The TwoCents News Chronicles Of Indiana:
The Basics Of The
Paycheck Protection Program
April 28, 2020
In late March, both houses of the United States Congress made the decision to extend financial aid to small businesses faced with difficulties because of the COVID-19 Pandemic. This decision became law with the passage of the CARES Act – the “Coronavirus Aid, Relief, and Economic Security Act” – by strong bipartisan support in the House of Representatives and the Senate and with the signature of President Donald Trump on March 27, 2020.
One of the items included in the CARES Act was the Paycheck Protection Program (known by the acronym “PPP”). This program allows small businesses to receive funding from the American taxpayers for specific types of business expenses, with a specific focus on providing funds so that businesses could retain or hire back employees that had been let go because of the pandemic.
Funds were exhausted for the PPP within about two weeks.
On Friday [April 24, 2020], the President signed a new law passed by the U S Congress – again, with strong bipartisan support – to provide additional funds to the PPP so additional small businesses would be able to be helped as they strive to retain workers or re-hire workers let go because of the pandemic.
The terms of the PPP for businesses are outstanding by almost any measure.
A PPP loan includes an interest rate of 1%, a term of two years, no pre-payment penalties, and deferral of up to six months for the first payment. Loan amounts to a single business were capped at $10 million.
According to the United States Department of the Treasury, “All businesses – including nonprofits, veterans organizations, Tribal business concerns, sole proprietorships, self-employed individuals, and independent contractors – with 500 or fewer employees can apply. Businesses in certain industries can have more than 500 employees if they meet applicable [United States Small Business Administration] SBA employee-based size standards for those industries. For this program, the SBA’s affiliation standards are waived for small businesses (1) in the hotel and food services industries [listed in NAICS code 72]; or (2) that are franchises in the SBA’s Franchise Directory; or (3) that receive financial assistance from small business investment companies licensed by the SBA.”
“This program provides small businesses with funds to pay up to 8 weeks of payroll costs including benefits [with payroll costs capped at $100,000 on an annualized basis for each employee],” the statement from the U S Treasury continued. “Funds can also be used to pay interest on mortgages, rent, and utilities.”
Best of all, a PPP loan could be forgiven and turned into a grant to the participating business.
Tax-free.
(Well, at least for Federal tax purposes. Likely, though not guaranteed, for State tax purposes in most states.)
“Funds are provided in the form of loans that will be fully forgiven when used for payroll costs, interest on mortgages, rent, and utilities (due to likely high subscription, at least 75% of the forgiven amount must have been used for payroll),” according to the U S Treasury Department. “Forgiveness is based on the employer maintaining or quickly rehiring employees and maintaining salary levels. Forgiveness will be reduced if full-time headcount declines, or if salaries and wages decrease.”
In a statement, the U S Treasury details how a borrower will be able to convert a PPP loan into a grant where some or all of the loan proceeds are forgiven: “You can submit a request to the lender that is servicing the loan. The request will include documents that verify the number of full-time equivalent employees and pay rates, as well as the payments on eligible mortgage, lease, and utility obligations. You must certify that the documents are true and that you used the forgiveness amount to keep employees and make eligible mortgage interest, rent, and utility payments. The lender must make a decision on the forgiveness within 60 days.”
A variety of financial institutions – banks included – were empowered to grant these loans through the SBA.
In exchange for the financial institutions processing these loans, the SBA used funds from the American taxpayers to pay fees to the participating financial institutions. According to guidelines set by the SBA:
Processing fees will be based on the balance of the financing outstanding at the time of final disbursement. SBA will pay lenders fees for processing PPP loans in the following amounts:
• Five (5) percent for loans of not more than $350,000;
• Three (3) percent for loans of more than $350,000 and less than $2,000,000; and
• One (1) percent for loans of at least $2,000,000.
Lenders may not collect any fees from the applicant.
In addition to the lenders, “agents” can also be compensated. “Agents,” according to the guidelines of the SBA can include such individuals as attorneys, accountants, and “Any other individual or entity representing an applicant by conducting business with the SBA,” among others. According to guidelines set by the SBA:
Agent fees will be paid out of lender fees. The lender will pay the agent. Agents may not collect any fees from the applicant. The total amount that an agent may collect from the lender for assistance in preparing an application for a PPP loan (including referral to the lender) may not exceed:
• One (1) percent for loans of not more than $350,000;
• 0.50 percent for loans of more than $350,000 and less than $2 million; and
• 0.25 percent for loans of at least $2 million.
That’s a summary of the background of the efforts by the U S Congress to help small businesses recover from the impact of the pandemic.
Contact Richard McDonough at thetwocentsnewschronicles@mail.com.
© 2020 Richard McDonough