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Know Your Rights: The Paycheck Protection Program in the Era of COVID-19

Is your business struggling due to the COVID-19 pandemic? Are you struggling to keep your employees? The paycheck protection program may offer a solution.

Continue reading to learn about the program, eligibility, and how to apply. This potentially forgivable loan can benefit you and your employees.

What Is the Paycheck Protection Program?

The Paycheck Protection Program (PPP) is part of the CARES ACT. It offers potentially forgivable loans for small businesses. The goal is to continue payroll for employees.

The Small Business Administration (SBA) administers the loans. The loan will be “forgiven” if employees remain on the payroll for eight weeks. The SBA specifies the use of this money for payroll, rent, mortgage interest, or utilities.

Who’s Eligible for the COVID-19 Paycheck Protection Program?

To qualify for the PPP, the business must be physically located in the United States. It may not have over 500 employees and must have been in operation on February 15, 2020.

Employees may include full-time, part-time, or another status. The 500-employee rule may apply to the number of workers at one location. Specific examples include businesses in the restaurant and hospitality industry.

Sole proprietorships, self-employed, independent contractors, and gig-economy works are eligible. Illegal businesses are not eligible.

How Much Money Can I Expect?

The PPP allows qualifying businesses to borrow up to the average of total monthly payroll expenses. This calculation is based on what you paid during the previous 12 months before the loan. This average monthly payroll expense is then multiplied by 2.5.

The largest amount a business may receive is $10 million. A single employee may not receive more than $100,000. Payroll costs include wages, salaries, commissions, and tips.

Small business payroll costs include:

  • Paid leave
  • Severance packages
  • Employee group health care benefits
  • State or local taxes on compensation

For sole proprietors or independent contractors, payroll costs include your wage, commissions, income, or net earnings.

Payroll Cost Exclusions

There are several exclusions when calculating payroll costs. These include:

  • Federal employment tax imposed or withheld between February 15, 2020, and June 30, 2020
  • Federal Insurance Contributions Act taxes
  • Railroad Retirement Act taxes
  • Income taxes
  • Money paid to independent contractors
  • Collateral
  • Personal guaranty
  • Sick and family leave wages if you take a tax credit under the Families First Coronavirus Response Act

You may not qualify if you’ve had legal trouble in the past. Owners who hold 20% of the business equity don’t qualify if they are:

  • In jail
  • On probation
  • On parole
  • Subject to any formal criminal charges

If the owner received a conviction, plead guilty or no contest to a felony in the past 5 years they’re excluded. This also applies if they're on a pretrial diversion, parole, or probation for a felony.

Will the PPP Loan Add More Costs?

The standard SBA 7(a) loan has no fees. You may incur fees from tax or financial professionals.

Any part of the loan that’s non-forgivable will have a 1% interest rate. You'll have a six-month deferral before repayment begins.

Remember not to use more than 25% of the loan for non-payroll expenditures. You must follow the rules described above.

Forgiven loan amounts will not calculate into your gross income. Thus, you won’t have to pay taxes for the loan as income.

How to Apply for the PPP

Eligible businesses should contact an SBA 7(a) lender to apply for the PPP. You may also contact any federally insured depository institution or credit union. A participating Farm Credit System Institution offers another option.

More regulated lenders will become available as they receive approval for the program. Approved lenders will begin processing loan applications as of April 3, 2020. The PPP will continue through June 30, 2020,

When preparing to apply for a PPP loan, gather the following documents. Small businesses need a payroll register for 2019 and available months in 2020. You will also need:

  • 941 Quarterly Tax Fillings for all 2019 quarters and quarter 1 of 2020
  • 944 Annual Tax Filings for 2019

Have a front and back color copy of a government-issued ID for all owners included on the application. If you use an Excel format for your payroll report, include 12 months of bank statements.

Independent contractors and self-employed persons should have the above documents if applicable. Also, independent contractors need their 1099-Misc and income/expense reports for 2019. Self-employed individuals need:

  • 2019 IRS 1040 Schedule C
  • 1099-MISC for every self-employed owner
  • 2019 income and expense report
  • Government-issued ID as described above

Calculate your owner percentage of the business for which you are applying. Also have your Taxpayer ID Number (SSN or EID), and role or title.

You Will Need to Certify Several Facts

The application requires that you confirm the following in good faith:

  • Your business needs the loan to keep operating during this economic uncertainty
  • The money is needed to keep and pay workers or pay the mortgage, lease, and utilities
  • You won’t receive another PPP loan
  • You will provide documentation to support all costs and payments for 8 weeks after getting the loan
  • You will not use more than 25% of the loan for non-payroll costs in relation to loan forgiveness
  • All information and documentation is true and accurate

You must give consent for the lender to calculate your loan amount based on your documentation. You agree to the sharing of your tax information with the SBA for compliance with the SBA Loan Program.

If you want help applying for the PPP, consult a professional. Business lawyers and tax or financial professionals can provide assistance.

Do You Think You Qualify for the PPP?

Are you a small business owner, independent contractor, or self-employed? You may benefit from the paycheck protection program.

During these tenuous economic times, this program’s goal is to offer some stability. This article provided an overview to help you decide if the PPP may offer you relief.

Welch Law Firm provides legal advice and creates legal documents. We offer estate planning and assist with business law issues. Contact us today to ask questions and learn how we can help you.