UPDATE Regarding the COVID-19 Paycheck Protection Program
April 6, 2020
On the afternoon of April 2, 2020, the Department of Treasury issued an Interim Final Rule regarding the Paycheck Protection Program (â€œPPPâ€).Â On the April 6, the Small Business Association issued a list of frequently asked questions (â€œFAQsâ€).Â The Interim Final Rule and the FAQsâ€™ clarified the following terms of the PPP:
PPP Loan Eligibility:
- Loans are first come, first serve.
- You are eligible if:
- You have 500 or fewer employees whose principal place of residence is in the United States, or are a business that operates in a certain industry and meet the applicable SBA employee-based size standards for that industry;
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- You are either:
- A small business concern as defined in Section 3 of the Small Business Act (15 USC 632), and subject to SBAâ€™s affiliation rules under 13 CFR 121.301(f) unless specifically waived in the Small Business Act;
- You are either:
Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â or
- A tax-exempt nonprofit organization described in Section 501(c)(3) of the Internal Revenue Code (IRC), a tax-exempt veterans organization described in Section 501(c)(19) of the IRC, tribal business concern described in section 31(b)(2)(C) of the Small Business Act, or any other business;
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- You were in operation on February 15, 2020;
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- You either had employees for whom you paid salaries and payroll taxes or you paid independent contractors, asÂ reported on a Form 1099-MISC, prior to February 15, 2020.
- You are an individual who (i) operates as a sole proprietorship or as an independent contractor or (ii) are an eligible self-employed individual and you were in operation on February 15, 2020.
- You must submit such documentation as is necessary to establish eligibility such as payroll processor records, payroll tax filings, or Form 1099- MISC, or income and expenses from a sole proprietorship. For applicants that do not have any such documentation, the applicant must provide other supporting documentation, such as bank records, sufficient to demonstrate the qualifying payroll amount.
- You can be rendered ineligible for a PPP loan even if you otherwise meet the eligibility requirements if:
- You are engaged in any activity that is illegal under federal, state, or local law;
- You are a household employer (i.e., you employ household employees such as nannies or housekeepers);
- An owner of 20% or more of the equity of the applicant is (i) incarcerated, on probation, on parole; (ii) presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction; or (iii) has been convicted of a felony within the last five (5) 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 (7) years and caused a loss to the government.
- Your business falls under one of the following:
- Financial business (i.e., banks, finance company);
- Passive business owned by a developer and/or landlord that does not actively use or occupy the assets acquired or improved with the loan proceeds;
- Life insurance company;
- Foreign business;
- Pyramid sale distribution plans;
- Private club and/or business that limits membership for reasons other than capacity;
- Business engaged in teaching;
- Business which presents live performances;
- Previously defaulted on a federal loan or federally assisted financing;
- Political or lobbying activities; or
- Speculative business.
- An eligible applicant may receive only one (1) PPP loan.Â This means that if you apply for a PPP loan, you should consider applying for the maximum loan amount.
Determination of PPP Loan Amount:
- Under the PPP, the maximum loan amount is the lesser of $10 million or an amount that you will calculate using a payroll-based formula specified in the PPP.
- The following methodology set forth in the PPP will be used to calculate the maximum amount you can borrow:
- Step 1:Â Aggregate Payroll Costs using data from either the previous twelve (12) months or from calendar year 2019 (unless business did not commence operations until 2020; then, January 1, 2020 through February 15, 2020) for employees whose principal place of residence is the United States. Note that each bank may require slightly different documentation.
- Step 2: Subtract any compensation paid to an employee in excess of an annual salary of $100,000 and/or any amounts paid to an independent contractor or sole proprietor in excess of $100,000 per year.Â The $100,000 employee compensation excess exclusion applies only to cash compensation, not to non-case benefits.
- Step 3: Calculate average monthly payroll costs (divide the amount from Step 2 by 12).
- Step 4: Multiply the average monthly payroll costs from Step 3 by 2.5.
- Step 5: Add the outstanding amount of an Economic Injury Disaster Loan (EIDL) made between January 31, 2020 and April 3, 2020, less the amount of any â€œadvanceâ€ or grant under an EIDL COVID-19 loan (because it does not have to be repaid).
- â€œPayroll Costsâ€ includes the following:
- Payroll consisting of compensation to employees (whose principal place of residence is the United States) in the form of (i) salary, wages, commissions, or similar compensation; (ii) cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips); (iii) payment for vacation, parental, family, medical, or sick leave; (iv) allowance for separation or dismissal; (v) payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, and retirement; and (vi) payment of state and local taxes assessed on compensation of employees.Â For an independent contractor or sole proprietor, payroll consists of wage, commissions, income, or net earnings from self-employment or similar compensation.
- The following are expressly excluded from Payroll Costs:
- Any compensation of an employee whose principal place of residence is outside of the United States;
- The compensation of an individual employee in excess of an annual salary of $100,000, prorated as necessary; however, the $100,000 employee compensation excess exclusion applies only to cash compensation, not to non-case benefits;
- Federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020, including the employeeâ€™s and employerâ€™s share of FICA (Federal Insurance Contributions Act) and Railroad Retirement Act taxes, and income taxes required to be withheld from employees; and
- Qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act (Public Law 116â€“127).
- Payments to independent contractors.Â Since independent contractors have the ability to apply for a PPP loan on their own, they do not count for purposes of a borrowerâ€™s PPP loan calculation.Â This is a significant clarification.
- Rent payments for either the previous twelve (12) months or for calendar year 2019 (unless business did not commence operations until 2020; then, January 1, 2020 through February 15, 2020).
- Utility payments for either the previous twelve (12) months or for calendar year 2019 (unless business did not commence operations until 2020; then, January 1, 2020 through February 15, 2020).
- Mortgage interest payments (but not mortgage prepayments or principal payments) for either the previous twelve (12) months or for calendar year 2019 (unless business did not commence operations until 2020; then, January 1, 2020 through February 15, 2020).
- Interest payments on other debt obligations for either the previous twelve (12) months or for calendar year 2019 (unless business did not commence operations until 2020; then, January 1, 2020 through February 15, 2020).
PPP Loan Terms:
- Interest Rate:Â 1.0%.Â This up from the previously stated 0.5% interest rate.
- Maturity Date:Â Two (2) years.
- Execution:Â E-signature or e-consents can be used.
- Payment Deferment:Â You will not have to make any payments for six (6) months following the date of disbursement of the loan.Â However, interest will continue to accrue on PPP loans during this six (6) month deferment.
- Collateral:Â No collateral will be required.
- Guaranty: No personal guarantees will be required.
PPP Loan Application:
- The applicant must submit SBA Form 2483 (Paycheck Protection Program Application Form) and any Payroll Cost documentation requested by the bank.
- SBA will allow the banks to rely on certifications of the applicant in order to determine eligibility of the applicant and use of loan proceeds and to rely on specified documents provided by the applicant to determine qualifying loan amount and eligibility for loan forgiveness.
- On the PPP application, an authorized representative of the applicant must certify in good faith to all of the below:
- The applicant (i) was in operation on February 15, 2020 and (ii) had employees for whom it paid salaries and payroll taxes or paid independent contractors, as reported on a Form 1099-MISC, prior to February 15, 2020.
- Current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.
- The funds will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments; Applicant understands that if the funds are knowingly used for unauthorized purposes, the federal government may hold applicant legally liable such as for charges of fraud.Â Not more than 25% of loan proceeds may be used for non-payroll costs.
- Documentation verifying the number of full-time equivalent employees on payroll as well as the dollar amounts of payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities for the eight (8) week period following the loan will be provided to the lender.
- Loan forgiveness will be provided for the sum of documented payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities. Not more than 25% of the forgiven amount may be for non-payroll costs.
- During the period beginning on February 15, 2020 and ending on December 31, 2020, the applicant has not and will not receive another loan under the PPP program.
- Applicant further certifies that the information provided in the application and the information provided in all supporting documents and forms is true and accurate in all material respects. Applicant understands that knowingly making a false statement to obtain a guaranteed loan from SBA is punishable under the law, including under 18 USC 1001 and 3571 by imprisonment of not more than five (5) years and/or a fine of up to $250,000; under 15 USC 645 by imprisonment of not more than two (2) years and/or a fine of not more than $5,000; and, if submitted to a federally insured institution, under 18 USC 1014 by imprisonment of not more than thirty (30) years and/or a fine of not more than $1,000,000.
- Applicant acknowledges that the lender will confirm the eligible loan amount using tax documents applicant has submitted.Â Applicant affirms that these tax documents are identical to those submitted to the Internal Revenue Service. Applicant also understands, acknowledges, and agrees that the lender can share the tax information with SBAâ€™s authorized representatives, including authorized representatives of the SBA Office of Inspector General, for the purpose of compliance with SBA Loan Program Requirements and all SBA reviews.
- Banks that comply with the PPP will be held harmless for an applicantâ€™s failure to comply with program criteria.
PPP Loan Forgiveness:
- Principal and interest can be forgiven. The borrower will not be responsible for any loan payment if the borrower uses all of the loan proceeds for forgivable purposes described below and employee number and compensation levels are maintained.
- The actual amount of loan forgiveness will depend, in part, on (i) total amount of payroll, (ii) payments of interest on mortgage obligations incurred before February 15, 2020, (iii) payments of rent on leases dated before February 15, 2020, and (iv) payments for utilities under service agreements dated before February 15, 2020, over the eight (8) week period immediately following the date of the loan.
- At least 75% of the loan amount must be spent on payroll.
- The SBA has determined that 75% is the appropriate percentage in light of the focus on keeping workers paid and employed.
- If less than 75% of the loan is spent on payroll, then the amount eligible for forgiveness will be reduced. However, the SBA has not yet issued a ruling on how the amount eligible for forgiveness will be reduced.
- Payments to independent contractors do not count as payroll for purposes of PPP loan forgiveness. Independent contractors have the ability to apply for a PPP loan on their own so they do not count for purposes of a borrowerâ€™s PPP loan forgiveness.
- Up to 25% of the loan amount may be spent on rent, utilities, and applicable interest.
- If more than 25% of the loan amount is spent on non-payroll, then the amount eligible for forgiveness will be reduced.Â However, the SBA has not yet issued a ruling on how the amount eligible for forgiveness will be reduced.
Use of PPP Loans:
- The proceeds of a PPP loan can be used 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;
- Rent payments;
- Utility payments
- Mortgage interest payments (but not mortgage prepayments or principal payments);
- Interest payments on any other debt obligations that were incurred before February 15, 2020; and
- Refinancing an SBA EIDL loan made between January 31, 2020 and April 3, 2020.Â If you received an SBA EIDL loan from January 31, 2020 through April 3, 2020, you can apply for a PPP loan.Â If your EIDL loan was not used for payroll costs, it does not affect your eligibility for a PPP loan.Â If your EIDL loan was used for payroll costs, your PPP loan must be used to refinance your EIDL loan.Â Proceeds from any advance up to $10,000 on the EIDL loan will be deducted from the loan forgiveness amount on the PPP loan.
- In the event PPP loan funds are misused:
- SBA will direct the borrower to repay those amounts.
- The borrower may be subject to additional liability such as charges for fraud.
- If one of borrowerâ€™s shareholders, members, or partners uses PPP funds for unauthorized purposes, the SBA will have recourse against the shareholder, member, or partner at issue for the unauthorized use of loan funds.
There is a lot of information for you to consider.Â We are available to answer your questions and to assist you in any way we can.Â Please give us a call at (504) 831-4091 or e-mail us.
Best regards and stay safe!
Blue Williams, LLC
DantÃ© V. Maraldo
Gregory S. LaCour
Craig R. Watson
Nicholas P. Arnold
Christopher M. Hatcher
April L. Watson
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