The Paycheck Protection Program (PPP)

Key updates for 2021:

• The deadline to receive a PPP loan has been extended to May 31, 2021.
• Many businesses are now eligible for significantly larger loans than before (see Loan Amount section below).
• Allowable business expenses paid with PPP funds in 2020 or 2021 are now tax deductible (in spite of the fact that forgiven loan amounts do not need to be reported as income).

Many farms and other businesses and non-profit organizations qualify for forgivable loans through the Paycheck Protection Program (PPP), which can fund payroll costs, including compensation for self-employed business owners. PPP loans are a great opportunity for businesses of all sizes, and many local businesses have already succeeded in getting their PPP loans forgiven. Contact your bank/lender to see if they can help you apply, or check out this link listing lenders that issue PPP loans. See more information on the PPP below, and here is a detailed guide to the PPP for farmers.

Loan Terms: PPP loans are fully forgivable for many borrowers. Loan payments are deferred for at least six months and come due once borrowers receive compensation for forgiven amounts, or ten months after the end of the borrower’s loan forgiveness covered period if the borrower doesn’t apply for forgiveness. The loans have a 1% interest rate and mature in a minimum of two years for loans made before June 5, 2020 or five years for loans made on or after June 5, 2020. No collateral or personal guarantees are required, and there are no borrower fees.

Loan Amount: The maximum loan amount you are eligible for through PPP is generally capped at 2.5 times your average monthly payroll cost for either 2019 or 2020 (or 3.5 times for restaurants). For those who are self-employed, the owners’ income is included in calculation of monthly payroll cost. Formerly this was calculated using the net income reported on 2019 tax returns — but now, for businesses filing a Schedule F or Schedule C, this calculation is now made using gross income, which significantly increases the maximum PPP loan amount for many businesses. See more details on how maximum loan amount is calculated here (farmers should refer to question 3 on this page). For seasonal businesses (defined as those operating <7 months/year or with at least 2/3 of gross receipts occurring in a 6-month period), the monthly payroll cost can be calculated based on any 12-week period from 2/15/19 to 2/15/20.

Loan Eligibility: When submitting a PPP application, all borrowers must certify in good faith that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant,” but all borrowers with loans under $2 million will be deemed to have made this certification in good faith without further scrutiny. Businesses that already received a PPP loan can qualify for a second loan (aka a “second-draw” loan) by additionally showing a 25% decrease in revenue in 2020 as a whole compared to 2019, or in any quarter of 2020 compared to the corresponding quarter from 2019. Note that if you or your employees receive pay through the PPP, this will likely reduce any unemployment benefits.

Loan Forgiveness: In addition to having a very low interest rate, many businesses are attracted to these loans because they are fully or partially forgivable, depending on how funds are used. Any loan money that is spent within 24 weeks of the first loan disbursement can be fully forgiven if both of the following conditions are met during the period leading up to your application for loan forgiveness (or up to 24 weeks after loan disbursement):

• At least 60% of loan funds must be spent on payroll. The amount not spent on payroll must all be spent on:
  • interest on mortgage obligations incurred before 2/15/20
  • rent under lease agreements in force before 2/15/20
    
  • utilities for which service began before 2/15/20, and/or
    
  • for loans obtained in 2021 only: worker protection costs related to COVID-19, uninsured property damage costs caused by looting or vandalism during 2020, and certain supplier costs and expenses for operations.
• You must maintain both your number of employees and your compensation of employees. For second-draw loans, you must maintain your employee numbers and compensation at the same manner as required for your first-draw loan.  Note that there is no obligation to continue to maintain staffing levels after loan forgiveness. The SBA has also indicated that employers will not be penalized if they offered to rehire laid-off employees (for the same salary/wages and same number of hours), as long as the offer was made in good faith and in writing, and the employee’s rejection of that offer was documented. See more details below on the requirements for employee retention and employee compensation to ensure loan forgiveness, and note that you must actively apply for loan forgiveness on a timely basis in order to receive it (forgiveness is not automatic).
  • Employee compensation requirement:
    • During the period leading up to your application for loan forgiveness (up to 24 weeks after loan disbursement), you must pay your employees at least 75% of what you paid them during the first quarter of 2020. For this test you can compare the average weekly compensation for both periods on an employee-by-employee basis.
    • If compensation declines by more than 25%, there will be a proportional reduction in loan forgiveness.
  • Employee retention requirement:
    • During the period leading up to your application for loan forgiveness (up to 24 weeks after loan disbursement), you must maintain the same average monthly number of FTEs that you had during the period from 2/15/19 – 6/30/19 if you’re a seasonal business, or 1/1/20 – 2/31/20 if not seasonal.
    • To calculate FTE numbers for purposes of loan forgiveness, you should count each full-time employee working 40+ hours per week as 1 FTE; and for part-time employees, you should divide the average number of hours worked per week by 40.
    • If your number of FTEs declines, there will be a proportional reduction in loan forgiveness. There will, however, be no reduction in forgiveness if are able to document either that 1) you were unable to rehire the individuals who were your employees AND you were unable to hire similarly qualified employees for unfilled positions; OR 2) you were unable to return to the same level of business activity due to compliance with federal guidance.

For more loan forgiveness information and applications, see this SBA info page. Note that borrowers with loans of $150,000 or less can now obtain loan forgiveness using the highly simplified one-page application.