pandemic is over.
If your business is experiencing hardship and is having difficulties making payroll expense payments, consult an attorney to help decide whether a PPP loan is right for your business needs. The attorneys at Krogh & Decker, LLP can help determine if a PPP loan is right for your business through the COVID-19 pandemic.