By now we’ve all heard about the sweeping aid provided in the Coronavirus Aid, Relief and Economic Security (CARES) Act. The highlights of the CARES Act that initially garnered the most press and attention were the overall amount of aid provided ($2 Trillion – yes Trillion, with a “T”) and the direct assistance that would be provided to qualifying individuals ($1,200 to adults and $500 for children). But of greater significance to the small business community is the aid provided by way of the Paycheck Protection Program (PPP).
The purpose of the Paycheck Protection Program is to encourage small businesses to retain and continue to employ their employees. The PPP incentivizes small businesses to maintain their employees by providing loans to employers which may be used for “payroll costs”, which is broadly defined to include salaries, paid sick or medical leave, insurance premiums, mortgage, rent and utility costs. Simply having a loan available is a good start, and certainly is a valuable asset to a small business. However, the PPP doesn’t stop there. The icing on the cake, if you will, is that the loans made under the PPP may be forgiven if the employer maintains its payroll during the current financial crisis or restores its payroll afterwards.
It is expected that lenders will begin taking loan applications as early as April 3, 2020. Details regarding how loans made under the PPP will be administered are still being worked out. Fortunately, many key details about the PPP are known at this time and permit the potential applicants to weigh their options.
Crucial PPP terms to consider:
Who is eligible for PPP Loans?
- Businesses (including 501(c)(3) non-profits) that were in operation on February 15, 2020 and have fewer than 500 employees
- Those who operate as a sole proprietorship, independent contractor or self-employed individuals are also eligible
- Applicants are required to make a good-faith certification that the loan is necessary due to the uncertainty of current economic conditions caused by COVID-19
How is loan size determined?
- The maximum loan size is $10 million
- For a business in existence in 2019, the maximum loan is equal to 250% of the business’s average monthly payroll costs in that time. For businesses not in existence in 2019, the average monthly payroll cost for January and February 2020 is used for calculation purposes, and the maximum loan is 250% of that average.
What costs are considered payroll costs?
- Compensation including salary, wages, commissions, or similar compensation, payment of cash tip or equivalent
- Payment for vacation, parental, family, medical, or sick leave
- Allowance for dismissal or separation
- Payment required for the provisions of group health care benefits, including insurance premiums
- Any payment of retirement benefit
- Payment of State or local tax assessed on the compensation of employees
What costs are not considered payroll costs?
- Most commonly, compensation payments made to an employee earning more than $100,000 annually
What may loan proceeds 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
- Employee salaries, commissions, or similar compensations
- Payments of interest on any mortgage obligation
- Interest on any other debt obligations that were incurred before the covered period
How is the forgiveness amount calculated?
Forgiveness is equal to the amount the borrower spent on the following items during the 8-week period beginning on the date of the origination of the loan:
- Payroll costs (using the same definition of payroll costs used to determine loan eligibility)
- Interest on the mortgage obligation incurred in the ordinary course of business
- Rent on a lease agreement
- Payments on utilities (electricity, gas, water, transportation, telephone, or internet)
- Loan forgiveness is limited if there is a reduction in the number of employees or a reduction of greater than 25% of wages.
Anyone considering whether to apply for a PPP loan or any other relief under the CARES would be well-advised to discuss their options with their trusted accountant and attorney. As has been done throughout our long history, the attorneys at Churchill, Quinn, Richtman & Hamilton, Ltd. continue to serve our clients and the community at large. Contact our office at 847-223-1500 to put our expertise and experience to work for you.
For additional information on the PPP, click HERE