A Few Details on the Payroll Protection Program

As part of the CARES Act recently enacted by Congress, the Payroll Protection Program ("PPP") is designed specifically to help Americans stay employed by providing assistance to their employers. Qualifying businesses can receive 2.5 times their monthly payroll expense, including health insurance premiums paid for employees.

Who's Covered?

Simply put, all small businesses qualify. This includes self-employed, sole proprietors, independent contracts and gig workers, such as those who accept assignments through Uber or Lyft. Even if you are a sole proprietor without any employees other than yourself, you can qualify. If you report income on Schedule C and are subject to a self-employment tax, you qualify. The only real limitation is that you had to engage in business before February 15, 2020.

Loan Forgiveness

The biggest benefit to the PPP is that the loans can be completely forgiven. If the loans are used to keep your employee salaries and wages consistent, the loans are eligible for forgiveness. The other benefit is that any portion of the loan that is forgiven will not be taxed. Ordinarily, if indebtedness of any type is forgiven, the amount forgiven is treated as income on which you can be taxed. Not so with PPP loans that are forgiven. This means the loans become tax-free grants. To the extent the loans are used for other business expenses besides wages and salaries of employees, the loan might have to be repaid.

What's Covered

PPP is designed to cover primarily wages and salaries of employees. Secondarily it is for rent, mortgage and utilities payments. The program is meant to keep the doors open and the business staffed. Loan proceeds can be used for other expenses, but to obtain full forgiveness, the loans must be used at least 75% for wages and salaries with the remainder being spent for rent, mortgage or utilities.

Logistical Problems

The PPP got off to a rocky start on April 3, the first day it was available. Being so new there are few, if any, guidelines. Applications have to be made through SBA-approved lenders. SBA issued an application form, only to revise it two days later. Lenders aren't certain which form to use. SBA also changed the interest rate on the loans shortly after the program went live. Some lenders, unsure of what loan documents to use, since the SBA hasn't provided any yet, are sitting on millions of dollars of loan applications. Their fear is that if they use the wrong forms, SBA might not honor the guarantee to repay any loans that go into default. To allay this fear, the Federal Reserve Board ("Fed") has announced a program to fund the loans. In effect, the Fed would purchase the loans issued by the individual banks. This would take the loans off the banks' balance sheets, freeing up capital for banks to make more loans. The loans purchased might be put into pools and resold to institutional investors the way mortgage loans and student loans often are.

Another problem is calculating the monthly wages on which the loans are based. Loans are 2.5 times the monthly payroll expense. This isn't a problem for larger businesses who use payroll companies to pay employees. Accurate records are readily available in these cases. The harder questions come with self-employed, sole proprietors, independent contractors and gig workers. In these cases, salary is based on your net profit, as reported on Line 31 of Schedule C, if you've filed your 2019 tax returns; or what you show as net profit on your year-end (2019) profit and loss, or income, statement. Divide the net profit by 12 to obtain a monthly net, and use 2.5 times this amount as the amount of the loan application.

Not Eligible

A few cases are not eligible for the program. One is if you are self-employed but operate through a corporation, if you don't pay yourself a salary and have no other employees, you are not eligible. A second is that if you are a qualifying small business otherwise, but use independent contractors, the amounts paid to those independent contracts may not be counted as part of your payroll expense. If you are the independent contractor, you can qualify as a self-employed applicant.

If your self-employment net income for 2019, either as reported on Schedule C of your 2019 return, or on your profit and loss or income statement, exceeds $100,000, you are limited to $100,000 divided by 12, or $8,333.33, as your monthly payroll expense.

You cannot simultaneously collect unemployment benefits as a sole proprietor and receive a PPP loan. Therefore you should analyze which of the two routes is more beneficial to you.

Documentation

Lenders will want documentation. For small businesses, including self-employed and sole proprietors, this will include at a minimum Schedule C from your 2019 tax return. Even if it isn't filed, you'll probably need it as it will be filed to support your application. Independent contractors and gig workers will need 1099-C forms or other proof of payment of compensation, which includes pay stubs.

How to Apply

As noted above, SBA has application forms. Contact your bank for help; they will also have forms. Just be sure your bank is an SBA-approved lender.

PPP is not Economic Injury Disaster Loan

There is another loan that you might be eligible for, an Economic Injury Disaster Loan ("EIDL"). EIDL is an established loan program designed to help businesses impacted by declared disasters such as hurricanes, floods, earthquakes and now coronavirus. EIDL loans include a $10,000 advance that is automatically forgiven. You can qualify for both. The only requirement is that you can't use both loans for the same thing. If you use PPP for wages and salaries, you must use EIDL for something else.

Good luck and stay safe!