On March 27, 2020 the U.S. federal government signed the CARES Act into law—a big coronavirus relief bill aimed at supporting small businesses through this difficult time.

One of the measures in the bill is the Paycheck Protection Program—here’s everything you need to know.

Further reading: The Coronavirus Relief Bill—Every Benefit for Small Businesses

What is the Paycheck Protection Program?

The Paycheck Protection Program is part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. This is a nearly $350-billion program intended to provide American small businesses with eight weeks of cash-flow assistance through 100 percent federally guaranteed loans. You can read the bill in its entirety here.

Program highlights

  • All small businesses are eligible

  • The loan has a maturity rate of 2 years and an interest rate of 1%

  • No need to make loan payments for the first six months

  • No collateral or personal guarantees required

  • No fees

  • The loan covers expenses for eight weeks starting from the loan origination date (if the obligations began before February 15, 2020)

  • The loan can be forgiven and essentially turn into a non-taxable grant

Do I qualify for the program?

Likely yes! This program is more extensive than the SBA disaster loan. Small businesses, sole proprietorships, independent contractors, and self-employed individuals can all qualify.

  • Sole proprietorships will need to submit schedules from their tax return filed (or to be filed) showing income and expenses from the sole proprietorship.

  • Independent contractors will need to submit Form 1099-MISC.

  • Self-employed individuals will need to submit payroll tax filings reported to the Internal Revenue Service.

Further reading: Self-Employment and the Paycheck Protection Program

What can I use the funds for?

75 percent of the PPP loan is supposed to be used to fund payroll and employee benefits costs.

The remaining 25 percent can be spent on:

  • Mortgage interest payments

  • Rent and lease payments

  • Utilities

If you stick to these guidelines, you’ll be able to have 100% of the loan forgiven (effectively turning it into a tax-free grant).

Tip: Create a new, separate bank account to hold the funding so it’s easier to keep track of these expenses when you’re preparing to apply for loan forgiveness.

What counts as “payroll costs”?

Payroll costs under the PPP program include:

  • Salary, wages, commissions, or tips (capped at $100,000 on an annualized basis for each employee)

  • Employee benefits including 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 on an annualized basis for each employee.

In other words, most payroll costs are covered. However, the following scenarios are not covered:

  • Payments made to independent contractors

  • S corps and C corps owners who aren’t on payroll (shareholders distributions don’t count as payroll under this program)

The $100,000 salary cap

As mentioned above, payroll expenses are capped for individuals earning over $100,000.

If you or any employees had an annual salary over $100,000 in 2019, you can only claim $100,000 (and nothing above it). So if an employee makes $120,000, you would subtract $20,000 from their salary for the purpose of the PPP. This would give you $8,333.33 as a monthly average payroll ($100,000 divided by 12).

If you are a sole proprietor or independent contractor without payroll and your net profit was over $100,000 in 2019, this will also be capped at $100,000. You would divide this by 12 to get $8,333.33 as your monthly average payroll.

How much funding can I receive?

The maximum amount you can receive from your SBA-approved lender is your monthly average payroll cost in 2019, multiplied by 2.5, up to a maximum of $10 million.

If you are a seasonal employer, the monthly average cost will be calculated differently. The lender will use a 12-week period beginning either February 15, 2019 or March 1, 2019, and ending June 30, 2019.

If your business did not exist before June 30, 2019, the lender will look at your costs in January and February 2020.

Here’s a full rundown on how to calculate your PPP loan amount.

How do I apply?

The SBA itself doesn’t lend you the money, they just “back” the loan that the lender provides. Lendflow works directly with SBA-backed lenders and banks to process your PPP application.

Sole proprietorships can apply starting April 3. Independent contractors and self-employed individuals can apply starting April 10. You are encouraged to apply early as there is a funding cap for this program. You have until June 30 to submit an application.

As part of your application, you’ll be asked to verify:

  • Current economic uncertainty makes the loan necessary to support your ongoing operations.

  • The funds will be used to retain workers and maintain payroll or to make mortgage, lease, and utility payments.

  • You have not and will not receive another loan under this program.

  • You will provide to the lender documentation that verifies the number of full-time equivalent employees on payroll and the dollar amounts of payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities for the eight weeks after getting this loan.

  • You acknowledge that the lender will calculate the eligible loan amount using the tax documents you submitted. You affirm that the tax documents are identical to those you submitted to the IRS.

Here is the Paycheck Protection application form, which shows information you’ll need to provide.

Financial documentation you’ll need

You’ll need to provide payroll/bookkeeping records to prove your payroll expenses.

That could include:

  • Payroll processor records

  • Payroll tax filings

  • Payroll tax forms from 2019 (Forms 941, 940 and W-3)

  • Form 1099-MISC records

  • Income and expenses from a sole proprietorship

If you don’t have access to those kinds of documents, you can also provide bank records.

How can I get my loan forgiven?

In the 8 weeks following your loan signing date, all expenses related to the following can be forgiven:

  • Payroll—salary, wage, vacation, parental, family, medical, or sick leave, health benefits

  • Mortgage interest—as long as the mortgage was signed before February 15, 2020

  • Rent—as long as the lease agreement was in effect before February 15, 2020

  • Utilities—as long as service began before February 15, 2020

You’ll 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 loan on payroll in order to qualify for loan forgiveness.

The lender must make a decision within 60 days of your forgiveness application submission.

What are the conditions for loan forgiveness?

The purpose of the Paycheck Protection Program is to, well, protect paychecks. You must commit to maintaining an average monthly number of full-time equivalent employees equal or above the average monthly number of full-time equivalent employees during the previous 1-year period. And you must spend 75% of the loan funds on payroll.

The amount that can be forgiven will be reduced…

  • In proportion to any reduction in the number of employees retained.

  • If any wages were reduced by more than 25%.

If you rehire employees that were previously laid off at the beginning of the period, or restore any decreases in wage or salary that were made at the beginning of the period, you will not be penalized for having a reduction in employees or wages, as long as you do this by June 30, 2020.

Note: These guidelines are based on the official 880-page bill. The SBA has been given 30 days to issue official guidance regarding loan forgiveness. We’ll share updates as soon as we learn of them.

How does this differ from the SBA disaster loan?

The SBA also offers a Economic Injury Disaster Loan (EIDL)—oftened shortened to just SBA disaster loan. This is a separate, but similar, initiative. Here’s how they differ:

  • No personal or business collateral is required. The SBA disaster loan may require collateral for loan amounts over $25,000.

  • It’s ok if you also have access to credit elsewhere. To receive a SBA disaster loan you generally need to have no other source of credit.

  • The funding covers a more restrictive set of purposes (details below). The SBA disaster loan can cover most operating expenses.

  • Your loan can be forgiven if you follow the terms. The SBA disaster loan requires repayment.

How is this similar to the SBA disaster loan?

  • You need to declare (in good faith) that the uncertainty of current economic conditions makes the loan necessary for your business.

  • It’s free to apply.

  • You have an extended deferment period (6-12 months, depending on your lender) before you begin repayment.

  • There is no prepayment penalty.

Can I apply for paycheck protection and an SBA disaster loan?

Yes, you can. However, you can’t apply for an SBA disaster loan for the same purpose as the Paycheck Protection Program. That being said, when you apply for the SBA disaster loan, you can also request a $10,000 emergency grant, interest-free. If approved, the SBA will provide the grant within three days. You can apply for the loan and grant here.

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