The Next Phase: The CARES Act Paycheck Protection Program

PPP Loan

By Alan R. Sasserath, CPA, MS

It’s been almost a week since our last email and a lot has changed in that time frame. The biggest change was that President Trump signed the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) into law on Friday. There are a myriad of tax changes and economic stimulus provisions in addition to unemployment, health care, health system as well as other stimulus and stabilization provisions.

While I said above that a lot has changed, a lot hasn’t. In our previous emails, we stressed that cash flow is critical right now for all businesses, especially small businesses. We are still at the point where it is the most critical issue and will continue to be the most critical issue for at least the short term. In our estimation, the most significant business provision in the CARES Act is the Paycheck Protection Program (“PPP”) which falls under the U.S. Small Business Administration’s (“SBA”) 7(a) loan program.

Because it is so significant from the cash flow perspective, we have spent the better part of the last few days analyzing the PPP. The tax and other cash flow provisions in the CARES Act are important and we expect to take a deeper dive into those this week; however, they don’t come close to comparing to the cash flow significance of the PPP.

The most significant provision of the PPP is the provision that it is a loan that can be forgiven under certain circumstances.

Here is a high-level overview of the PPP:

  • It generally applies to businesses with fewer than 500 employees.
  • The amount of the loan is the lesser of (1) the average monthly payroll (salary, wage, commission, tips, vacation, group health benefits, certain other payments, etc.…) up to $100,000 on an annualized basis per employee/payee for the 12 months preceding the date of the loan multiplied by 2.5 plus the balance of any pre-existing emergency loan, or (2) $10,000,000.
  • The loan proceeds may only be used for payroll as defined above, interest on any mortgage obligation, rent, utilities and interest on any other debt obligations that were in place before February 15, 2020 (“Covered”).
  • In evaluating the eligibility of a borrower, the lender shall consider whether the borrower was in operation on February 15, 2020; had employees; or paid independent contractors as reported on Form 1099-MISC.
  • No personal guarantee requirement.
  • No collateral requirement.
  • Forgiveness: The amount that can be forgiven include the amounts paid by the borrower during the 8-week period following the loan origination date for:
    • Covered payroll costs – Generally including payroll as defined above up to $100,000 per employee/payee on an annualized basis. In other words, the amount of loan forgiveness available is limited to $1,923.07 per week or $15,384.56 over an 8-week period per employee.
    • Interest on a “Covered” mortgage obligation.
    • “Covered” rent obligation.
    • “Covered” utility obligation.
    • Any amount not forgiven will become a term loan for up to 10 years with a maximum interest rate of 4%.

The loan forgiveness can be reduced either based on a reduction in employees or a reduction in salaries of certain employees if their salaries are less than $100,000 on an annualized basis.

Even if you have laid people off, you are still entitled to the loan based on prior year payroll.  If you lay people off during the period February 15, 2020 – April 26, 2020 and hire them back by June 30, 2020, then you will not be penalized as discussed in the paragraph above. Remember, even if you are penalized, the penalty is that the term loan remains in effect and is not forgiven. Please note that the penalties related to the forgiveness of the loan is a complicated area of this program and beyond the scope of this writing.

We are suggesting that everyone should analyze this loan as it pertains to their circumstance. If you aren’t sure, take it. There is no penalty to prepay it.

It is going to take a little while for the banks to gear up to be able to make these loans. We don’t know how long. As of Friday, one banker mentioned that they were waiting from the SBA for guidelines. Treasury Secretary Mnuchin said that he wants loans to start by Friday. We’ll see.

With the program’s dependence on banking relationships, those businesses who lacked strong relationships prior to the coronavirus pandemic may get left behind if they don’t act quickly. We can help you with this. In the meantime, if you do have a banking relationship, call your bank and make sure they know you are on top of this and want it as soon as it is available.

Attached is a spreadsheet to assist in the calculation of the amount of the loan. Please call us if you need assistance and we will walk you through it. If there is enough demand, we will hold a webinar to explain the workbook and how to use it. Please let us know if you are interested.

It’s the start of a new week, and we are now one week closer to getting through this ordeal. Keep moving forward. Look at the shovel, don’t look at the mountain.

Thank you for your time. Click here to download the workbook