Paycheck Protection Program

Update as of 5-27-2020

As we’ve been covering, there have been numerous changes to the PPP over the last 10 days or so.  And they’ve been pretty significant. And there’s even more coming!  To help hold you all over until Congress is done doing what they do this week, and hopefully providing us ultimate clarity here, please see a new installment of our PPP FAQs:

Q. We got approved for an Economic Injury Disaster Loan (EIDL) after we received the PPP. Can I use both?
Yes.  Just not for the same “stated purposes,” meaning that you can accept both loans, but just use the funds for different things – one for payroll and rent; one for general cash flow. If you received an EIDL cash advance, however, that cash advance amount will be automatically deducted from your potential loan forgiveness amount.  

Q. Can I use my PPP funds to pay 5 months of rent?
According to the SBA’s most recent guidance, yes – pre-payments and deferred rent payments can now be covered, as long as you actually PAY them during your 8-week covered period.

Q. Do we have to hire back the same employees to reach our FTE targets? Or can we hire new people and/or create new positions?
Ideally, you would attempt to rehire your original employees first, since the SBA is encouraging borrowers to use the PPP funds to retain and rehire. That being said, you can absolutely create new positions, particularly in light of the fact that your operations have undoubtedly changed – and will continue to do so – in response to the crisis.

Q. Does a part-time employee with 5 hours per week count as 0.5 FTE?
If you choose to use the SBA’s recent “simplified” FTE calculation, yes. You are still able to use the exact FTE calculation if you choose — which would likely be beneficial if you have a large number of employees working under 20 hours/week — but you’ll need to be consistent throughout all measuring periods.

Q. How much do I need to pay my employees during the covered period to qualify for loan forgiveness?
It’s our understanding that you should be taking each re-hired employee’s Q1 2020 gross earnings, multiplying it by 4 to get an employee’s annualized “salary” (capped at $100k). That annualized salary is divided by 52 (for a weekly rate), then multiplied by 8 [weeks] to get you the employee’s target take-home during the covered period. That total CAN be reduced by up to 25%, while still complying with the forgiveness guidelines.

*If the employee is a new hire – and has never received a paycheck from the borrowing entity before – there is no salary threshold requirement. You are, however, bound by all wage and hour rules under applicable law.

Q. When it comes to the salary threshold test, is that based on an employee’s weekly pay or their total compensation over the 8-week covered period?
Total cash compensation over the course of the 8 weeks.

Q. If an employee is offered employment and declines, their FTE count can be counted toward the total. But what happens to the money that was allocated for them?
Those amounts can be reallocated and redistributed to cover other payroll costs (I.e., increasing other employees’ comp, hiring new employees, etc.)

Q. Are we responsible for payroll taxes while using PPP funds?
State and local taxes can be paid using PPP funds (and are included in covered payroll costs), but federal employer-side taxes are not covered and must be paid out of pocket.
*Please also note that workers comp is not included as a forgivable payroll costs.

Q. What kind of repercussions might we face (aside from repaying the loan) if we decide to hang on to the money for expenses since we have no opening date in sight?
No repercussions, necessarily — and you are one of many people who are planning to hang on to their PPP funds. Just be mindful of the fact that you are still bound by the 75/25 ratio, irrespective of whether you’ll be applying for forgiveness or not.

The Paycheck Protection Program provides small businesses with funds to cover payroll costs, interest on mortgage obligations, rent, insurance, and utilities incurred from February 15, 2020 to June 30, 2020. Borrowers may apply to have these loans forgiven, which means that you may not have to pay them back.

Who’s Eligible?

Any business with fewer than 500 employees is eligible, provided that the business was created/organized in the U.S, has been operating as of February 15, 2020, and had employees on payroll as of such date. Hospitality-based businesses with 500+ employees are also eligible, as long as there are no more than 500 employees working at any one location.

As of April 2, the sample loan application released by the SBA and the U.S. Dept. of Treasury indicated that all applicants would need to certify that all individuals with more than 20% ownership interest were U.S. citizens or otherwise had lawful permanent residence in the U.S. As you can imagine, this was completely unexpected and equally devastating, especially for an industry so enriched by foreign participants.  

Please note that the SBA reported to us today that the sample loan application was just that: a sample. Private lenders may ultimately have the discretion to impose citizenship requirements. So, they may, or they may not. However, note that lenders will be doing whatever they can to maximize their chances of federal reimbursement for these loans. This fear of non-reimbursement may compel many lenders to follow the SBA sample to a tee. That said, we just don’t know the answer yet, and the answer will likely vary from bank to bank. 
Is there additional criteria for approval?

You must certify that a loan is necessary to support business operations and that any funds received will be used only to retain workers, maintain payroll, make mortgage and lease payments, and pay for utilities. You will also be required to certify that you have not applied or received funding for a “duplicative” loan in order to cover the same expenses and amounts.
Note that you can apply for other federal relief loans, such as EIDL, as long as you don’t spend EIDL money on the same thing for which you’re spending PPP money. For example, if you obtain a PPP loan for payroll and rent costs, you cannot use EIDL money for those costs as well.

How much funding can I get?

You may receive up to 2.5 x the borrower’s average monthly payroll costs, not to exceed $10M.

Your average monthly payroll costs are calculated using the costs incurred during the year prior to the loan date. If you were not operating in 2019, you can use the payroll costs incurred for January and February.

What can be used to calculate payroll costs? 

Employee compensation (salary, wages, commissions, payment of cash tips or an equivalent), payments for employee leave (vacation, parental, family, or sick leave), severance payments, health insurance costs (including insurance premiums), retirement benefits, and state/local taxes assessed for compensation. You cannot include payroll tax, income tax, any amounts paid to an employee that exceeds $100,000, or any payments made to employees for leave under the Families First Coronavirus Response Act.

Although SBA guidance now says that each lender will be responsible for computing the loan amount, some lenders have indicated that applicants should consult with their advisors to properly compute the loan amount being requested before submitting the application.
What can the funds be used for?

PPP proceeds can only be used to cover payroll costs and to pay mortgage, rent, and utilities (to the extent that those obligations were effective as of 2/15/20). According to the guidance released by the U.S. Department of Treasury, if you use funds for any other purpose, the federal government will pursue criminal fraud charges against you.

Do I have to repay the funds?

While PPP proceeds will be issued as a loan, you may be able to avoid having to repay it. However, you must meet a very specific set of criteria to qualify for loan forgiveness, so please familiarize yourself with those details outlined below.

How does PPP loan forgiveness work?

You can obtain loan forgiveness equal to the amounts spent during the 8 weeks after the issuance of your loan, only as that spending relates to payroll costs, mortgage interest, rent, and utilities during that period will be eligible for forgiveness. The Treasury Department has now stated that PPP loans will not be eligible for forgiveness unless at least 75% of the loan amount is used towards payroll costs and payroll costs alone. And of course, the amount forgiven cannot exceed the original amount borrowed.

To avoid having to repay any of this loan, you must plan to normalize your payroll on or before June 30, 2020. The amount of forgiveness can be reduced under two circumstances: (1) if your full-time equivalent (FTE) employee headcount is lower on June 30, 2020 than it was during 2019 at that time and (2) if, on June 30, 2020, your employee pay rates have been reduced by more than 25% from what they were during this period in 2019.

How do I apply for loan forgiveness?

Lenders will not forgive loan amounts without this supporting documentation, so borrowers should maintain thorough recordkeeping practices and are encouraged to work with their professional advisors in doing so. Lenders are required to render decisions on loan forgiveness applications within 60 days after submission.

For any portion of the funding that cannot be forgiven, what are the terms of the loan?

The precise terms of these loans will differ on a case-by-case basis. But to the extent that a PPP loan is not forgiven, your repayment will be subject to the following terms: interest rates will be capped at 1% (this and increase from the previous rate of .5%) with a repayment term of up to 2 years. Deferment of repayment will be granted for 6 months after loan issuance.

All loan application fees, personal guarantees, collateral requirements, and credit status will be waived for any covered loan, however, any person using loan proceeds for unauthorized uses will be personally liable for repayment (and may also be subject to criminal charges).

Funds from this loan are to be used ONLY for the following:

  • Payroll costs – including benefits;
    • Payroll costs include:
      • Salary, wages, commissions, or tips (capped at $100,000 on an annualized basis for each employee);
      • Employee benefits including costs for vacation, parental, family, medical or sick leave; allowance for separation or dismissal; payments required for the provisions of group health care benefits, including insurance premiums; and payment of any retirement benefit;
      • State and local taxes assessed on compensation; and
      • For a sole proprietor independent contractor: wages, commissions, income, or net earnings from self-employment, capped at $100,000 on an annualized basis for each employee.
  • Interest on mortgage obligations, incurred before February 15, 2020
  • Rent, under lease agreements in effect before February 15, 2020
  • Utilities, for which service began before February 15, 2020

How Payroll Factors In.

No more than 25% of the total funded loan amount can be used for things other than “payroll expenses.” So, yes you can still use proceeds from this loan to pay your rent and utilities, but if that amounts to greater than 25% of the total loan amount, you run the risk of having a portion of those proceeds not being forgiven.
Previously the guidance was that your payroll had to be within 25% on June 30, 2020 of what it was on February 15, 2020.  There was no specification as to whether that contemplated head count, actual payroll dollar amount or both.  Today, it has been clarified that it means BOTH.  Headcount of employees must be the same (from Feb 2020 to June 30, 2020) and salaries may not be decreased by more than 25% to achieve the maximum amount of loan forgiveness.