The Paycheck Protection Program, or PPP, is the SBA loan program that you have heard about regarding loans that you may not have to pay back. Late last night, the SBA issued both final interim regulations to get the program started and a form application to submit to lenders. This updates previous information we distributed to incorporate new information from the regulations and the application form. The PPP Loans are made by existing SBA-approved lenders and by certain new lenders who are approved by the SBA. You apply to the lender (usually a bank) and you deal with the lender, not the SBA, but the SBA is responsible for creating the rules that you and the lender must satisfy. There is $349 billion available for these loans, which sounds like a lot, but that money is expected to go very fast on a first-come, first-served basis. We were up all night refining this prior analysis to help you understand the process. You need to move quickly and we are here to help.

Does my business qualify to get a loan? Businesses or nonprofits with 500 or fewer employees qualify if current economic conditions require that you obtain the loan to support ongoing operations. When you submit your application, you must certify that “Current economic uncertainty makes this loan request necessary to support [your] ongoing operations.” Unfortunately, there is no definition of the word “necessary.” We are seeking clarification from the SBA, but it is unlikely we will get one before you file your application.

What about an Economic Injury Disaster Loan (EIDL)? You can apply for both. We generally believe that most companies should apply for both, but it depends on your specific facts. Filing both applications is a good idea because there is a $10,000 upfront grant under the EIDL program that you can’t get unless you apply for the EIDL loan, and you do not have to repay the grant even if you are not approved for the loan. The most significant restriction is that you can’t use the fact that you paid a particular debt to satisfy the rules for both loans. If you use the proceeds of an EIDL loan to pay a particular debt, you cannot use the fact that you paid that same debt to satisfy both the EIDL and PPP requirements.

What if I am self-employed or an independent contractor? You qualify to obtain a PPP loan yourself.

What if I have a nanny or a maid? Does that make me a business employer? Sorry, but the SBA says that you are not eligible for a PPP loan if you are a “household employer (individuals who employ household employees such as nannies or housekeepers).”

How much may I borrow? Approximately 2.5 times average monthly payroll costs. The SBA’s instructions to the application form explain that the relevant time period for calculating the average monthly payroll costs is calendar year 2019 for most applicants. If you have a seasonal or new business, you may use different rules that should be more advantageous to you. You must exclude any compensation over $100,000 paid to people whose salary is over $100,000 per year. Health insurance and some other benefits are part of payroll costs so don’t just add up the base salaries you paid, divide by 12, and then multiple by 2.5.

We have a restaurant and employees collect tips. What do we include? Payroll costs include tips paid to your tipped employees, whether they are paid directly by customers or paid to your business and then given to your employees.

Am I allowed to include independent contractors to whom I pay a commission? That is a question that everyone has been asking the SBA to define more clearly and they did not. The guidance issued last night did not clear up the issue, because it contains inconsistent language. On the one hand, one section of the rule, states that independent contractors are not counted for purposes of determining the amount of the loan or the loan forgiveness. But, in another section of the rule, it says to include payments to independent contractors in deciding the amount of the loan. We are working on getting a better answer from the SBA. Well-informed people have differing opinions.

What are the interest rate and other loan terms? The interest rate is 1%. Any part of the loan that is not forgiven, as explained below, must be repaid over 2 years. You do not have to make any loan payments for the first 6 months and if you get complete forgiveness, you never pay anything.

What can I use the loan for? Salaries and other payroll costs, certain other health care benefits, mortgage interest, rent, utilities and interest on other debt. You cannot game the system by signing a new lease, adding a fancy new Internet connection, or borrowing a new loan. Payments on those items only count if the arrangement started before February 15, 2020.

What if the lender is worried that I will not be able to repay? The SBA is giving a 100% guarantee of the loan, so the lender’s decision on whether to approve your application should be based entirely on whether you have satisfied the SBA application rules.

Do I have to guarantee the loan or provide collateral? No. These common requirements for “normal” SBA loans do not apply.

Am I going to have to pay any loan fees or other costs? No. There is no fee to the SBA and the SBA is paying the lender an origination fee so you do not have to pay that. Fees of your lawyer, accountant or SBA loan expediter are supposed to be paid by the lender out of its fee from the SBA.

Do I have to pay the loan back? The loan (both interest and principal) may be forgiven up to the amount of your expenditures on payroll costs, rent, utilities and certain debts during the eight-week period after the loan is made, so long as at least 75% of the loan proceeds are used to pay payroll costs. You may lose part of the forgiveness if you reduce salaries or fire employees.

How do I risk having my forgiveness reduced? The CARES Act, which established the PPP loan program provided that there are two ways that your loan forgiveness may be reduced – a reduction in your total employees and reductions in the salary of lower compensated employees. Unfortunately, in the rush to get the program started the emergency regulations just issued by the SBA do not provide any significant amplification or interpretation of the forgiveness reduction provisions in the statute. The following is a description of what the statute says, but we caution you that relying on the statute can, unfortunately, cause problems because the SBA has shown that it is willing to ignore the statute when it finds it appropriate. The SBA has stated that it will issue additional guidance on loan forgiveness.

• Fewer employees. If you reduce the average number of full-time equivalent employees per month from February 15 through June 30 of 2020 below your prior average number during either February 15 to June 30, 2019, or January 1, 2020, to February 29, 2020 (you get to choose one of those periods), your forgiveness is reduced. The reduction in forgiveness is equal to the same percentage as the reduction in employees. However, new hires prior to June 30, 2020, will allow you to bulk back up and replace employees terminated between February 15 and April 26, thus saving some of the reduction in forgiveness.
• Reductions in salary. If you reduce the salary and wages of an employee during the 8 weeks after the loan closes by more than 25% of their total salary during the period from January 1, 2020 through March 31, 2020, your forgiveness is reduced dollar for dollar for any excess salary reduction. We are troubled by this calculation because it is disadvantageous to employees, so we suspect that there is a strong possibility that the SBA may change the calculation. Furthermore, reduction in the salaries of employees earning more than $100,000 are excluded from this analysis so you may reduce those salaries as much as you want without reducing your forgiveness.

What documentation do I have to submit to get the forgiveness? The simple answer is, a lot! You will have to provide tax filings to prove wages paid, canceled checks, or other proof of payment of other forgivable expenses, and remember that the SBA has said it will issue additional guidance on forgiveness that may even increase the documentary requirements. We advise our clients to be fastidious in documenting expenses. You may want to consider depositing the entire loan proceeds into a separate checking account and write all checks out of that account only to pay unquestionably forgivable expenses.

Is the lender going limit my forgiveness because forgiveness means that it loses money? No. The SBA reimburses the lender for the entire forgiveness.

What about any part of the loan that is not forgiven? You must repay it over 2 years.

If you have any questions or need further advice concerning the PPP loan program or any of the other relief programs, please feel free to contact us.

About the Authors: 
Jay L. Hack, Esq. is the head of Gallet Dreyer & Berkey LLP’s Banking and Financial Institutions Practice.
David T. Azrin, Esq. is the head of Gallet Dreyer & Berkey LLP’s Employment Law Practice.