On Friday, March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act into law. Part of that Act is the Paycheck Protection Program (“PPP”) which authorizes up to $349 billion in forgivable loans to small businesses, sole professorships, and self employed to pay their employees and/or themselves during the COVID-19 crisis. All loan terms are the same for everyone. Crucial to the PPP is average monthly payroll.
Essentially, the PPP provides a forgivable loan to businesses based upon average monthly payroll costs for 8 weeks. Accordingly, the SBA will forgive loans under the PPP if all employees are kept on the payroll for eight weeks and the money is used for payroll and additionally rent, mortgage interest, and utilities. But how much can you get and how much can be forgiven? Loan Amount and Loan Forgiveness should not be confused since they are determined by two entirely separate provisions. Generally, the universe of Loan Forgiveness is much larger than the universe of Loan Amount.
Loan amount is determined by multiplying 2.5x an employer’s average monthly payroll. The definition of average monthly payroll comes from the Cares Act: and Interim Final Rule:
To determine how much you qualify for, you need to look at average payroll costs:
‘‘(viii) the term ‘payroll costs’
‘‘(aa) the sum of payments of any compensation with respect 3 to employees that is a
‘‘(AA) salary, wage, commission, or similar compensation;
‘‘(BB) payment of cash tip or equivalent; ‘‘(CC) payment for vacation, parental, family, medical, or sick leave;
‘‘(DD) allowance for dismissal or separation;
‘‘(EE) payment required for the provisions of group health care benefits, including insurance premiums;
‘‘(FF) payment of any retirement benefit; or
‘‘(GG) payment of State or local tax assessed on the compensation of employees;
To determine how much you qualify for, you need to look at average monthly payroll:
- I have determined that I am eligible. How much can I borrow? Under the PPP, the maximum loan amount is the lesser of $10 million or an amount that you will calculate using a payroll-based formula specified in the Act, as explained below.
Step 1: Aggregate payroll costs (defined in detail below in f.) from the last twelve months for employees whose principal place of residence is the United States.
- What qualifies as “payroll costs?” Payroll costs consist of compensation to employees (whose principal place of residence is the United States) in the form of salary, wages, commissions, or similar compensation; cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips); payment for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, and retirement; payment of state and local taxes assessed on compensation of employees; and for an independent contractor or sole proprietor, wage, commissions, income, or net earnings from self-employment or similar compensation.
Despite the limitations in determining Loan Amount based upon average monthly payroll, Loan Forgiveness is much broader. Loan Forgiveness of the entire loan is available even if the loan is not solely spent on average monthly payroll. This is because loan expenditures on mortgage, rent, and utilities also qualifies for Loan Forgiveness:
(b) FORGIVENESS.—An eligible recipient shall be eligible for forgiveness of indebtedness on a covered loan in an amount equal to the sum of the following costs incurred and payments made during the covered period:
(1) Payroll costs.
(2) Any payment of interest on any covered mortgage obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation).
(3) Any payment on any covered rent obligation.
(4) Any covered utility payment.
To determine how much you might be forgiven:
- Can my PPP loan be forgiven in whole or in part? Yes. The amount of loan forgiveness can be up to the full principal amount of the loan and any accrued interest. That is, the borrower will not be responsible for any loan payment if the borrower uses all of the loan proceeds for forgiveable purposes described below and employee and compensation levels levels are maintained. The actual amount of loan forgiveness will depend, in part, on the total amount of payroll costs, payments of interest on mortgage obligations incurred before February 15, 2020, rent payments on leases dated before February 15, 2020, and utility payments under service agreements dated before February 15, 2020, over the eight-week period following the date of the loan. However, not more than 25 percent of the loan forgiveness amount may be attributable to nonpayroll costs. While the Act provides that borrowers are eligible for forgiveness in an amount equal to the sum of payroll costs and any payments of mortgage interest, rent, and utilities, the Administrator has determined that the non-payroll portion of the forgivable loan amount should be limited to effectuate the core purpose of the statute and ensure finite program resources are devoted primarily to payroll. The Administrator has determined in consultation with the Secretary that 75 percent is an appropriate percentage in light of the Act’s overarching focus on keeping workers paid and employed. Further, the Administrator and the Secretary believe that applying this threshold to loan forgiveness is consistent with the structure of the Act, which provides a loan amount 75 percent of which is equivalent to eight weeks of payroll (8 weeks / 2.5 months = 56 days / 76 days = 74 percent rounded up to 75 percent). Limiting non-payroll costs to 25 percent of the forgiveness amount will align these elements of the program, and will also help to ensure that the finite appropriations available for PPP loan forgiveness are directed toward payroll protection. SBA will issue additional guidance on loan forgiveness.
So when you fill out your PPP application, be sure to only include average monthly payroll and not mortgage, rent, and utilities. Once you are ready for Loan Forgiveness, you may then provide evidence of expenditures of average monthly payroll, mortgage, rent, and utilities.
Written by Michael G. Doan– Owner of the Oceanside Bankruptcy office, Michael is a highly skilled Southern California Bankruptcy Attorney Specialist approaching 30 years of experience. Throughout the years he has practiced in numerous fields of law including but not limited to: personal injury, landlord-tenant, workers compensation, insolvency, bankruptcy, consumer rights, debt negotiation, creditor collection abuse, estate planning, contracts, real estate, and tax. Currently, Michael is solely concentrating in Bankruptcy Law and is a Board Certified Specialist in Consumer Bankruptcy Law by the American Board of Certification.