Disclaimer: As of the time of the publication of this blog, this program is not live. The information below is based on my interpretation of the bill and my opinions. Please consult with your legal/financial team.
We’ll go over a little deeper on the Sect. 1102 – Paycheck Protection Program (PPP) of the CARES Act Bill.
PPP is a loan specifically to cover Paycheck Expenses. The government finds it better to assist small businesses to stay open than to pay for unemployment – more than 3 million Americans have applied for unemployment benefits since this epidemic began.
Let’s get that feline good summary of the PPP
- This is a new addition to the section 7(a) of the Small Business Act
- The loan is applied through an SBA approved institution (you can find those here)
- The loan is 100% backed by SBA (usually is a mix between SBA and the financial institution)
- Covered Period: February 15, 2020, to June 30, 2020
- Business needs to be in operation on February 15, 2020
- A loose term on what “in operation” means.
- Who is eligible:
- Small Businesses with less than 500 employees
- Veterans Organizations
- Tribal Business Concerns
- Sole Proprietors
- Independent Contractors
- Eligible Self-Employed Individuals
- I’m pretty sure no one knows what this means 🤪
- Is there a cap for this loan?
- Yes! $10,000,000 OR 2,5X average payments for payroll costs for the 1 year before the date the loan is made PLUS any EIDL (Economic Indirect Distress Loan) made Jan 31, 2020, or after is refinanced under PPP
- What “Payroll Costs” Means?
- Salaries, wages, commissions, payment of cash tips, vacation and sick time, severance or dismissal pay, group health insurance premiums, retirement plan benefits, state and local payroll taxes (not clear on federal taxes)
- This loan is not meant to replace your profit
- Acceptable uses of this loan are pretty much to keep your business open and your employees still working:
- Payroll Costs
- Group Health Insurance Premium
- Employees salaries, wages, commissions
- Mortgage interest (business mortgage, not mortgage principal)
- Other Interest (Business related)
- Who is eligible?
- Business must be operating on February 15, 2020, AND
- Had employes with Payroll and Taxes OR
- Had independent contractors reported on 1099-MISC
- MISCELLANEOUS Information:
- The loan is non-recourse, as long as it’s used for allowed expenses
- No guarantee or collaterals needed
- Interest rate capped at 4%
- Maximum term is 10 years for unforgiven amounts
- Loan Payments are deferred or at least 6 months (maximum of 1 year)
- No Pre-Payment penalty
- The loan runs until June 30, 2020
- $349,000,000,000 (yes.. this is BILLIONS) allocated to this fund
As of today – March 30, 2020, at 10:52 pm MST – this program is not live yet (SBA PPP)
- PPP went live on March 31, 2020. Here’s the info on the SBA website and here’s a sample application form.
- The cap for salary calculation is $100,000/year. If an employee earns more, you’ll add up to that amount on the calculations
- I recommend you talk with your financial institution NOW
There’s a possibility for forgiveness on this loan – Sect. 1106 – Loan Forgiveness. If the funds are solely used for allowed expenses, the loan can be “forgiven”.
This means that you do not need to pay it back. And, in this very special case, you do not even need to pay taxes on the loan. This is NEW and UNUSUAL.
Some feline caution is needed in this case. As the bill is open for interpretation and this is still not “live”, I’d love for you to keep a few things in mind:
- It’s not clear which kind of documentation you’ll need to show to prove the funds were used for allowed expenses
- Forgiveness is reduced or even eliminated if the borrower reduce their workforce during the covered period (which is 8 weeks from the date of the loan origination)
- This is administrated by the bank, then submitted to SBA
What are the “allowable expenses” under this loan?
- Payroll Costs (defined in section 1102)
- Payments interest on any covered mortgage that was incurred prior to February 15, 2020
- Rent, as long as the lease was executed prior to February 15, 2020
- Utilities, elect, gas, water, transportation, telephone and internet access
In a nutshell, this portion of the bill was still not interpreted by the financial institutions that will carry it on. We’ll depend on those guidelines to really understand which information you’ll need to present to be eligible for a PPP loan forgiveness.
My recommendation to you is:
- Start the conversation with your bank/financial institutions
- Start the conversation with your bookkeeper/accountant
- If the loan is granted, make sure to capture the expenses paid with those funds on your accounting system (categories, tags, etc)
- If the loan is granted, consider opening a new bank account to manage this funds – receipt of the funds and usage of the funds
- The last 2 items will help you with gathering documentation if you need to prove how those funds were used
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