Paycheck Protection Program – Updated Application Requirements Small Businesses Should Know About
The Paycheck Protection Program (PPP), part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), will be regulated by the U.S. Small Business Administration (SBA) and is designed to incentivize job retention by providing small businesses with access to a partially forgivable loan to support payroll and related costs.
03.31.20
On March 31, 2020, the SBA released updated guidance to borrowers and lenders regarding the PPP program, including a sample application form.
Important New Developments
The SBA’s updated guidance and sample application provides additional information regarding certain aspects of the PPP loan program, including the following:
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- Application Processing Begins April 3, 2020.
Processing of formal applications by SBA 7(a) lenders and other participating institutions will begin on Friday, April 3, 2020 for small businesses and sole proprietorships, and one week later on April 10, 2020 for independent contractors and those who are self-employed. We expect that the PPP will be very popular and that lenders may have limited capacity to issue covered loans. Small business owners are encouraged to reach out to lenders with whom they have an existing relationship or other potential lenders so that they are prepared to proceed quickly once applications can be processed.
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- Limitation on Forgiveness of Non-Payroll Costs.
Although PPP loans may be used for non-payroll expenses like rent, utilities and interest on mortgage payments, the application form and related guidance indicate that not more than 25% of the forgiven amount will be for non-payroll costs.
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- Significant Owners Must Be Identified and Make Certifications.
The sample application requires a list of the owners of the applying business with greater than 20% ownership interests.[1] In addition to the business itself, each 20% owner will be required to make good faith certifications in connection with the loan application that include, but are not limited to, certifying that need for the loan is based on the current economic uncertainty, the funds will be used for the permitted purposes, payroll documentation is accurate, and that no other PPP loans have been or will be received.
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- Certain Applicants Are Prohibited.
The application explains that certain applicants will be denied for reasons such as (i) bankruptcy by the business or any owner, (ii) delinquency by the business or any owner on a loan from the SBA or other federal agency in the past seven years that caused a loss to the government, (iii) certain formal criminal charges against or indictment of individual applicants or owners of 20% or more of the business, and (iv) any felony or misdemeanor crime against a minor by an individual applicant or owner of 20% or more of the business within the last seven years. In addition, applicants must either be a U.S. Citizen or have Lawful Permanent Resident status.
Supplemental Documentation May Be Required
Although the form application and guidance do not mandate specific supporting documentation for the application, and underwriting practices may vary by individual lenders, we expect that applicants for PPP loans should anticipate requests by lenders for additional supporting documentation, which may include:
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- Proof that the business was operating as of February 15, 2020.
- 2019 1099 forms for independent contractors and any additional documentation concerning amounts paid to subcontractors, sole proprietors, and similar self-employed individuals for services performed during the previous twelve months.
- 2019 and 2020 IRS Quarterly 940, 941 or 944 payroll tax reports.
- Twelve months of payroll reports, ending on the most recent payroll date, that include:
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- Employee gross earnings, including officers paid W-2 wages
- Paid time off for each employee
- Family medical leave pay for each employee
- Vacation pay for each employee
- State and local taxes assessed on each employee’s compensation
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- Documentation listing health insurance premiums that the business owners pay under a group health plan and all payments made under a self-insured plan for the past twelve months.
- Documentation of the aggregate amount of all retirement plan funding paid by business owners, not including funding that came from employees out of paycheck deferrals, but including 401K plans, SEP IRAs and Simple IRAs.
The Coronavirus Task Force at Klehr Harrison stands ready to assist you in your business and legal needs. We will continue to provide additional information and guidance as the COVID-19 situation develops.
Co-authors Matthew McDonald, partner and Elizabeth Bucilla, associate are members of the Corporate & Securities Department at Klehr Harrison.
[1] Based on the sample application, the parties listed below will be included as being “owners” or “principals” for purposes of the application:
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- A sole proprietor;
- All general partners, and all limited partners who own 20% or more of the equity of a partnership;
- All owners of 20% or more of a corporation;
- All members owning 20% or more of a limited liability company; and
- Any trustor (if the applicant is owned by a trust).
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