The New Paycheck Protection Program: What Business Owners Need to Know
On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). Among its many provisions, the CARES Act authorizes the Paycheck Protection Program (the “PPP”), which will provide economic aid to small businesses and certain other employers to cover the capital costs of retaining employees and maintaining their payroll through this ongoing national emergency. A portion of the low-interest loans (including up to 8 weeks of payroll) under the PPP will be forgiven if the employer maintains its workforce and salary levels and complies with certain other requirements of the CARES Act. To incentivize employers that may have already laid-off employees to bring their workers back onto the payroll, the program is retroactive to February 15, 2020.
An employer will be eligible for this loan if it was in operation as of February 15, 2020, and is:
- A small business or 501(c)(3) nonprofit with fewer than 500 employees; or
- A sole proprietorship, an independent contractor, or an eligible self-employed individual
Note that alternative rules and size exceptions apply to employers in certain industries, some other types of nonprofit organizations, and some franchisees. If you are an employer with more than 500 employees and wish to take advantage of this program, please contact one of our attorneys for guidance on whether you may be eligible despite the above restrictions.
Participants in the PPP will be eligible for a loan of up to $10 million, with:
- A maximum interest rate of 4 percent
- Zero fees and zero prepayment penalty
- A maximum term of 10 years for any amounts not forgiven
- Repayments deferred up to 1 year after the loan origination date
The maximum amount of the loan is determined based on average monthly payroll costs—which includes, among other items, compensation, family/sick leave, payments for group health benefits, retirement benefit contributions, and state/local taxes—during the applicable prior-year period. Note that several caps, exceptions, and deductions to this calculation apply. In particular, a cap on individual employee compensation of $100,000 (annualized) and an exclusion of qualified sick and family leave for which a credit has been taken under the Families First Coronavirus Response Act will reduce the maximum amount of the loan.
Loan amounts under the PPP may be used to cover payroll costs, interest on mortgage payments, rent, utilities, and interest on previously incurred debt obligations, among other items. Again, certain exclusions and limitations apply.
An employer will be eligible for forgiveness on loan amounts equal to the sum of eligible payroll costs, plus mortgage interest, plus rent, plus utilities, calculated for the 8-week period following the borrowing date, by applying for forgiveness through the lender. This application will require documentation verifying how the amounts were spent; the number of employees on payroll and their pay rates; and certification that amounts were expended per the PPP’s rules. Note: if an employer reduces its full-time employee headcount or employee compensation/wages, there will be a reduction in the amount of the loan eligible for forgiveness.
If you are an eligible employer, our attorneys have developed tools to help you determine the maximum amount of the loan for which you may apply, and can offer you practical advice to help you maximize the portion of the loan that will be forgiven. We understand that everyone’s situation is different and encourage you to contact our attorneys for further analysis on whether you are eligible for this program, and how to apply for and best take advantage of it, if applicable.