If you are one of fortunate applicants who has received approval and funding for a Paycheck Protection Program (PPP) loan, then chances are you are interested in the criteria and process for forgiveness of some or all of the PPP funds you received. For most applicants, this feature was the essential benefit that distinguishes a PPP loan from the Economic Injury Disaster Loan (EIDL), otherwise known as an SBA disaster loan. Although these loans have some similarities, unlike PPP loans, EIDLs require repayment, as well as a showing that no other credit source was available to the borrower. Collateral may also be required to receive an EIDL if the amount requested is more than $25,000. However, unlike the PPP, an EIDL is expressly intended to provide “working capital,” which appears to allow the use of the proceeds to cover most operating expenses. This flexibility may prove more advantageous for some borrowers.
The CARES Act is intended to provide immediate assistance to individuals, families, and businesses affected by the COVID-19 pandemic. Among the provisions contained in the CARES Act are provisions authorizing SBA to temporarily guarantee loans under a new 7(a) loan program titled the “Paycheck Protection Program.” In general, a business is eligible for a PPP loan if it has 500 or fewer employees whose principal place of residence is in the United States, or is a business that operates in a certain industry and meets the applicable SBA employee-based size standards for that industry; and the other eligibility criteria are satisfied, including the requirement that the business was in operation on February 15, 2020 and paid compensation to W-2 employees or certain independent contractors whose compensation was reported on a Form 1099-MISC. Under the PPP, the maximum loan amount is the lesser of $10 million or 2.5 times the aggregate payroll costs from the last twelve months, capped at $100,000 of compensation per employee.
Broadly speaking, a PPP loan will be forgiven to the extent the funds are used for qualified expenses, within the first eight weeks of the loan signing date. Based on current guidance from the SBA, you must use at least 75% of the PPP loan for payroll and employee benefits costs, while the remaining 25% can also be used to pay for mortgage interest (but not principal), rent, and utilities. Mortgage interest, rent, and utilities must have been in place or service before February 15, 2020 to be eligible for forgiveness.
Employee salaries, wages and benefits, such as health and medical, paid time off for vacation or sick leave, and certain employment taxes qualify. In certain situations, payments to sole proprietors, partners or LLC members may qualify. Eligibility and guidance on PPP for self-employed persons came out in mid-April, which was a couple of weeks after the program’s launch, so it is likely that many PPP borrowers applied for and received (or will receive) PPP loans based on applications that did not include self-employment income. Based on revised guidance issued by the SBA on April 14, 2020, compensation from self-employment (i.e., Schedule C income) paid to certain shareholders, LLC members and partners may, under certain circumstances, be considered payroll for purposes of loan eligibility and forgiveness, subject to the $100,000 cap applicable to compensation paid to employees.
Regardless of how the funds are used, it will be important to keep accurate and detailed books and records. Equally important, you will need to maintain or increase the average monthly number of full-time equivalent employees, as compared to the average number during the previous 1-year period. If you reduce your number of employees, or you reduce wages by more than 25%, then the amount of your loan forgiveness will be reduced proportionally. But if you have previously laid off employees or reduced wages, you can rehire employees or restore wages before June 30, 2020 to avoid a reduction in the amount that will be forgiven.
If you have questions about the Paycheck Protection Program or the SBA disaster loan program, please contact Eric Stoll or David Petteys at (206) 456-6697, or via email at firstname.lastname@example.org.
Disclaimer: this article is for informational purposes only and is not intended to constitute legal advice. Your receipt of this update and/or use of the information presented herein does not create an attorney-client relationship between the recipient or user and our firm or any of its attorneys. We strongly recommend seeking the advice of a qualified attorney to address these and any other legal issues or concerns. Thank you.