The Payroll Protection Plan
The CARES Act was signed into law on March 27, 2020 making provisions for payroll protection that supports small businesses in keeping their employees on and paid during the COVID-19 pandemic. This provision provides $345 billion dollars in relief funds to small businesses who qualify for these forgivable loans.
What Is the Payroll Protection Plan?
This is essentially a loan program targeted at small businesses hit hard by the coronavirus pandemic. The loan program stems out of the Coronavirus Aid, Relief and Economic Security (CARES) Act which is a multi-billion dollar project intended to provide American small businesses with eight weeks of cash flow assistance through loans that are 100 percent guaranteed by the federal government. The Small Business Administration (SBA) backs the loans (1).
This is a two year fully forgivable loan at 1% interest rate and the maximum amount loaned is 10 million dollars based on business done between January 1 and February 29, 2020.
Who Is Eligible?
You must be able to certify that the current economic uncertainty makes the loan request necessary and have 500 or fewer employees. You must be able to attest that the coronavirus has negatively impacted your business (2), something most will have no trouble doing.
Eligibility is further broken down into any business categorized as “Accommodation or Food Services” that have 500 or fewer employees; tribal businesses; independently owned franchises; and self-employed workers, independent contractors, gig workers and sole proprietors.
Where to Apply?
An eligible entity may apply at any of the 1800 participating SBA approved lenders or through any participating federally insured institution, credit union and Farm Credit System institution (2).
You can start by contacting your local lender and seeing if they participate. If you have trouble locating a lender, try using the SBA Paycheck Protection Program lender search tool.
How to Apply for a PPP
Applications are being accepted now until June 30, 2020 when the program ends. Start by downloading and filling out the form on the small business administration site.
All claimed payroll expenses must be incurred before February 15, 2020 to be eligible for consideration. In other words, an employee has to be hired and working before February 15 to have their payroll counted.
All or part of the loan could be forgiven if you keep or rehire all employees on payroll in 2019 by June 30, 2020. Only 25% of the amount forgiven can be used for non-payroll expenses such as rent, mortgage interest or utilities.
How to Figure Payroll Expenses
Figure in salary, wages, commissions, tips, health insurance and state and local taxes. Benefits including vacation, parental, family and medical or sick leave should also be part of the computation. What you pay independent contractors does not count since they can apply for their own loan (2).
Salaries are capped at $100,000 on an annualized basis for each employee.
What Can the Funds Be Used For?
- 75% should be used for payroll expenses
- 25% can be used for rent, mortgage interest, lease payments, utilities
How Much Funding Should I Expect?
The maximum amount you can receive from an SBA approved lender is your monthly average in payroll in 2019 times 2.5 (up to ten million). For sole proprietors, net profit is used.
Financial Documentation Needed
You will need to provide the documentation of payroll which may include (2):
• Payroll 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 applicable (Schedule C, etc.)
• Bank statements are allowable
How Do I Get My Loan Forgiven?
In the 8 weeks following your loan signing date, all expenses related to payroll, mortgage interest, rent and utilities can be forgiven if the guidelines are met.
You will need to keep your records up to date showing accurate documentations to prove your expenses during your loan period proving that the guidelines of spending 75% of the loan on payroll expenses and 25% on nonpayroll expenses were met. The lender must decide within 60 days of your forgiveness application submission.
The purpose of the payroll protection act is to protect payrolls. The SBA wants to be assured that you are committed to maintaining the same number of full-time employees on payroll that you had in 2019 and that you will spend 75% of the money on payroll expenses.
These funds are available on a first-come first-serve basis, so it is to your benefit to file as soon as possible for these benefits (3).