One of the most significant provisions in the recently passed federal CARES Act is the Paycheck Protection Program (PPP). It makes available $349 billion to qualifying small businesses for low-interest loans to cover up to two months of payroll and certain other expenses. Importantly, the loans may not have to be repaid to the extent the borrower uses the proceeds to cover qualifying expenses, including payroll, benefits, rent, utilities, and interest on other indebtedness.
Because the PPP is intended to incent businesses to retain employees during the current crisis, loan forgiveness may be reduced to the extent that a borrower (i) lays off or reduces pay to employees during the eight-week loan period or (ii) fails to reverse any such actions taken during previous periods included in the payroll calculation for purposes of the loan amount. PPP loans will have a two-year term and are capped at $10 million. The unforgiven portion will bear interest at an annual rate of 1%, with no payments required for the first six months.
On April 2, the Small Business Administration (SBA) released its interim final rule (IFR) (link is here) addressing implementation of the PPP, supplemented by a second interim final rule on April 3 (link is here) that focuses more narrowly on the SBA’s affiliation rules, particularly the fact that such requirements are waived for faith-based organizations. Also, on April 6, the U.S. Treasury Department issued an FAQ related to the PPP (link is here). These documents provide helpful clarifications about key aspects of the program, including:
- Who qualifies for the program. Businesses that, together with their domestic and international affiliates, have averaged fewer than 500 U.S.-based employees per month over the last 12 months will automatically meet the size standards for the PPP; however, certain businesses with a larger number of employees (including those of domestic and international affiliates) may also qualify. Also, the PPP is one of several business and employee assistance programs included in the recent federal legislation, some of which, if utilized, may limit or preclude using the PPP. In particular, taking the Employee Retention Tax Credit would disqualify you from getting a PPP and vice versa. For more details on how to determine eligibility, click here to view relevant excerpts from the IFR and the FAQ.
- How to calculate the maximum available loan amount. Generally, borrowers may borrow up to 2.5 times their average monthly payroll, including benefits, but excluding certain items, such as the prorated portion of salaries over $100,000. For more details, click here.
- Permitted uses of loan proceeds. At least 75% of loan proceeds must be used to cover payroll costs during the eight-week period following loan origination (known as the “Covered Period”). Other permitted uses include payment of rent, utilities, and interest on existing debt, to the extent such expenses were paid or incurred during the Covered Period. For more details, click here.
- How loan forgiveness is determined. Up to 100% of the loan may be forgiven so long as (i) proceeds were used for permitted purposes; (ii) not more than 25% of the proceeds were used for non-payroll purposes, and (iii) the borrower’s headcount and payroll amount during the Covered Period were comparable to prior periods. For more details, click here. Note that implementing regulations for loan forgiveness have not yet been released and are not required to be published until April 27, 2020.
There are other questions related to the PPP that have not been fully answered by the IFR and the Treasury’s guidance to date. Additional guidance and implementing regulations regarding the PPP are issuing from the government on a daily basis, and the hope is that these issues will be clarified.
The application period for PPP loans commenced on April 3. For information purposes, here is a link to the revised application form recently issued by Treasury. Many participating lenders are only accepting applications from existing customers. Others have announced that they are no longer accepting any applications.
Because PPP loans will be issued on a “first come, first served” basis and the amount of funds allocated to PPP loans is capped, clients with an interest in the PPP should reach out to their bank as soon as possible about the process and timing for submitting an application, including required payroll and other documentation.
It is also worth noting that Congress may add to the PPP’s overall budget. Congressional leaders indicated on April 7 an interest in expanding the funds available.
We have a team of people at Parker Poe who are tracking all of this constantly. For more information, please contact us or your regular Parker Poe contact. You can also find our other COVID-19 alerts here.