The Paycheck Protection Program (PPP), which was created by the Coronavirus, Aid, Relief, and Economic Security (CARES) Act, ran out of its initial funding of roughly $349 billion just a few days after the program launched on April 3. Last week, Congress approved another $310 billion for PPP loans.
The fresh funding means many small-business owners will have a second chance at getting a PPP loan that could help them keep their companies afloat. Businesses will be able to apply for PPP loans again starting on April 27.
Uncertainty and confusion have surrounded the PPP since its launch–especially with respect to eligibility, payroll costs, and debt forgiveness. Hopefully, the answers below to common question about the PPP loans will help small business owners who are seeking financial support right now. The country needs our small businesses to bounce back as quickly as possible, and PPP loans are a big part of the plan to make that happen.
Eligibility Based on Size of the Business
Question: Are small businesses required to have 500 or fewer employees to be eligible for PPP loans?
Answer: No. The Small Business Administration (SBA) says businesses can be eligible for PPP loans even if they have more than 500 employees. For example, a business with more than 500 workers can qualify if it meets the SBA employee-based or revenue-based size standard corresponding to its primary industry.
A business can also qualify for a PPP loan as a small business if it met both tests in the SBA’s “alternative size standard” as of March 27, 2020:
— The maximum tangible net worth of the business is not more than $15 million; and
— The average net income after federal income taxes (excluding any carry-over losses) of the business for the two full fiscal years before the date of the application is not more than $5 million.
Annual Compensation Over $100,000
Question: The CARES Act excludes annual employee compensation in excess of $100,000 from the definition of payroll costs. Does that exclusion apply to all employee benefits of monetary value?
Answer: No. The exclusion of annual compensation in excess of $100,000 applies only to cash compensation, not to non-cash benefits, such as employer contributions to retirement plans.
Question: Do PPP loans cover paid sick leave?
Answer: Yes. PPP loans cover payroll costs, including costs for employee vacation, parental, family, medical and sick leave. But sick and family leave wages are excluded for which a credit is allowed under certain sections of the Families First Coronavirus Response Act.
Payroll Cost Exclusions
Question: Is there anything that is expressly excluded from the definition of payroll costs?
Answer: The CARES Act excludes the following:
— Compensation of an employee whose principal place of residence is outside the U.S.;
— Compensation of an individual employee exceeding $100,000 for the year; and
— Federal employment taxes imposed or withheld between February 15, 2020, and June 30, 2020.
Payments to Independent Contractors or Sole Proprietors
Question: Should payments that an eligible borrower made to an independent contractor or sole proprietor be included in calculations of the borrower’s payroll costs?
Answer: No. Amounts paid to an independent contractor or sole proprietor should be excluded. However, an independent contractor or sole proprietor is eligible for a PPP loan if he or she satisfies the applicable requirements.
Start of Eight-Week Period
Question: How much of a PPP loan that is forgiven depends on the borrower’s payroll costs over an eight-week period. When does that eight-week period begin?
Answer: The eight-week period begins on the date the lender makes the first disbursement of the PPP loan.
Question: Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?
Answer: Probably not. Borrowers must certify in good faith that their PPP loan request is necessary to support their ongoing operations, taking into consideration their current business activity and their ability to tap other sources of funding. According to the SBA, “it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith.”
Question: Is a seasonal business that was not fully ramped up on February 15, 2020, still eligible for a PPP loan?
Answer: Yes. The SBA says that in evaluating a borrower’s eligibility, a lender may consider whether a seasonal business was in operation on February 15, 2020, or for an eight-week period between February 15, 2019, and June 30, 2019.
(Article written by Rodrigo Sermeno)