A Quick Look at the Paycheck Protection Program

Small businesses are still surviving, months after the United States government signed the CARES Act into law and introduced the Paycheck Protection Program, a nearly $650 billion loan program. The program’s purpose is to provide business owners with eight weeks of cash-flow assistance through 100 percent federally guaranteed loans.

All small businesses are eligible for the loan. It has a maturity rate of 2 years and an interest rate of 1%. There is no need to make payments until after six months. No fees are necessary, nor are collateral or personal guarantees. The loan only applies to obligations that began before February 15th and originally covered expenses for eight weeks, but this now has been extended to twenty-four weeks or December 31, 2020, whichever occurs first.

The Small Business Administration has offered similar disaster loans, but not as extensive, with small businesses, sole proprietorships, independent contractors and self-employed individuals able to qualify. Certain businesses must follow different procedures. For example, if you are self-employed, you must submit your payroll tax filings to the Internal Revenue Service. Sole proprietorships and independent contractors will have to submit certain forms from their tax returns.

The primary purpose of the loan is to fund payroll and employee benefits costs. The remainder can be spent on mortgage interest payments, rent and lease payments and utilities. If businesses follow these guidelines, 100% of the loan can be forgiven. If they fail to do so, they can face charges of fraud. The ratio was initially 75% payroll costs and 25% for mortgage interest, rent and utilities, but this ratio has now been changed to 60% and 40% respectively to make it easier for small businesses to comply with the law.

Payroll costs are clearly defined under the PPP program. They do not include payments made to independent contractors. However, they do include salary, wages, commissions, or tips with a cap of $100,000 per year. The program pays for 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.

Of course, there are clearly defined parameters. The specific formula for determining the maximum amount a business can receive is its monthly average payroll cost in 2019, multiplied by 2.5, with a ceiling of $10 million.  Seasonal employers base their monthly average on a 12-week period beginning either February 15, 2019 or March 1, 2019 and ending June 30, 2019.

A terrific resource for calculating your PPP loan amount can be found here.

All measures being taken by the federal government to protect small business owners are still in flux. It is imperative that we not only adhere to public health policy, but figure out how best to ensure our clients’ financial health as well. Rest assured that attorneys, who are business owners themselves, are monitoring developments as closely as any other.