CARES Act Most Frequently Asked Questions (FAQ) Answered
The US is nearly four months into the distribution of Paycheck Protection Program (PPP) loans to small businesses, with funding reaching more than 4.5 million businesses and disbursing over $518 billion in aid. But many business owners have questions on the loan programs, loan forgiveness, a potential second round of COVID-19 relief, as well as payroll cost and employee requirements. To help understand the CARES Act and coronavirus relief, we compiled some frequently asked questions (FAQ) and answers for business owners looking at aid options and PPP loan forgiveness.
Question: Is the PPP Loan Forgiveness Application being simplified?
Yes, the PPP Loan Forgiveness Application Form has been simplified. As of June 11, and revised on June 16, the PPP Loan Forgiveness Application Form 3508EZ is available through the Small Business Administration (SBA) and the Treasury Department. The EZ application can be used by borrowers that:
- Are self-employed, independent contractors, or sole proprietors;
- Did not reduce the salaries or wages of their employees by more than 25% and did not reduce the number of their employees or the hours worked;
- Experienced reductions in business activity because of health directives related to COVID-19.
The EZ form offers participating businesses a simpler application in three pages by focusing on payroll costs, business mortgage interest payments, business rent or lease payments, and business utility payments against the initial PPP loan amount. As a reminder, borrowers are eligible for 100 percent loan forgiveness; however, to be eligible, businesses must adhere to guidelines for full-time equivalent (FTE) employees and payroll:
- Payroll expenses must be 60 percent of the total loan amount.
- Salaries at or below $100,000 per year cannot be reduced by more than 25 percent.
- Employees must be working 40 hours per week to be counted as an FTE employee in the business headcount.
Businesses can fail to receive the full amount of loan forgiveness, and instead get partial loan forgiveness or a forgiveness reduction, based on their full-time employee’s status – i.e. if they reduce employees or wages. More information on equivalent employees’ status and exemptions under the new Paycheck Protection Program Flexibility Act of 2020 (PPPFA) can be found here and below.
Question: How soon should employers complete the forgiveness application, after 8 weeks, after 24 weeks, or as soon as possible?
According to existing documentation, businesses should wait until the end of their covered periods before applying for PPP loan forgiveness. Depending on when the borrower received the loan, the covered period is either:
- the 24-week (168-day) period beginning on the disbursement date for PPP loans on or after June 5, 2020, or
- the eight-week (56-days) if the borrower received their loan before June 5, 2020, and elected to use an eight-week period.
- No matter what, the covered period may not extend beyond December 31, 2020.
The SBA, on June 12, 2020, said borrowers do not have to pay during the loan “covered period” and for the 10 months after that period ends. If a PPP borrower is going to apply for loan forgiveness within that 10-month time period, they may continue deferment on payments on their PPP funds until the SBA forgives the loan or declines forgiveness.
Question: What criteria and documentation are needed to meet forgiveness?
Criteria and documentation needed to meet forgiveness are those related to proof of eligible expenses. On or before June 4, 2020, eligible expenses include 75% payroll requirement and up to 25% eligible non-payroll expenses. On June 5, 2020, or later, following the PPP Flexibility Act (see below for more information), eligible expenses include 60% payroll requirement and up to 40% eligible non-payroll expenses. Borrowers will apply for forgiveness with their lending institutions and lenders will need to verify information on the business. It is recommended that businesses have with them:
- Payroll summary report for the last 12 months;
- IRS Form 940 & 941 (payroll tax forms);
- 2019 business tax returns (or 2018 return if 2019 is not yet filed);
- 2019 year-end financials (if tax return is not prepared);
- Statement of payroll benefits offered to employees;
- Evidence of payroll taxes, insurance premiums and benefits paid;
- Driver’s licenses for all owners with 20% or greater ownership stake; and
- Entity formation documents (articles of incorporation; bylaws and operating agreement; tax ID or employer identification number).
Check here for a full CARES Act documentation checklist from Biz2Credit.
Borrowers can apply for loan forgiveness at the end of their current period. They will need to prove that they have kept on FTE employees or rehired FTE employees by December 31, 2020, or the end of their covered period, whichever comes first. As stated above, to ensure that borrowers receive a loan forgiveness amount equivalent to 100 percent of their PPP loan, businesses must make every effort to retain or rehire FTE employees and commit to wage expenses.
Learn more here for information on meeting FTE requirements: PPP FTE: 2 Ways to Meet Forgiveness Requirements
Question: Can my business meet forgiveness even if an employee leaves or is fired for reasons unrelated to COVID-19?
Yes, you may still be eligible for forgiveness even in the case that an employee leaves for reasons unrelated to COVID-19. Businesses should document the reason for an employee leaving and any attempts to rehire. The business should also be prepared to show that proof as supporting documentation to lenders and SBA.
As a reminder, to be eligible for full 100 percent loan forgiveness, businesses must use the PPP loan funds to keep FTE employees on the payroll and not their reduce their wages by more than 25 percent (if the employee makes $100,000 or less). However, it is important to note that for FTE employee reductions and wage reductions there can be exemptions:
- If reduced wages are restored, using PPP funds, by December 31, 2020.
- If there is a reduction in FTE employees because documented attempts to rehire or restore hours by the business were rejected by the employee.
- If an employee was fired with cause, voluntarily changed their own schedule, or voluntarily resigned.
It is important that all businesses keep records of any wage or employee reductions during the COVID-19 pandemic so that they have documentation when applying for loan forgiveness. Any FTE employee reductions or wage reductions that are not documented exemptions may lead to partial loan forgiveness.
Question: As many businesses face a second wave of COVID-19 related closures are there plans for a second round or augmentation of PPP?
Yes, there are plans in both the House of Representatives and the Senate that would extend the second round of aid to businesses in need. One plan is being called Prioritized Paycheck Protection Program or P4, which is a new PPP loan available to businesses that have already received and used their initial amount of the loan. You can learn more here about the proposed P4 legislation to help small businesses.
So far, neither the House nor Senate bills have been approved. According to Senator Collins, the goal is to make the second round of aid available by the end of July. As the bill has yet to be passed, there are few details available. Small businesses, restaurants, and medical practitioners continue to be a top priority for legislators in Washington.
The P4 Act would authorize a second loan, using the $120 billion of PPP funding remaining in the program, for eligible small businesses. Recipients can receive up to $2 million in a P4 loan, which is determined based on average monthly payroll costs multiplied by 2.5, the same formula as the original PPP loan. Publicly traded companies cannot apply for this loan. The proposed application deadline is October 1, 2020, however, there may be flexibility with the deadline based on the SBA Administrator’s discretion.
Question: What Loan Options Are Still Available?
One recent modification to the CARES Act and PPP loans was the Paycheck Protection Program Flexibility Act of 2020 (PPPFA) that was signed into law by President Donald Trump on June 5, 2020. It modified loan forgiveness provisions for small businesses under the Paycheck Protection Program. The bi-partisan bill provides “businesses with more time and flexibility to keep their employees on the payroll and ensure their continued operations as we safely reopen our country,” SBA Administrator Jovita Carranza and U.S. Treasury Secretary Steven Mnuchin said in a statement. The PPPFA made key modifications to the original Paycheck Protection Program:
- the covered period for loan forgiveness was extended from eight weeks to 24 weeks (see above for more on this change);
- the requirement that 75 percent of the borrower’s loan goes to payroll costs was lowered to 60 percent; and
- the deferral period was extended for ten months after the covered period has ended.
Additionally, approximately $129 billion is remaining in the CARES Act for PPP loans, and loan applications are still being accepted. PPP loans are still fully forgivable and backed by a 100 percent government guarantee. Borrowers must certify in “good faith” with the SBA that their PPP application is necessary to support their operations due to the coronavirus pandemic. On June 25, 2020, the SBA and Treasury Department determined that a safe harbor will apply to borrowers who received principal funds less than $2 million will be deemed to be in good faith for their loan due to economic uncertainty.
The Small Business Association has disaster assistance and has specifically been using the Economic Injury Disaster Loan program (EIDL) during the coronavirus pandemic. Small businesses and non-profit organizations, with no more than 500 employees that are experiencing revenue loss, are eligible to apply for a low-interest loan that is not forgivable. Loans up to $2 million are available, with interest rates from 3.75 percent for small businesses and 2.75 percent for non-profits, and payments are deferred for one year. Businesses can apply directly with the SBA until December 21, 2020.
Businesses are not expected to return to a pre-coronavirus level of business activity until safety guidelines in their area allow them to operate with customer safety requirements including PPE and social distancing. Until then, many businesses are relying on PPP loan proceeds to keep their businesses afloat and employees on the payroll.