By Jennifer Mailhes, Business Advisory Shareholder

The Coronavirus Aid, Relief and Economic Security Act (CARES Act) introduced several areas of financial assistance and relief for business owners, but one of the more hyped provisions included is the loan forgiveness outlined under the Small Business Administration (SBA) Paycheck Protection Program (PPP).

Most lenders began accepting applications from companies classified as small businesses or sole proprietors on Friday, April 3, 2020 (independent contractors may begin applying on Friday, April 10, 2020), and within a couple of days, some banks had reached their lending capacity under the program. As a result, some lenders are either no longer accepting applications and most are only accepting them from current clients due to the demand.

With the $349 billion allocated to support this program expected to be reached very quickly, organizations seeking financial assistance via the PPP should act now before it’s too late. Gain more insight on the PPP, including how to get started, the loan calculation and amount that may be forgiven, and what to have prepared before you begin the application process.

About the Loan

Designed to provide a direct incentive for small businesses to keep their workers on the payroll, the PPP has a feature that is likely to make the loans forgivable if all employees are kept on the payroll for eight weeks and the money is used for payroll, rent, mortgage interest or utilities.

To qualify, an organization must have fewer than 500 employees and have been affected by COVID-19. There are some exceptions for businesses based on their ownership structure or within certain industries that may have more than 500 employees, such as those in the hospitality and food industries.  There are also considerations if an organization has investors and how other holdings are handled through the affiliate rules. Organizations may also qualify if they meet previously existing SBA definitions of a “small business concern”; however, that can be more complicated than being below the 500-employee threshold.

Additionally, the loan has a maturity of two years and an interest rate of 1%. SBA fees will also be waived and there is deferment of payments for six months.

Keep in mind, if you accept a payroll protection loan, employers will not be able to take advantage of the employee retention payroll tax credits and the payroll tax deferral provided in the CARES Act. We strongly advise you to work with a trusted advisor, like those at Doeren Mayhew, to discuss the process in more detail and clarify other areas that may impact your ability to obtain the loan.

Loan Calculation

The PPP loan amount is calculated as follows:

Average Monthly Payroll costs (from the previous 12 months or calendar year 2019) X 2.5 

There is a cap of $10 million. Additionally, there are different time periods that can be used for seasonal or new businesses.

Most of the confusion on the application has been surrounding the “payroll costs” definition. Payroll costs include:

Interim Final Rule Explanation
Salary, wages, commissions or similar compensation Gross wages. Guaranteed payments made through partnerships to active partners does count towards the gross wages.
Cash tips or the equivalent Based on past records or a reasonable good-faith estimate in the absence of records
Payments for vacation, parental, family, medical or sick leave, allowance for separation or dismissal Amounts typically included in gross wages
Payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums and retirement The employer cost of these benefits
Payment of state and local taxes assessed on compensation of employees Organization’s SUTA payments

Employers cannot include the following in their payroll costs:

  • Federal payroll taxes
  • Compensation of an employee whose principal place of residence is outside the United States
  • Qualified sick and family leave wages for which a credit is allowed under the Families First Coronavirus Response Act
  • Payments to independent contractors (there was some confusion surrounding independent contractor payments by businesses due to early articles written about the CARES Act bill, but the language was written to cover when independent contractors apply for their own PPP and was misinterpreted in many cases)

Employers are also limited to wages of $100,000 per employee in the gross wages determination, but this limitation annually applies only to cash compensation, not to non-cash benefits.



Amount Forgiven

The amount eligible for forgiveness under the PPP is the sum of covered payments made during the eight weeks from the beginning date the loan is received, not to exceed the loan amount. The covered payments include payroll costs (see definition above), mortgage interest, rent (leases or loans before Feb. 15, 2020) and utility payments under service agreements dated before Feb. 15, 2020. No more than 25% of the forgiveness amount may be attributable to non-payroll costs.

Forgiveness is based on the employer maintaining or quickly rehiring employees and maintaining salary levels, and it will be reduced if full-time headcount declines, or if salaries and wages decrease compared to other periods in 2019 or 2020. According to the CARES Act, the reduction for employee count will be the average number of full-time equivalent employees per month employed by the business during the covered period (the eight weeks) divided by the average number of full-time equivalent employees per month employed by the eligible recipient during the period beginning March 1, 2019, and ending on June 30, 2019 (the calculation is slightly different for a seasonal employer).

Meaning, if you have a PPP loan for $1.2 million and your forgiveness amount calculated was $1 million, at least $750,000 of the $1 million needs to consist of payroll costs. If you have average monthly employees of 90 during the eight-week period, but you had 100 average monthly employees between March 1, 2019 and June 30, 2019, then you would only get forgiveness of $900,000 (90% of the $1 million). The average number of full-time equivalent employees shall be determined by calculating the average number of employees for each pay period falling within a month.

The loan forgiveness amount may also be reduced if an employer reduces compensation for their employees in excess of 25%. This applies if the reduction was in the most recent full quarter in which the employee was paid compensation during the covered period of any employee who was compensated:

a. In an amount less than $33,333 during the period beginning on March 1, 2019 and ending on June 30, 2019; or

b. Not more than $100,000 on an annualized basis during 2019.

The SBA will be issuing additional guidance on loan forgiveness soon and it is expected that the forgiveness application will require that applicants prove payment of these costs – payroll records, paid bills, cancelled checks, etc. As everyone is learning in the application process, this guidance can differ from the CARES Act.

The PPP application process has proven to be a complex situation, and organizations are strongly encouraged to work with their advisors. For assistance with getting your financial information needed to apply prepared or questions, contact Doeren Mayhew today.

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