What is the Small Business Paycheck Protection Program?
Small businesses have been hit hard by closures and other disruption caused by the COVID-19 (coronavirus) pandemic. Among the financial hardships and tough decisions include whether businesses should keep employees or lay off or furlough workers. The CARES Act provides a solution aimed to help small businesses keep workers on payroll with the Paycheck Protection Program (PPP). Below are answers to some frequently asked questions around the program.
Paycheck Protection Program FAQs
Below are answers to some frequently asked questions abound the PPP program.
What is the Paycheck Protection Program?
The PPP provides significant financial incentives for small businesses to hold on to current employees and bring back workers who have been laid off or furloughed, even before their business is fully back up to speed.
This stimulus program is designed to provide quick access to loans from the Small Business Administration (SBA) for companies with 500 or fewer employees to assist with payroll and operating costs during short-term business disruption caused by the COVID-19 pandemic.
To receive the loan, a financial institution must confirm that the borrower was in operation on Feb. 15, 2020 and had employees, and determine the maximum amount of loan. The borrower may use the loan to pay any eligible expenses incurred during the period beginning on the date the lender makes the first disbursement of the PPP loan to the borrower.
How does the Paycheck Protection Program work?
Generally, businesses with 500 or fewer employees are eligible for up to $10 million in loans, which can be used for payroll and other expenses, such as insurance premiums, mortgage interest, rent, or utilities.
A portion of the loan (up to 8 weeks of covered costs) is eligible for forgiveness (does not need to be repaid) if certain conditions are met.
What kind of expenses does the loan cover?
The loan covers the following expenses:
- Payroll costs
- Costs related to 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 (not including mortgage principal or interest pre-payments)
- Utilities (electricity, gas, water, transportation, telephone, and internet access)
- Interest on any other debt obligation that was incurred before the covered period
The loan does not cover:
- Compensation of an individual employee in excess of an annual salary of $100,000, as prorated;
- Any compensation of an employee whose principal place of residence is outside the U.S.; and
- Qualified family leave or sick leave wages under the Families First Coronavirus Response Act.
Am I eligible for a loan under the Paycheck Protection Program?
Small businesses with 500 or fewer employees may be eligible. Businesses with more than 500 employees are eligible in certain industries.
Specifically, you may be eligible if you are:
- A small business with not more than 500 employees.
- A small business that otherwise meets the SBA’s size standard.
- A 501(c)(3) with 500 or fewer employees.
- An individual who operates as a sole proprietor.
- An individual who operates as an independent contractor.
- An individual who is self-employed and regularly carries on any trade or business.
- A tribal business concern that meets the SBA size standard.
- A 501(c)(19) veterans’ organization that meets the SBA size standard.
Some special rules may also make you eligible if you are:
- In the accommodation and food services sector (NAICS 72). The 500-employee rule is applied on a per physical location basis.*
- Operating as a franchise or receive financial assistance from an approved Small Business Investment Company, the normal affiliation rules do not apply.
* The 500-employee threshold includes all full-time employees, part-time employees, and employees of any other status (i.e. employees currently on leave, temporary employees, day laborers supplied by a temp agency).
I am a seasonal business. Can I still apply?
Yes. Jackson Lewis specifies that the maximum amount of a loan for a seasonal business would be calculated as follows:
250% (or 2.5X) of the average total monthly payments for payroll costs for the 12-week period beginning Feb. 15, 2019, or March 1, 2019, and ending June 30, 2019.
How and where can I apply?
To apply, businesses must:
- Sign a Certification that the loan is for eligible purposes.
- Complete an application (found here).
- Be prepared to provide documentation verifying the number of headcount on staff and average monthly payroll, which can be obtained from your payroll service provider.
- Contact your CPA, accountant, or financial institution.
You can apply through any existing SBA 7(a) lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. Other regulated lenders will be available to make these loans once they are approved and enrolled in the program.
As of mid-April, the first round of PPP loans has already been depleted. In the event more funding is approved, you will want to make sure your documents are ready to go. If you use a payroll service, your ability to provide documentation about headcount and payroll, which are both critical to qualifying for the loan and potential loan forgiveness, will be easier.
Paychex has established partnerships with lenders capable of fulfilling a variety of funding options to suit your business needs. You should also consult with your local lender as to whether it is participating. All loans will have the same terms regardless of the lender or borrower. A list of participating lenders, as well as additional information and full terms, can be found at www.sba.gov.
How much can I borrow?
Loans can be up to 2.5X the borrower’s average monthly payroll costs, not to exceed $10 million.
Will my loan be forgiven?
Recipients of a loan made under the Paycheck Protection Program may be eligible for loan forgiveness in an amount equal to the sum of the following costs incurred, and payments made, during an 8-week period beginning on the date of the loan origination:
- Payroll costs (including employee benefits);
- Interest payments on any covered mortgage obligation incurred before Feb. 15, 2020;
- Payment of rent under a lease in force prior to Feb. 15, 2020; and
- Utility payments for which service began before Feb. 15, 2020.
Any loan amounts not forgiven at the end of one year are carried forward as an ongoing loan with terms of a max of 2 years, at a max of 1% interest.
Due to likely high subscription, at least 75% of the forgiven amount must have been used for payroll.
- Forgiveness amount cannot exceed the principal amount of the loan.
- Forgiveness amount is subject to reductions based on (1) reduction in the number of FTEs; and/or (2) reduction in the amount of salary or wages, with an important exception for rehires.
Am I eligible for the Employee Retention Credit if I repay my PPP loan by the safe harbor deadline (May 14, 2020)?
According to updated SBA guidance on May 6, if you return your loan proceeds by May 14, 2020 and meet all other criteria to receive the credit, you will be eligible for the Employee Retention Credit. We recommend you consult with your CPA and/or financial advisor to determine whether returning your PPP loan makes sense for you.
What will lenders be looking for?
Lenders will be looking for whether the applicant was in operation on Feb. 15, 2020 and had employees for whom they paid salaries and payroll taxes, or paid independent contractors.
Lenders will also ask applicants for a good-faith certification that:
- The uncertainty of current economic conditions makes the loan request necessary to support ongoing operations;
- The borrower will use the loan proceeds to retain workers and maintain payroll or make mortgage, lease, and utility payments;
- The borrower does not have an application pending for a loan duplicative of the purpose and amounts applied for here;
- The borrower has not received a loan duplicative of the purpose and amounts applied for from Feb. 15, 2020 to Dec. 31, 2020.
What are the loan terms?
Terms of the loan are as follows:
- No personal guarantee or collateral is required.
- Loans are 100% guaranteed by the government.
- No “credit elsewhere” tests (normally required for SBA loans).
- No borrower fees or prepayment penalties.
- Loans are non-recourse against owners/shareholders so long as used for authorized purposes.
- If loans are not forgiven, the loan balance is payable over 2years at no more than 1% interest. Initial payments are deferred for at least 6 months.
- Loan maximum is calculated as follows:
[Average total monthly payments for payroll costs incurred during the 1-year period before the date on which the loan is made] X 2.5*
* Not to exceed $10 million; special rules for seasonal businesses and new businesses.
Self-Employed and the PPP FAQs
In a move that validates the gig economy, On April 14, 2020, the SBA released an Interim Final Rule providing guidance for individuals with self-employment income who file a Form 1040, Schedule C. Below are answers to frequently asked questions regarding the PPP eligibility for the self-employed, freelancers, independent contractors and sole proprietors.
I have income from self-employment and file a Form 1040, Schedule C. Am I eligible for a PPP Loan?
You are eligible for a PPP loan if you meet the following criteria:
- you were in operation on February 15, 2020;
- you are an individual with self-employment income (Self-employment may include freelancers, gig workers, independent contractors, or a sole proprietor);
- your principal place of residence is in the United States; and
- you filed or will file a Form 1040 Schedule C for 2019.
If your business is a partnership or you are a sole proprietor that business is only eligible for one loan under the PPP, not two separate ones. Instead, the self-employment income of general active partners may be reported as a payroll cost, up to $100,000 annualized, on a PPP loan application filed by or on behalf of the partnership.
What if my business was not in operation in 2019?
As of April 2020, the SBA says it will issue additional guidance for those individuals with self-employment income who were not in operation in 2019 but in operation Feb. 15, 2020, and will file a Form 1040 Schedule C for 2020.
Are there any other restrictions on how I can use PPP loan proceeds?
Yes. At least 75% of the PPP loan proceeds should be used for payroll costs. For purposes of determining the percentage of use of proceeds for payroll costs (but not for forgiveness purposes), the amount of any refinanced EIDL will be included.
What amounts shall be eligible for forgiveness?
According to the IRS, the amount of loan forgiveness can be up to the full principal amount of the loan plus accrued interest. However, it's important to know that the actual amount of loan forgiveness will depend, in part, on the total amount spent over the covered period on eligible costs and expenses. The SBA has determined that for individuals with self-employment income who file a Schedule C, PPP self-employment loan forgiveness is limited to a proportionate eight-week share (8/52) of 2019 net profit, as reflected in the individual's 2019 Form 1040 Schedule C. For example, if you reported making $52,000 to the IRS in 2019, you would be forgiven for $8,000 of self-employment income as long as that income represented at least 75% of your total loan. The other 25% can be forgiven if it's spent on eligible costs and expenses.
How is Paychex helping clients apply for the Paycheck Protection Program?
Paychex has created a specialized report with payroll costs calculations you’ll need to complete an application for a Paycheck Protection Program loan through the SBA.
If you use Paychex Flex®, these new reports are available within the Quick Reports section of your dashboard. Access the Report
For clients who do not use Paychex Flex, complete this form to be put in touch with a Service Specialist who can assist.
If you are a former Paychex client who accessed records through Paychex Flex, you can access all 2019 payroll records until June 1, 2020. If you were not an online Paychex Flex user, submit your contact information, and our Service Specialists will be in touch.
Note: You must have run payroll with Paychex in 2019 to get a report.
Does My Business Qualify for a Paycheck Protection Loan? prepared by Jackson Lewis
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