Updated: Jul 15, 2020
By Stephanie Raimbert
Some businesses are struggling to stay afloat because of inadequate cash flow and inability to keep the momentum going, but your business doesn’t need to end up that way. Smaller businesses, especially young businesses that haven’t had time to build cash reserves, can be particularly vulnerable. Luckily, you have several tools and strategies at your disposal to help your small business navigate these choppy waters. One option for accessing additional cash flow is to secure fast small business loans. Right now, small business owners, like yourself, can apply for government funding programs to help get through the Coronavirus pandemic. One of the federal funding programs is the famous Paycheck Protection Program.
Overview: What is the Paycheck Protection Program?
The Paycheck Protection Program (“PPP”) is a loan program that is a part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. This is about a $350-billion program that provides small businesses with 8 weeks of financial assistance to have up to 100% of their loan forgiven. The Paycheck Protection Program is a loan designed to provide a way for small businesses to keep their workers on the payroll. The U.S. Small Business Administration (SBA) will forgive loans if all employees are kept on the payroll for 8 weeks and the money is used for payroll, rent, mortgage interest, or utilities. The main highlights of the program are: all small businesses are eligible (criteria requirements are listed below); the loan has a maturity rate of 2 years and an interest rate of 1%; no need to make loan payments for the first 6 months; no collateral or personal guarantees required; no fees; the loan covers expenses for 8 weeks starting from the original loan date (if the obligations began before February 15, 2020); the loan can be forgiven if businesses uses at least 75% of the forgiven amount for payroll, and if the money is used for payroll, interest on mortgages, rent and utilities.
Who Can Qualify?
Small businesses, sole proprietorships, independent contractors, and self-employed individuals can all qualify.
-Any small business that meets SBA’s size standards (either the industry based sized standard or the alternative size standard).
If they have 500 or fewer employees, provided that the loans were made between February 15, 2020, through June 30, 2020.
-Any business, 501(c)(3) non-profit organization, 501(c)(19) veterans organization, or Tribal business concern (sec. 31(b)(2)(C) of the Small Business Act) with the greater of:
500 employees, or
That meets the SBA industry size standard if more than 500
-Any business with a NAICS Code that begins with 72 (Accommodations and Food Services) that has more than one physical location and employs less than 500 per location
-Sole proprietorships will need to submit a Schedule C from their tax return filed (or to be filed) showing the net profit from the sole proprietorship.
-Independent contractors will need to submit Form 1099-MISC in addition to their Schedule C.
-Self-employed individuals will need to submit payroll tax filings reported to the Internal Revenue Service.
What are your next steps?
STEP 1 - Loan Details: Guidelines to Apply for Loan
At least 75 percent of the PPP loan must be used to fund payroll and employee benefits costs. Covered costs:
“Payroll costs” includes salary, wages, commissions, or tips (capped at $100,000 annual basis for each employee).
“Employee benefits” includes 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.
For a sole proprietor or independent contractor: wages, commissions, income, or net earnings from self-employment, capped at $100,000 annual basis for each employee.
Following scenarios are not covered:
Payments made to independent contractors
S corps and C corps owners who aren’t on payroll
The remaining 25 percent can be spent on:
Mortgage interest payments - as long as the mortgage was signed before February 15, 2020
Rent and lease payments - as long as the lease agreement was in effect before February 15, 2020
Utilities - as long as service began before February 15, 2020
For the borrower application form 3508, click here.
STEP 2 - Loan Forgiveness: Guidance for the Paycheck Protection Program Loan Forgiveness Application as of May 17, 2020
Loan forgiveness is based on the employer maintaining or quickly rehiring employees and maintaining their salaries. According to the SBA, a borrower must request the forgiveness of PPP loan process by filing SBA Form 3508, Paycheck Protection Program Loan Forgiveness Application. For more information, click here.
The application has four parts: (1) the PPP Loan Forgiveness Calculation Form; (2) PPP Schedule A; (3) the PPP Schedule A Worksheet; and (4) an (optional) PPP Borrower Demographic Information Form. Borrowers are required to submit items (1) and (2) to their lender. To date, the SBA and U.S. Treasury have issued a number of Interim Final Rules governing the PPP (collectively, the “PPP Rules”). In addition, the SBA and U.S. Treasury have also published: borrower (SBA Form 2483) and lender (SBA Form 2484) application forms; program “fact sheets” for borrowers and lenders; a summary of the applicable affiliation rules; a forgiveness application form (SBA form 3508); and responses to certain Frequently Asked Questions (“FAQ”) (which the SBA has updated numerous times). This rapidly changing regulatory environment is making it difficult for potential borrowers to avail themselves of the program with certainty as to their eligibility and scope of available benefits.
On Friday, May 15, 2020, SBA released a press release regarding the form and instructions that include several measures to reduce compliance burdens and simplify the process for borrowers, including:
Options for borrowers to calculate payroll costs using an “alternative payroll covered period” that aligns with borrowers’ regular payroll cycles.
Flexibility to include eligible payroll and non-payroll expenses paid or incurred during the eight-week period after receiving their PPP loan.
Step-by-step instructions on how to perform the calculations required by the CARES Act to confirm eligibility for loan forgiveness.
Borrower-friendly implementation of statutory exemptions from loan forgiveness reduction based on rehiring by June 30.
Addition of a new exemption from the loan forgiveness reduction for borrowers who have made a good-faith, written offer to rehire workers that was declined.
The new application provides clarity on a few points based on the Forbes report:
Time Period for Forgiveness: allows you to choose the eight-week period that begins on your first payroll date following the loan disbursement.
Whether or not the total loan amount of your business is $2 million or above: application shows how they will be taking note of those companies who borrowed $2 million or above.
Payroll Reduction Exemption: new guidance makes it clear that your forgiveness amount will not be reduced for employee reductions related to:
Individuals to whom the borrower has made a written offer in good faith to rehire but the employee declined (see FAQ 40);
Employees whose employment was terminated for cause; or
Employees who voluntarily resigned.
Owner’s Cap: SBA clarifies that any owner-employee or self-employed individual/general partner may calculate payroll costs as eight weeks of 2019 compensation. However, the total forgivable amount is capped at $15,385 per individual.
Taxes: Amounts forgiven are not taxable income to the borrower. However, the IRS has held that a borrower whose PPP loan is forgiven may not deduct the expenses that relate to the forgiven amount (e.g., the eight weeks of wages, employee benefits, interest, rent, and utilities that determined the forgiven amount).
Here are some important requirements to keep in mind for the loan forgiveness:
● You must commit to maintaining an average monthly number of full-time equivalent (FTE) employees or above the average monthly number of full-time equivalent (FTE) employees during the previous 1-year period. Also, you must spend 75% of the loan funds on payroll.
● You will need to keep your records and have accurate bookkeeping to prove your expenses during the loan period. You will also need to have spent 75% of the loan on payroll in order to qualify for loan forgiveness.
● The lender must make a decision within 60 days of your forgiveness application submission.
● Some of the most pressing issues are not addressed in the new application. And in other areas, it appears new questions have arisen, particularly in the areas where uniform reporting methodology from payroll providers will support a consistent and efficient approach to key calculations.
● The deadline to apply for loan is June 30, 2020.
Where are we now with the Paycheck Protection Program?
Since the beginning of the Paycheck Protection Program, it has gotten some criticism because some argue that the funds have not been given to the small businesses with the greatest need. In addition, all the applicants have been left with little guidance from the U.S. Treasury and SBA with many unanswered questions about the forgiveness application. Based on the up-to-date guide from Proskauer Rose LLP, the SBA announced on April 16, 2020 that the $349 billion authorized for the PPP had been exhausted. On April 24, 2020, the Paycheck Protection Program and Health Care Enhancement Act (the “PPPHCEA”) was signed into law, which increased the funding available for the PPP by $310 billion, bringing the total funding amount to $659 billion. The application window for the second round of PPP funding opened on April 27. Based on numbers released by the SBA, as of May 8, 2020, there were $120 billion left for disbursement.
Almost any business has to deal with uncertain times when the money coming in doesn't keep pace with the money going out. The effects of low cash flow can be magnified for owners of small businesses, but don't be discouraged. You were resourceful enough to start a small business in the first place, so look at the problem of slow cash flow as another challenge to overcome. Ultimately, all applicants should keep in mind that PPP loans are subject to ongoing rulemaking and guidance by the U.S. Treasury and the SBA and therefore should pay close attention as further guidance is issued by these agencies. Confusion continues to abound with these PPP loans; the following areas have ample uncertainty: (1) specific guidance on forgiveness of these PPP loans remains to be issued; (2) how the “guidance to-date” defense will function; and (3) how can PPP loan proceeds be used after June 30? Even though there are still some unanswered questions from the Paycheck Protection Program Forgiveness Application, the need of guidance is critical during this time as we wait for further instructions on the PPP.
Helpful Links to apply for the PPP loan and the loan forgiveness program:
If you wish to begin preparing your application for the loan, you can download a copy of the PPP borrower application form (Spanish version) to see the information that will be requested from you when you apply with a lender.
After you receive the loan, then apply for forgiveness of the loan. Use the PPP Loan Forgiveness Application form and instructions (SBA Form 3508).
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