Photo | Courtesy of blumshapiro
Alan Osmolowski
April 7, 2020
Details on how the Paycheck Protection Program can help your business
By Alan Osmolowski
In these challenging times many employers are struggling with liquidity. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) is now law, and it provides some assistance by way of government-backed loans able to be forgiven if an employer demonstrates they maintained their headcount in the eight weeks following the loan. This is the Paycheck Protection Program.
Through an expansion of existing U.S. Small Business Administration loan programs, PPP loans will be made available to small businesses for the purpose of paying payroll and other eligible costs and will be 100% guaranteed by the U.S. government. The really great news is that an eligible employer can have all or a portion of the loan forgiven.
In general, the maximum amount of any PPP loan is determined by referring to the employer’s average monthly payroll during the prior year. The maximum loan amount is 250% of average monthly payroll, not to exceed $10 million. The loan proceeds are to be used for payroll, interest on debt service, rent or utilities.
In general, eligible employers include any business, nonprofit organization, veteran organization or tribal business with less than 500 employees. There are special rules for accommodation and food service businesses: They are limited to no more than 500 employees per physical location.
For purposes of the 500-employee limit, affiliated businesses must be combined using standards established by the SBA. In summary, the SBA affiliation rules focus on control and economic dependency, among other factors.
For investor-backed, private equity-owned companies, the affiliate attribution rules may include as affiliates the private equity fund itself and associated portfolio companies. Affiliated entities are determined based on facts and circumstances such as equity ownership structure, composition of the board of directors, and contractual, voting and other rights of the investors.
As part of the application process, eligible businesses will be required to certify the uncertainty of the current economic conditions makes the loan necessary to support ongoing operations.
The interest rate on PPP loans is 0.5%, and repayment is deferred for six months. The term of the loan is two years.
Employers are eligible for forgiveness of their PPP loan if they meet certain criteria: The employer has to demonstrate the proceeds were used for payroll, interest, rent and utility payments in the eight weeks following the loan, and also demonstrate they did not reduce headcount.
The amount of the loan able to be forgiven is reduced in proportion to any payroll reduction in the eight-week testing period. The focus of the loan program is to help employers keep their employees on their payroll as best they can. So, for example, if an employer reduced their workforce by 30% during the testing period, only 70% of the loan will be eligible for forgiveness.
Some more good news – any amounts forgiven under a PPP loan will be excluded from income for tax purposes.
The Paycheck Protection Program will be administered largely by SBA lenders, so you should talk with your banker as well as financial advisors about your ability to obtain this benefit. The program started on Friday.
Alan Osmolowski, CPA is a tax partner with blumshapiro (www.blumshapiro.com) at 100 Front Street in Worcester, where he leads the firm’s technology and life sciences practice.
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