A Few Nuances to the Paycheck Protection Program Established Pursuant to the CARES Act

By: Susan St. John

The Paycheck Protection Program under the CARES Act (the “Act”) allows a small business to apply for a low interest rate loan to sustain the business during the economic disruption caused by COVID-19. This program focuses on payroll costs as opposed to revenues of the small business. Allowable uses of the PPP loan funds include the following:

1. Payroll costs;
2. costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;
3. employee salaries, commissions, or similar compensating;
4. payments of interest on any mortgage obligation (which shall not include any prepayment of or payment of principal on a mortgage obligation);
5. rent (including rent under a lease agreement);
6. utilities; and
7. interest on any other debt obligations that were incurred before the covered period.

The Act defines payroll costs as follows:

1. the sum of payments of any compensation with respect to employees that is a:
   1. salary, wage, commission, or similar compensation;
   2. payment of cash tip or equivalent;
   3. payment for vacation, parental, family, medical, or sick leave;
   4. allowance for dismissal or separation;
   5. payment required for the provision of group health care benefits, including insurance benefits;
   6. payment of any retirement benefit; or
   7. payment of State or local tax assessed on the compensation or employees; and
2. the sum of payments of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment, or similar compensation and that is in an amount that is not more than $100,000 in 1 year, as prorated for the covered period; and shall not include the compensation of an individual employee in excess of an annual salary of $100,000, as prorated for the covered period; taxes imposed or withheld under chapters 21, 22, or 24 of the Internal Revenue Code for the covered period; compensation for employees outside of the US; qualified sick leave wages for which credit is allowed under the Families First Coronavirus Response Act; or qualified family leave wages for which credit is allowed under the Families First Coronavirus Response Act.

The PPP loans are non-recourse loans meaning no collateral or guarantees for repayment are required. Although interest accrues at 1 percent from the date the PPP loan proceeds are approved and received, payments, including principal, interest and fees, will be deferred for 6 months. These loans mature after 2 years from receipt of funds. Additionally, these loans may be fully forgivable, depending on how the loan proceeds are used.

Costs that are covered under forgiveness include:

1. Payroll costs (see definition above);
2. payments of interest on any covered mortgage obligation (paying principal is not an intended use of the PPP loan);
3. payments on any covered rent obligation; and
4. covered utility payments.

PPP loan amounts forgiven are considered canceled indebtedness; however, the canceled debt is not included in the calculation of a loan recipient’s (the debtor) gross income (i.e., the debt forgiveness is excluded from gross income).

Forgiveness does not cover interest paid on debt obligations other than interest payment on covered mortgages and it does not cover payment of principal of any indebtedness.

The amount forgiven may be adjusted if there has been a decrease in salaries or wages paid (determine employee-by-employee) that exceeds 25 percent of what the employee was paid in the most recent full quarter prior to the covered period. However, the description of an “employee” with respect to salary/wage reduction and loan forgiveness does not apply to employees that receive more than $100,000 on an annual basis. Thus, it may be possible for an employer to reduce the salary or wages of highly compensated individuals without being subject to a reduction in the amount of loan to be forgiven.

Loan forgiveness will also be reduced if a PPP loan recipient reduces its workforce or reduces the salary or wages of one or more employees without restoring the work force to the level of FTEs at February 15, 2020, by June 30, 2020, or restoring salaries or wages for affected employees (those that had salary/wages reduced) by June 30, 2020. The Act is silent as to whether employees that might separate from a PPP loan recipient between February 15 and June 30, 2020, would have to be rehired or if other individuals may be hired to restore an employer’s workforce.

Further, the amount of loan to be forgiven cannot exceed the principal amount made available under the covered loan. Also, not more than 25 percent of the loan forgiveness may be for non-payroll expenses.

Forgiveness is not automatic – the loan recipient must make application for loan forgiveness and must supply supporting documentation as to payroll costs, mortgage payments, rent, or utilities to substantiate use of the loans proceeds. A lender has 60 days after receiving the loan forgiveness application to make a decision. Any remaining balance of the covered loan that is not forgiven will have a maximum maturity of 10 years from the date of the forgiveness application and the SBA will continue to guarantee the remaining loan balance.

If an employer receives a loan under the PPP and any amount of the loan is used for unauthorized purposes, the recipient will have to repay amounts improperly used. Further, if the recipient knowingly uses PPP loan funds for improper purposes, the recipient may be charged with fraud.

Loan funds to be distributed under the PPP will be on a first come, first serve basis. To benefit from this program, it is imperative that employers or others that might be eligible for the PPP funds submit applications forthwith. Also, keep in mind – there is only one bite at the apple. An employer or others that might be eligible may only get one PPP loan. Do not sell yourself short and low-ball your PPP loan application.

(There are numerous other criteria to understand about the Paycheck Protection Program. If you have any questions concerning this program, speak to an attorney prior to applying for the PPP loan or spending funds obtained through a PPP loan.)