As guidance in this area is being released regularly, we recommend you read all of our blogs on this subject. All the blogs in the Paycheck Protection Program series are here: Updates #1, #2, #3, #4, #5, #6, #7, #8, #9, #10
To say things are moving quickly relative to the CARES Act Paycheck Protection Program would be an understatement. Within hours of issuing our blog summarizing the law yesterday, both the Treasury Department and Small Business Administration issued additional guidance and a sample loan application.
- Fillable loan application;
- Paycheck Protection Program (PPP) Information Sheet; and
- Small Business Administration (SBA) information.
As expected, release of the additional guidance clarified certain aspects of the law, but questions remain. Our focus here will be on the changes and new items not included as part of our original blog.
Has anything changed regarding who may apply?
The additional guidance clarifies that all businesses – including nonprofits, veteran’s organizations, Tribal business concerns, sole proprietorship, self-employed individuals, and independent contractors – with 500 or fewer employees can apply. Businesses in certain industries can have over 500 employees if they meet SBA employee-based size standards that can be found here. The affiliation standards are waived for small businesses in certain industries (see the PPP Information Sheet).
When can I apply?
Small businesses and sole proprietorships can apply for and receive loans through an existing SBA lender beginning on April 3, 2020. Independent contractors and self-employed individuals can apply for and receive loans through an existing SBA lender beginning on April 10, 2020. We assume the distinction between a small business/sole proprietorship and independent contractor/self-employed individual is a business that has employees vs. one that does not but contact your banker to verify.
Other regulated lenders trying to become an authorized lender can make loans when approved and enrolled in the program. We suggest you contact your lender to determine when they will accept applications. Borrowers are also encouraged to apply quickly since there is a funding cap and lenders need time to process applications.
What information is needed to apply?
The application is self-explanatory but contains previously unknown nuance. After entering some basic information, the applicant is asked for the Average Monthly Payroll and the Number of Jobs. Average Monthly Payroll determines the available loan amount and is discussed in the next question below. Number of Jobs is not defined and assumed to be the current number of full-time equivalent employees at the time of application. The applicant must also disclose owners having greater than a 20% ownership stake.
The remainder of the application contains various questions to ascertain the applicant’s eligibility for the loan. Dependent upon the answers provided, additional information is requested. The signature page includes representations and authorizations the applicant must make, and the required certifications as outlined in the original law.
The representations and authorizations should be reviewed carefully. One item of note is the applicant, and the individuals owning greater than 20%, are authorizing the SBA to request a criminal background check. In the certifications section, a previously unknown item is the need to supply payroll tax filings noted in the final certification. This requirement is not formally stated in the application, or instructions, and is found in the other supplemental guidance issued.
The estimated time to complete the application is 8 minutes. We anticipate assembling the required information will take much longer. The most time-consuming part will be calculating the Average Monthly Payroll which was simplified in relation to the actual law (see next question).
The rules around calculating average monthly payroll are complex. Has anything changed?
According to the application, for most applicants, Average Monthly Payroll will be calculated using the average monthly payroll for 2019 excluding costs over $100,000 on an annualized basis for each employee. The law indicated they would look at the trailing 12-months of payroll making the calculation complex for most taxpayers. The nuances of calculating Payroll Costs used to determine the Average Monthly Payroll remain but abandoning the trailing 12-months is a significant simplification.
How much of the loan must be used on payroll costs?
Recall that from our original blog, Payroll Costs include wages, commissions, the employer share of group health coverage, employer paid retirement benefits and state and local payroll taxes imposed on the employer. Also recall that Payroll Costs were eligible for forgiveness along with a handful of other expenses.
While the law provided no requirement around how much of the loan must be used for Payroll Costs to be eligible for forgiveness, the additional guidance issued by the Treasury and SBA indicate an anticipated requirement to use at-least 75% of the loan on Payroll Costs based upon their expectation of a high subscription rate.
Was anything else important clarified in the updated information?
- Provide your lender Federal payroll tax information and other supporting documents. What documents are required may vary by lender and could include: quarterly Form(s) 941, annual Form W-3 and supporting Form(s) W-2, and a year-end payroll register by employee. Additional supporting documents should be submitted for the included employer share of group health coverage, employer paid retirement benefits and state and local payroll taxes imposed on the employer. Tying this information together, along with putting forth your own calculation of the eligible loan amount, will likely speed up the loan process.
- The issue around inclusion of independent contractors as Payroll Costs appears to be clarified in the additional guidance and payments to independent contractors are not an eligible Payroll Cost. However, some would argue the additional guidance contradicts the law. Discuss whether/not independent contractor payments can be included with your banker.
- The interest rate was set at 0.50% fixed.
- The loan term has been set at 2 years.
- The payment deferral is set at 6 months, but your lender may allow up to 1-year.
- If you use the proceeds fraudulently, the U.S. government will pursue criminal charges.
Was anything important not clarified?
One of the biggest questions surrounding the law remains the definition of a full-time equivalent employee. Based upon prior loan programs, a full-time equivalent employee is typically defined for the specific program. As of this writing, no definition has been put forward.
We’re conversing with many of our clients about the opportunities and challenges this program presents. While the loan application is relatively streamlined, determining and supporting the portion eligible for forgiveness is critical. We have found models and projections are best, and what you “think” will happen is not always how the numbers shake out. There are also other programs available that CANNOT be used if PPL loans are obtained, so it’s best to stop and consider those before applying. If you have specific questions about how the CARES Act may affect your business, or what your next steps should be, please contact us.