The Small Business Administration (SBA) has issued an interim final rule to announce implementing regulations for the new Paycheck Protection Program (PPP), which was created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act to offer low-interest loans to small businesses affected by the COVID-19 crisis. The PPP encourages businesses to maintain employee numbers and compensation by offering loan forgiveness, subject to certain conditions. General information on the PPP and eligibility requirements can be found here.
The SBA’s interim final rule clarifies how borrowers should calculate their average monthly payrolls for purposes of determining how much money they may borrow. The rule provides that payroll costs include salaries, wages, commissions, tips, payment for vacation, parental, family, medical, or sick leave, allowances for dismissals or separations, payments for the provision of employee benefits consisting of group health care coverage (including premiums) and retirement, and payment of state and local taxes assessed on compensation of employees.
These costs should be aggregated for the 12-month period preceding the loan application, and then employers should subtract any compensation paid to an employee in excess of an annual salary of $100,000 and/or any amounts paid to an independent contractor or sole proprietor in excess of $100,000 per year. Next, employers should divide by 12 to get the average monthly payroll. Finally, they should multiply that number by 2.5 to get their maximum loan amount (unless this amount exceeds $10 million, in which case the maximum loan amount is $10 million). See the following examples:
i. Example 1
No employees make more than $100,000
Annual payroll: $120,000
Average monthly payroll: $10,000
Multiply by 2.5 = $25,000
Maximum loan amount is $25,000
ii. Example 2
Some employees make more than $100,000
Annual payroll: $1,500,000
Subtract compensation amounts in excess of an annual salary of $100,000: $1,200,000
Average monthly qualifying payroll: $100,000
Multiply by 2.5 = $250,000
Maximum loan amount is $250,000
The rule also expounds on the conditions for loan forgiveness. Loans may be forgiven in whole (including accrued interest) or in part. Under the CARES Act, employers can apply for forgiveness if they spend their loans on qualifying expenses over the eight weeks after receiving a loan. Qualifying expenses include payroll costs, utilities, mortgage interest (but not principal), and rent payments. The SBA states that not more than 25% of the loan forgiveness amount may be attributable to non-payroll costs. This is to effectuate the core purpose of the PPP – to keep workers paid and employed.
The rule includes several other clarifications. For one, if loan funds are used for unauthorized purposes, the SBA will direct the borrower to repay those amounts. Knowing misuse could subject a borrower to additional liability such as charges for fraud. The SBA also indicates that maturity of a PPP loan is two years. The CARES Act provided for a maximum maturity of up to ten years, but the SBA has determined two years should be sufficient in light of the temporary disruptions caused by COVID-19. The SBA provides for a 1% interest rate on PPP loans, while the CARES Act had allowed for as much as 4%. Further, the SBA explained that lenders will issue PPP loans on a first-come, first-serve basis and that borrowers may only receive one PPP loan. Accordingly, businesses interested in the loans should apply as soon as possible and consider applying for the maximum amount.
Please note this current global emergency and applicable laws, regulations, proposals, guidance, advice, and responses change rapidly. We strive to keep you up to date as much as possible, but this blog article is intended for general informational purposes only and should not be construed as legal advice or opinion. Contact myHRcounsel with questions concerning specific facts and circumstances.
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