By Jay L. Morse
Last week, we explained what the CARES Act PPP loan program is and who qualifies for a PPP loan. This article focuses on how much funding a borrower can obtain through the PPP program and how loan proceeds may be forgiven.
The amount of a PPP loan may be up to 2.5 times the borrower’s average monthly payroll costs over either (a) January through December of 2019, or (b) the 12-month period prior to the loan date. The borrower may decide what time period to use and, provided the applicant justifies its reasoning, the lender is not required to challenge the applicant’s decision. Note that for seasonal employers, the borrower may calculate its average monthly payroll costs over the 12-week period beginning either on (y) February 15, 2019, or on (z) March 1, 2019. The average monthly payroll cost is the difference between what the CARES Act considers “included payroll costs” and “excluded payroll costs.” Generally, the amount is equal to “cash compensation,” being wages or salary paid to employees (however, limited to a maximum of $100,000 per employee), plus “non-cash compensation,” being most benefits and state and local taxes. Non-cash benefits generally include (i) employer contributions to defined-benefit or defined-contribution retirement plans, (ii) payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, (iii) employee vacation, parental, family, medical, and sick leave, and (iv) payment of state and local taxes assessed on compensation of employees. In any event, the total PPP loan amount may not exceed $10 million.
Borrowers are eligible for PPP loan forgiveness in the amount equal to what the borrower spends during the 8-week period after the origination date of the loan on payroll costs. Nevertheless, eligible payroll costs do not include compensation above $100,000 in wages. Other forgivable uses of the loan funds include amounts spent on interest payments on any mortgage incurred prior to February 15, 2020, the payment of rent on any lease in force prior to February 15, 2020, and the payment of any utility for which service began before February 15, 2020. However, note that the primary purpose of the PPP loan program is to cover payroll costs and, accordingly, only up to 25% of the funds used on non-payroll related costs can be forgiven. Amounts not forgiven must be paid within two years and will accrue interest at a rate of 1.0%. Principal and interest are deferred for up to six months. No interest is charged on forgiven amounts.
It is important that borrowers also understand that firing employees and/or reducing employee compensation can lead to reduced forgiveness under the PPP loan program. Do not hesitate to inquire for more information in this regard.