URGENT NEWS - The Paycheck Protection Program Explained

/ Freidel & Associates/

On Friday, March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) into law. The CARES Act is generally referred to as the stimulus bill and comes with a projected $2 trillion price tag. But, at 880 pages in length, many are asking what the CARES Act means for them. We at Freidel & Associates are going to be providing a few posts to summarize the key provisions for both businesses and individual taxpayers. In this post, we summarize the Paycheck Protection Program.

The Paycheck Protection Program is a $350 billion program for small businesses (generally less than 500 employees) to receive low-interest loans in order to keep their businesses operating. These loans allow businesses which were in existence as of February 15, 2020, to continue to cut paychecks for their employees.

The maximum amount of loans available under the Paycheck Protection Program is 2.5 times the average monthly payroll of the company during twelve months prior to the loan, with special rules for seasonal employers. For new businesses, modified measurement rules also apply.

Permitted uses of the loans include:

  • Payroll costs (up to $100,000 per employee, and including certain independent contractor costs)

  • Certain employee benefit costs

  • Mortgage interest

  • Rent payments

  • Utilities

  • Interest on certain other debts

Most significantly - the loan amount can be fully or partially forgiven based on the business spending in the eight weeks after the loan is received. This forgiveness amount is based on spending during these 8 weeks for payroll costs, interest on certain business debt, rent, and utilities. For many of our clients, this means that the entire loan balance is forgiven. As a final “bonus” - the forgiveness amount is fully non-taxable for tax purposes!

However, if employees are terminated or employee wages are reduced beyond certain thresholds, the amount of forgiveness may be reduced. In short, the Paycheck Protection Program is seeking to keep as many employees of small businesses employed as possible—with the federal government offering to foot the bill to keep these employees employed.

As you might expect - there are many nuances to how all of this works - this blog post is just intended to cover this at a very high level. Please contact us or your local SBA lender for more information on the numerous details. Please also be aware that getting Paycheck Protection Program loan forgiveness may eliminate your eligibility for a $5,000 per employee “Employee Retention Credit”.

The Paycheck Protection Program also waives a host of other-requirements for SBA loans, including eliminating the requirement that businesses have no other access to credit, and the loans also waive any personal guarantee requirements. The Paycheck Protection Program also empowers the SBA to expand the banks that are eligible to write the loans, which will potentially allow small businesses to continue to work with their existing banks.

For those businesses engaged in businesses with NAICS codes beginning with “72” (generally hospitality and food service), the Paycheck Protection Program also waives certain related business aggregation rules, and also provides for less restrictive overall employee size limits.

It is expected that the SBA will roll out interim regulations to further define, expand, and/or limit who is eligible for loans under the Paycheck Protection Program. If that is the case, we will continue to update our clients that are impacted by those regulations.

Freidel & Associates, LLC provides this post for informational purposes only and this post does not constitute tax advice rendered by Freidel & Associates, LLC to the reader. All tax advice is personal to each client and simply viewing this post does not form an accountant-client relationship between you and Freidel & Associates, LLC. For all current clients of Freidel & Associates, LLC, if you are not sure how the CARES Act affects you, please contact Paul or a member of the team for further information.