As part of the $2 trillion Coronavirus Aid, Relief and Economic Security Act, or CARES Act, $350 billion is allocated to Paycheck Protection Program that acts as a loan and optionally, a forgivable grant for businesses with 500 or fewer employees (“PPP Loan”). The PPP Loans will be forgiven if used for specific business expenditures, including payroll, rent, utilities, and mortgage interest (“Loan Forgiveness Program”); the amount that is not forgiven is repayable over two years at 0.5% interest. As always, restrictions apply. If you need immediate funds to cover payroll, healthcare, rent, mortgage payments, and associated costs, and wish to avoid necessary repayment, please review our Q&A summary below. For specific questions on how the new laws impact your business, please call Michael Adler at 310-540-2000×274, or send me an e-mail at [email protected].
- Who is eligible for a PPP Loan?
Small businesses with 500 or fewer employees (including sole proprietorships, independent contractors, and self-employed persons), private non-profit organizations, or 501(c)(19) veterans organizations, which are affected by coronavirus are eligible for a PPP Loan. Employees include full-time, part-time, or employees classified on another basis.
- Can a sole proprietor, independent contractor, or self-employed individual take out a PPP Loan?
Yes. To qualify, you will submit required documentation, which may include payroll tax filings, 1099’s, and a P&L for sole proprietorships.
- What is the maximum amount a business can borrow under a PPP Loan?
The maximum PPP Loan is 2.5 times the average total monthly Payroll Costs incurred during the 12 months before the date of the loan, up to $10 million.
- For a seasonal business, is the calculation different for the maximum amount they can borrow under a PPP Loan?
Yes. In the case of an applicant that is a seasonal employer, the maximum PPP Loan is 2.5 times the average monthly Payroll Costs for either the 12 weeks beginning February 15, 2019, or March 1, 2019, and ending June 30, 2019, up to $10 million.
- What dates does a company that was not in business from February 15, 2019, through June 30, 2019, use to calculate the maximum amount they can borrow under a PPP Loan?
For an otherwise eligible company that was not in business from February 15, 2019, through June 30, 2019, the maximum PPP Loan is 2.5 times the average monthly Payroll Costs during the period of January 1, 2020, through February 29, 2020.
- What counts as Payroll Costs?
Payroll Costs are defined as:
-
- Salary, wage, commission, or similar compensation, including payment of cash tips or equivalent;
- Vacation, parental, family, medical, or sick leave;
- Allowance for dismissal or separation;
- Group health care benefits, including insurance premiums;
- Any retirement benefit; or
- State or local tax assessed on the compensation of employees.
- What can a sole proprietor, independent contractor, or self-employed individual include as Payroll Costs?
Sole proprietors, independent contractors, and self-employed individuals, can additionally include in the definition of Payroll Costs payments of compensation to, or income of, a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment, or similar compensation up to $100,000 in one year, prorated for February 15, 2020 – June 30, 2020.
- What cannot be included as Payroll Costs?
The following items cannot be included as Payroll Costs:
-
- Compensation of an employee above an annual salary of $100,000, as prorated for February 15, 2020 – June 30, 2020;
- Payroll and income taxes.
- Compensation of an employee whose principal place of residence is outside of the United States; and
- Qualified Sick Leave or Family Leave wages for which a credit is allowed under the Families First Coronavirus Response Act (the “FFCRA”).
- If a business took out an SBA Disaster Loan on or after January 31, 2020, can it still apply for a PPP Loan?
Yes. If a business took out an SBA Disaster Loan on or after January 31, 2020, it can refinance that loan by adding the amount to the PPP Loan.
- What are the allowable uses of a PPP Loan?
There are several allowable uses for the proceeds of a PPP Loan (the “Allowable Uses”), including:
-
- Payroll costs;
- Group health care benefits and insurance premiums;
- Employee salaries, commissions, and similar compensation;
- Interest payments on any mortgage obligation;
- Rent;
- Utilities; and
- Interest on any other debt obligations incurred before February 15, 2020.
- How does the Loan Forgiveness Program work?
The Loan Forgiveness Program is based on the employer maintaining or quickly rehiring employees, as well as maintaining salary levels of at least 75% of the historical level. Subject to reduction for the employer not maintaining or quickly rehiring employees, or not maintaining salary levels of at least 75% during a prior quarter, the amount incurred and paid during the eight weeks beginning on the date of the PPP Loan origination for the following items are forgivable:
-
- Payroll Costs (potentially Payroll Costs will have to account for 75% of the amount forgiven) which are:
- Salary, wage, commission, or similar compensation, including payment of cash tips or equivalent;
- Vacation, parental, family, medical, or sick leave;
- Allowance for dismissal or separation;
- Group health care benefits, including insurance premiums;
- Any retirement benefit; or
- State or local tax assessed on the compensation of employees;
- Interest on any covered mortgage obligation (not including principle);
- Rent; and
- Utilities
- Payroll Costs (potentially Payroll Costs will have to account for 75% of the amount forgiven) which are:
- Is there a maximum amount that is forgiven through the Loan Forgiveness Program?
Yes. The amount forgiven:
-
- May not exceed the principal of the PPP Loan;
- May be reduced if full-time headcount declines, or if salaries and wages decrease. The formula is complicated. Contact our office for guidance.
- How does a business apply for a PPP Loan?
Starting April 3, 2020, small businesses and sole proprietorships, and beginning April 10, 2020, independent contractors and self-employed individuals, can apply for and receive PPP Loans through existing SBA Lenders. Click here for the SBA application. We are available to assist in answering application questions.
- For a business in the Accommodation or Food Services industry, does the 500-employee cap apply?
Any business that employs 500 or fewer employees per physical location, and is assigned a NAICS code beginning with 72 (Accommodation and Food Services) at the time of disbursal, shall be eligible to receive a covered loan.
- Does the business owner need to guarantee the debt personally?
No.
- Is collateral required to take out a PPP Loan?
No.
- Is there any recourse against the owners of a business that obtains a PPP Loan?
There is no recourse against any individual shareholder, member, or partner for nonpayment of a PPP Loan, except to the extent that such shareholder, member, or partner used the PPP Loan proceeds for other than the Allowable Uses.
- What is the interest rate of the PPP Loan?
The SBA has set the interest rate at 0.5%.
- Are there any fees charged by the bank or government to apply for a PPP Loan?
No.
- Does the business have to sign a certification when applying for the PPP Loan?
Yes. The business shall make a good faith certification that:
-
- The uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the company;
- The funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments;
- They do not have another application pending for a loan which is duplicative of the PPP Loan; and
- From February 15, 2020, through December 31, 2020, they have not and will not receive a loan for the same purpose.
- What will the lender take into consideration when determining a business’s eligibility?
In evaluating the eligibility of a borrower for a PPP Loan, a lender shall consider whether the business:
-
- Was in operation on February 15, 2020; and
- Had employees for whom the borrower paid salaries and payroll taxes; or
- paid independent contractors, as reported on a 1099.
- What is the Maturity Date of the PPP Loan?
PPP Loans have a maturity date of 2 years.
- How does a business apply for the Loan Forgiveness Program?
Eight weeks or more after the PPP Loan is originated, the business submits to the lender that is servicing the PPP Loan the required documents, which will include:
-
- Documentation verifying the number of full-time equivalent employees on payroll and pay rates for the applicable dates, including IRS and state payroll tax filings, as well as unemployment insurance filings;
- Canceled checks, payment receipts, transcripts of accounts, or other documents verifying payments on covered mortgage obligations, lease obligations, and utility payments; and
- Certification that the documentation presented is true and correct, and the amount requested under the Loan Forgiveness Program was used for the allowed purposes.
- When will the business find out the amount of the PPP Loan forgiven?
The lender shall issue a decision on the amount of the PPP Loan forgiven within 60 days of submitting the Loan Forgiveness Program application.
Obtaining a Paycheck Protection Program Loan is relatively straight forward. Determining the documentation required, the amount your business can borrow, and most importantly, the forgivable amount, is more complicated. We are available to provide advice based on your specific situation. Please call us at 310-540-2000 x274, or send me an e-mail at [email protected].
Stay Safe and Healthy,
Michael E. Adler
The information in this blog is for general informational purposes only. It does not create an attorney-client relationship, nor does it constitute legal advice on any subject matter. Legal questions related to the COVID-19 crisis, in particular, are unique and complicated, and no reader should act or refrain from acting based on any information included in this e-mail without seeking appropriate legal or professional advice as it relates to you and your business.
GrayLaw Group, Inc. is a transactional and litigation boutique firm that combines expertise and experience with personalized service. We periodically send out updates on legal developments that may be of interest to our clients.
GrayLaw Group, Inc.
21515 Hawthorne Blvd. Suite 450
Torrance, CA 90503
Tel: (310) 540-2000×274 / Fax: (818) 912-6504
www.graylawinc.com