CARES Act: Payroll Protection Program
In between watching episodes of Tiger King this past weekend, you may have read or heard about the new stimulus bill that was passed on March 27th, 2020. This bill is being called the CARES Act and it stands for the Coronavirus Aid Relief & Economic Security Act. There are many components to this bill, but if you're a business owner, you've probably heard about the Paycheck Protection Program. This is a potentially forgivable loan program offered to small businesses through the Small Business Administration to support with payroll costs, along with some other operating expenses, through this time of economic uncertainty.
So who qualifies for this program?
Like with any bill, there are exceptions, but this primarily applies to businesses with fewer than 500 employees, and that includes Sole Proprietorships, Self-Employed individuals, and even Independent Contractors. In order to qualify, you do have to make a Good Faith certification indicating that this loan is necessary for your business due to the negative economic impact caused by COVID-19. The question that everybody wants to know is:
How much is my business qualified to receive?
Your business may be eligible for up to 2.5 times the average monthly payroll costs of your business from 2019; however, in making that calculation, you have to exclude annual compensation that exceeded $100,000. There is also a limit on how much you can receive: $10,000,000. Now, you would have to have an enormous amount of payroll costs in order to get that amount, but that's the cap.
To get an idea for how much your business might qualify for, take your average monthly payroll costs, eliminate compensation over $100,000, and multiply it times 2.5. So let's say your average monthly payroll cost was $100,000 a month 2019, you may be eligible for $250,000. This was designed to get businesses through the next three months—essentially through the end of June 2020. Although the amount that your business qualifies for is based on payroll costs, what you can use the loan for is actually more than payroll costs.
What can the money be used for?
Money received under the Payroll Protection Program can be used for things like rent, mortgage, interest utilities and even business interests that was incurred before February 15th, 2020. Believe it or not, this loan can actually be forgiven! The amount of the loan that can be forgiven is the amount that was spent in the first 8 weeks of receiving the loan, IF that money was spent on payroll costs, rent, utilities, or group health insurance premiums.
Another requirement for the loan to be forgiven: you have to maintain the same number of employees between February 15th, 2020 - June 30th, 2020 as you did between, February 15th, 2019 and June 30th 2019. Essentially, you have to maintain the same number of employees as you did last year at this time. Or, you can also use the time period from January 1st, 2020 to February 15th, 2020. So for not laying off people, your business is rewarded with a forgiven loan.
One more requirement: in order for this loan to be forgiven, for those employees that are compensated less than $100,000, their pay cannot be cut by more than 25%. And in case you're wondering, this forgiven debt does NOT count as income towards your business! If for some reason you're not able to maintain those requirements, the amount you receive will remain a loan, paid over a two-year period, at no more than 4% interest—which is crazy for a business loan! Also, if it does remain a loan, you can actually defer the first payment for up to 6 to 12 months. So even if it remains alone, it's still a great deal! So now you're probably wondering:
How do I get this for my business?
You will need to apply directly with your bank, or at a SBA-participating bank. Most banks will be offering this soon, but start with your current bank. You can call or email your bank and ask them if they have a loan officer who handles SBA loans or if they are participating in the Paycheck Protection Program.
As of right now, you cannot apply to the Paycheck Protection Program online. If you go to the SBA website, you will see an application for an Economic Injury Disaster Loan (EIDL). This is separate from the Paycheck Protection Program (PPP). Under the CARES Act, their were some expansion made to EIDL, but that is separate from the PPP. The application process is different and anything received under the EIDL will be applied as an advance against the PPP Loan. You can apply for the EIDL online, but you have to actually apply with a bank for the PPP Loan.
So what does this application process can look like?
You can find the application for the Payroll Protection Program here: https://www.sba.gov/document/sba-form--paycheck-protection-program-borrower-application-form
This program is first come, first serve. So once the $349 billion budget cap has been reached, we don't know what's going to happen. They may extend the budget limit or stop providing loans. In the meantime, start contacting local banks and start pulling important documents together, stay informed, and stay healthy.