President Trump signed the Paycheck Protection Program Flexibility Act into law. The legislation gives small business owners more flexibility in how they can use PPP funds and may make it easier to qualify for forgiveness. This article will be updated to include the new requirements soon. In the meantime, you can read about the updates HERE.
The Coronavirus Aid Relief and Economic Security Act (CARES Act) includes a number of programs to help small business owners, including Paycheck Protection Program (PPP) loans. The first round of funding for this program went quickly, but on April 23, 2020 Congress authorized an additional $310 billion in funding for PPP loans. Here we answer the most frequently asked questions about these loans.
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Please keep in mind:
- This article is not about the Economic Injury Disaster Loans (EIDL) which is a separate loan program. Read our FAQs about Disaster Loans due to coronavirus here.
- Funding for this second round is expected to go quickly. Make sure you apply as soon as possible.
Please keep in mind this information is changing rapidly and is based on our current understanding of the programs. It can and likely will change. Although we will be monitoring and updating this as new information becomes available, please do not rely solely on this for your financial decisions. We encourage you to consult with your lawyers, CPAs and Financial Advisors. To review your real-time funding options with one of Nav’s lending experts, please contact us.
Do I Qualify for The Small Business Stimulus Loans?
To qualify for a Paycheck Protection Program loan, you must be a small business as defined by the SBA. This includes:
- Small businesses or non-profit 501(c)(3) organizations with 500 or fewer employees
- Small businesses, 501(c)(19) veteran’s organizations or tribal concerns that meet the SBA size standards (See SBA size standards here.)
- Sole proprietors or independent contractors
Businesses in the food or hospitality industry (NAICS codes beginning in (72) may be eligible on a per location basis.
In addition the normal affiliation rules are waived for franchises or businesses receiving financial assistance from a Small Business Investment Company.
The business must be in operation by February 15, 2020.
I Don’t Have Employees. Can I Still Qualify?
Yes you may. Self employed individuals and independent contractors may apply.
What If I Have A Franchise?
Franchises and hospitality businesses (NAICS code 72) with multiple locations, even if they have more than 500 employees, may be eligible on a per location basis as well as any businesses receiving financial assistance from a Small Business Investment Company (SBIC).
How Much Money Can I Borrow?
The basic answer is that the maximum loan amount is 2.5 times the average monthly payroll for the 12 months preceding the date the loan is made, up to a maximum of $10 million. Alternatively, businesses may use 2.5 times average monthly payroll for 2019.
However, if you are a seasonal business, you can apply to borrow 2.5 times your payroll for either the 12-week period beginning February 15, 2019 and ending May 10, 2019, or the period of March 1, 2019 through June 30, 2019.
What if you are a newer business? If you were not in business for the time period beginning on February 15, 2019 and ending on June 30, 2019, then you can use your average total monthly payroll costs incurred from January 1, 2020 to February 29, 2020 and multiply that by 2.5.
Payroll does not include salaries above $100,000 or qualified sick leave pay under the Families First Coronavirus Response Act. That does not mean these salaries are completely excluded; it means that only the first $100,000 will qualify. (See What Does Payroll Include? below.)
I Don’t Pay Myself Payroll. How Do I Qualify?
If you are self-employed you likely report your business income or self-employment income on Schedule C, which you file with your tax return Form 1040. If that’s the case, you can apply based on your net profit for 2019 (Schedule C Line 31).
Can I Qualify Based On Owner’s Draw?
It’s questionable. Although we haven’t seen official guidance from the SBA Administrator on this topic, an email from the SBA dated April 6, 2020 states, “Only payroll costs in the form of salary, wages, tips, etc. are eligible for the PPP program. Owner draws, distributions, amounts recorded on a K-1 are not eligible for the PPP program.”
Is This The Free SBA Grant Money I Heard About?
No. The advance (or grant) of up to $10,000 is part of the Economic Injury Disaster Loan program, not Paycheck Protection Program Loans. Read about Disaster Loans here.
Where Can I Get One of These Loans?
Individual lenders, including many banks, credit unions and some online lenders make these loans. You are not automatically out of luck if your bank can’t help you. You can apply elsewhere.
Nav matches borrowers to SBA approved lenders and agents. Fill out a QuickConnect form to be matched to a lending partner now.
See How Much SBA Loan Money You Qualify For
Use our CARES Act SBA loan calculator to see how much money your business may qualify to get.Use the Calculator
Keep in mind that the cost is the same no matter where you get your PPP loan: 1% interest and no fees for any balance not forgiven.
What Can I Use the Funds For?
You can use the loan proceeds for:
- payroll costs;
- costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;
- employee salaries, commissions, or similar compensations;
- payments of interest on any mortgage obligation (but not to pay principal or to prepay a mortgage)
- rent (including rent under a lease agreement);
- interest on any other debt obligations that were incurred before the covered period,
- refinancing an SBA EIDL loan made between January 31, 2020 and April 3, 2020
How Fast Will I Have to Repay It?
These loans have a maximum term of two years. You can prepay at any time without penalty.
What Is the Interest Rate and Fees?
The interest rate for these loans will be 1% for all lenders that make them. Normal 7(a) loan fees are waived.
Is there a Personal or Business Credit Check?
None is required.
Is There a Personal Guarantee?
No. There is no personal guarantee required. In addition, these will be non-recourse loans as long as proceeds are used for covered purposes. (Non-resource means the government won’t be able to collect if you default.)
Is Collateral Required?
No. Normally SBA loans for more than $25,000 require collateral. That requirement is waived for these loans.
How Soon Do I Have to Start Making Payments?
Payments will be deferred for six months (though interest will accrue).
Do I Have to Prove I Can’t Get Credit Elsewhere?
No. Normally SBA loans require a “credit elsewhere” test to determine whether the borrower can get similar credit at another financial institution. This is waived here.
How Do I Get Loan Forgiveness?
If you get one of these loans, you can request forgiveness of the principal portion of the loan for the eight week period after you get the loan that covers:
- Payroll costs
- Interest on a mortgage
However, no more than 25% of the forgiven amount can be attributed to non-payroll costs.
Your loan forgiveness will be reduced if you decrease your full-time employee headcount. It will also be reduced if you decrease salaries and wages by more than 25% for any employee that made less than $100,000 annually in 2019. You may also receive forgiveness for additional wages paid to tipped workers.
- Payroll includes the costs listed under the section “What Does Payroll Include?” below.
- Forgiven debt will not be taxable.
- The mortgage, rent and utilities covered in this section must be in place before February 15, 2020.
Please note: there are specific and technical calculations included in this section of the law, and you should not rely on this description to determine whether to keep employees, reduce employee wages or to determine your eligibility for loan forgiveness.
Do Independent Contractors Count as Employees?
No. Independent contractors can apply for a PPP loan on their own so they do not qualify for purposes of a borrower’s PPP loan forgiveness. (Unless you are an independent contractor applying for yourself.)
Can I Get More Than One PPP Loan?
No. If you are an owner in multiple businesses, please read: Can I Apply for EIDL or PPP for Multiple Businesses?
What Happens if PPP Loan Funds are Misused?
If you use PPP funds for unauthorized purposes, SBA will direct you to repay those amounts. If you knowingly use the funds for unauthorized purposes, you will be subject to additional liability such as charges for fraud. If one of your shareholders, members, or partners uses PPP funds for unauthorized purposes, SBA will have recourse against the shareholder, member, or partner for the unauthorized use.
Keep good records of how you use these funds. Sloppy record keeping may prove costly!
What If I Have Already Laid Off Employees or Cut Pay?
If you have already laid off workers, you have until June 30, 2020 to restore full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020. This part of the law is confusing and additional guidance from the SBA and Treasury is needed, so be sure to get professional advice if you are hoping to obtain full loan forgiveness.
Again, you should not rely on this description to determine whether to lay off or hire employees.
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What Does Payroll Include?
The CARES Act states that payroll includes:
- Salary, wages, commissions or similar compensation,
- Payment of cash tips or equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips),
- Payment for vacation, parental, family, medical, or sick leave;
- Allowance for dismissal or separation;
- Payment required for the provisions of employee benefits including insurance premiums;
- Payment of any retirement benefit;
- Payment of State or local tax assessed on the compensation of employees; plus
- For sole proprietors or independent contractors, wages, commission, income, or income from net earnings from self-employment, or similar compensation.
It does not include:
- The compensation of an individual employee in excess of an annual salary of $100,000, as prorated for the covered period;
- Federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020, including the employee’s and employer’s share of FICA (Federal Insurance Contributions Act) and Railroad Retirement Act taxes, and income taxes required to be withheld from employees;
- Any compensation of an employee whose principal place of residence is outside the United States;
- Qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act.
Are Employee Benefits In The $100,000 Salary Cap?
No. The CARES Act excludes from the definition of payroll costs any employee compensation in excess of an annual salary of $100,00. According to the SBA, the exclusion of compensation in excess of $100,000 annually applies only to cash compensation, not to non-cash benefits, including:
- employer contributions to defined-benefit or defined-contribution retirement
- payment for the provision of employee benefits consisting of group health care
coverage, including insurance premiums; and
- payment of state and local taxes assessed on compensation of employees.
What Do Utilities Include?
Utilities include electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.
How Do I Document Payroll?
You must submit such documentation such as payroll processor records, payroll tax filings, or Form 1099- MISC, or income and expenses from a sole proprietorship. For borrowers that do not have any such documentation, the borrower must provide other supporting documentation, such as bank records, sufficient to demonstrate the qualifying payroll amount.
Are There Disqualifiers?
Yes. You are ineligible for a PPP loan if, for example:
- You are engaged in any activity that is illegal under federal, state, or local law;
- You are a household employer (individuals who employ household employees such as nannies or housekeepers);
- An owner of 20 percent or more of the equity of the applicant is incarcerated, on probation, on parole; presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction; or has been convicted of a felony within the last five years; or
- You, or any business owned or controlled by you or any of your owners, has ever obtained a direct or guaranteed loan from SBA or any other Federal agency that is currently delinquent or has defaulted within the last seven years and caused a loss to the government.
What’s the Difference Between PPP and EIDL?
The CARES Act includes a number of relief programs for small businesses. The one we are focus on in this article is Paycheck Protection Program Loans. The Economic Injury Disaster Loan is a separate loan altogether and you apply directly to the SBA, not to individual lenders.
Can I Apply For This Loan and Disaster Assistance?
Yes but you cannot “double dip” and use funds from both loan programs for the same purpose. Furthermore, according to the SBA Interim Final Rule, “If you received an SBA EIDL loan from January 31, 2020 through April 3, 2020, you can apply for a PPP loan. If your EIDL loan was not used for payroll costs, it does not affect your eligibility for a PPP loan. If your EIDL loan was used for payroll costs, your PPP loan must be used to refinance your EIDL loan. Proceeds from any advance up to $10,000 on the EIDL loan will be deducted from the loan forgiveness amount on the PPP loan.”
This guidance does not address what happens if you applied for an EIDL before April 3, 2020 but received one after that date.
Can I Apply For This Loan and the Payroll Tax Credit?
There is a payroll tax credit of up to 50% of qualified wages for certain businesses whose operations have been fully or partially suspended by a government order or whose gross receipts in a quarter have fallen by at least half compared to a similar quarter the year before.
Your business cannot receive both the Employee Retention Payroll Tax Credit and a Paycheck Protection Program Loan, so if you are considering both make sure you consult with your legal or financial advisor.
Paycheck Protection Program Loans may prove to be a crucial tool helping some small businesses survive this crisis. The second round of funding for this program is likely to be depleted quickly so apply as soon as possible.