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SBA Paycheck Protection Program (PPP) Loans Explained

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PPP UPDATES as of May 14, 2020:

Ericksen Krentel continues to monitor the ever-changing guidance and requirements for the PPP loan application and debt forgiveness process to ensure you receive the maximum benefits. Our team is ready to help create a customized approach for your organization to effectively, and correctly, use those funds to guarantee maximum forgiveness. If you received PPP funds and need assistance in allocation and forgiveness documentation or calculation, please contact us by clicking here.


The U.S. Congress passed, and President Trump signed, The Coronavirus Aid, Relief and Economic Security (“CARES”) Act on March 27, 2020. The CARES Act includes an allocation of up to $349 billion to fund the Paycheck Protection Program (“PPP”). The PPP will be used to fund forgivable loans to help small businesses retain their employees during the economic downturn caused by the COVID-19 pandemic.

PPP loans will be administered through the U.S. Small Business Administration (“SBA”). SBA rules, terms and guidance on the PPP have been very fluid and are subject to change. The information below was available on the SBA website as of April 1, 2020.

Borrowings under the PPP will be forgiven if:

  • the loan proceeds are used to cover payroll costs, most mortgage interest, rent and utility costs in the eight-week period after the loan is made; and
  • employee and compensation levels are maintained.

You can click on any provision in the list below to go directly to that summary (direct link feature may not work on mobile devices):

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Who is Eligible?

  • A small business with fewer than 500 employees (the 500-employee threshold includes all employees: full-time, part-time and any other status).
  • A small business that otherwise meets the SBA’s size standard.
  • 501(c)(3) organizations with fewer than 500 employees.
  • An individual who operates as a sole proprietor.
  • An individual who operates as an independent contractor.
  • An individual who is self-employed who regularly carries on any trade or business.
  • A Tribal business concern that meets the SBA size standard.
  • A 501(c)(19) Veterans Organization that meets the SBA size standard.

Additionally, the following special rules may allow eligibility for employers with more than 500 employees:

  • For businesses in the accommodation and food services sector (NAICS 72) the 500-employee rule is applied on a per physical location basis.
  • Normal SBA affiliation rules do not apply to businesses operating as franchises or businesses receiving financial assistance from an approved Small Business Investment Company.

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How Much Can I Borrow?

  • Loans can be up to 250% (2.5 times) the borrower’s “average monthly payroll” costs, up to $10 million.
  • Most applicants will use their average monthly payroll for 2019, excluding costs over $100,000, for calculating “average monthly payroll.”
  • For employers payroll costs include: salaries / wages, and commissions; vacation, sick and other paid leave; health insurance premiums; retirement benefits; state unemployment taxes.
  • For sole proprietors or independent contractors payroll costs include: wages, commissions, income, or net earnings from self-employment, capped at $100,000 on an annualized basis for each employee.

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What Can PPP Loans Be Used For?

  • Payroll costs, including benefits.
  • Interest on mortgage obligations, incurred before February 15, 2020.
  • Rent, under lease agreements in force before February 15, 2020.
  • Utilities, for which service began before February 15, 2020.

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How Much of a Loan Will be Forgiven? 
Borrowers are eligible for loan forgiveness equal to the amount spent on the following items during the eight-week period beginning on the date of loan origination:

  • Payroll costs (using the same definition of payroll costs used to determine loan eligibility).
  • Interest on the mortgage obligation incurred in the ordinary course of business.
  • Rent on a leasing agreement.
  • Payments on utilities (electricity, gas, water, transportation, telephone or Internet).
  • For borrowers with tipped employees, additional wages paid to those employees

The amount of loan forgiveness will be reduced if there is a decrease in the number of full-time equivalent employees or a reduction of greater than 25% in wages paid to employees.

The loan forgiveness cannot exceed the loan principal. Any forgiven loan amounts are not considered taxable income.
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What is the Interest Rate on PPP Loans? 

  • 1% fixed rate

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What is the Term of PPP Loans? 

  • 2 years.
  • Payments are deferred for six months; however, interest will continue to accrue over this period.
  • There are no prepayment penalties or fees.

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When Can I Apply? 

  • Starting April 3, 2020, small businesses and sole proprietorships can apply for and receive loans to cover their payroll and other certain expenses through existing SBA lenders.
  • Starting April 10, 2020, independent contractors and self-employed individuals can apply for and receive loans to cover their payroll and other certain expenses through existing SBA lenders.
  • Other regulated lenders will be available to make these loans as soon as they are approved and enrolled in the program.

Although the PPP is open until June 30, 2020, SBA is encouraging business owners to apply quickly because there is a funding cap and lenders need time to process loan applications.
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Where Can I Apply? 
Apply through any existing SBA lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. Visit www.sba.gov for a list of SBA lenders.
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What is Needed to Apply?
Borrowers will need to complete the PPP loan application and submit the application with the required documentation to an approved lender that is available to process your application by June 30, 2020.

The SBA and borrowers currently are determining the specific documentation that will be required. The information we expect will be required includes:

  • Organizational documents for the borrowing entity.
  • Fiscal year end 2019 balance sheet and profit and loss statement.
  • Year-to-date date 2020 balance sheet and profit and loss statement through the most current date available.
  • Tax returns for the most recent fiscal year filed.
  • 2019 IRS Forms 940 and 941.
  • First quarter 2020 IRS Form 941, if available.
  • Payroll registers\reports for 2019 and most current year to date available for 2020, including names and total compensation (salaries, benefits, bonuses and commissions)

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How Will Loan Forgiveness be Requested? 
Borrowers will submit a request to the lender that is servicing their 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. They must certify the documents are true and the forgiveness amount was used to keep employees and make eligible mortgage interest, rent and utility payments. The lender must make a decision on the forgiveness within 60 days.
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PPP Sample Form and Fact Sheet 
If you would like to begin preparing a PPP loan application, you can download a sample form to see the information that will be requested from you.

The SBA’s PPP Fact Sheet contains additional information on the loan program.
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The CARES Act excludes from the definition of payroll costs any employee compensation in excess of an annual salary of $100,000. Does that exclusion apply to all employee benefits of monetary value?

No. The exclusion of compensation in excess of $100,000 annually applies only to cash compensation, not to non-cash benefits, including:

  • employer contributions to defined-benefit or defined-contribution retirement plans;
  • payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums; and
  • payment of state and local taxes assessed on compensation of employees.

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What time period should borrowers use to determine their number of employees and payroll costs to calculate their maximum loan amounts? 

The clarification states that, in general, borrowers can calculate their aggregate payroll costs using data either from the previous 12 months or from calendar year 2019.

For seasonal businesses, the applicant may use average monthly payroll for the period between February 15, 2019 (or March 1, 2019) and June 30, 2019. An applicant that was not in business from February 15, 2019, to June 30, 2019, may use the average monthly payroll costs for the period January 1, 2020, through February 29, 2020.

Borrowers may use their average employment over the same time periods to determine their number of employees, for the purposes of applying an employee-based size standard.

Alternatively, borrowers may elect to use SBA’s usual calculation: the average number of employees per pay period in the 12 completed calendar months prior to the date of the loan application (or the average number of employees for each of the pay periods that the business has been operational, if it has not been operational for 12 months).
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As questions or concerns arise, we ask that you contact us so we can address them as quickly as possible to ensure we continue to meet your needs. As a reminder, you can always monitor our COVID-19 Updates webpage by clicking here for the latest or monitoring our accounts on LinkedInTwitter or Facebook.

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About Ericksen Krentel

Ericksen Krentel CPAs and Consultants, founded in New Orleans, Louisiana in 1960 with offices in New Orleans and Mandeville, believes that serving as the clients’ most trusted adviser is grounded in going beyond the numbers.

That includes helping clients achieve their business and personal financial goals by providing innovative and exceptional services in the following areas: audit and assurance services, tax compliance and planning, outsourced CFO services and business valuations for a variety of industries; employee benefit plan audits; fraud and forensic accounting; business planning; IT consulting; loss calculations; and estate planning.

Learn more at www.ericksenkrentel.com.

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