Every time there is a government rescue package, I'm left scratching my head wondering where all the money really goes. During the 2008 – 2009 financial crisis, Congress approved a $787 billion economic stimulus package that basically went to three things:
- $288 billion in tax cuts
- $224 billion in unemployment benefits
- $275 billion for public works
Getting up to 99-weeks of unemployment was pretty huge for those who lost their jobs. This was the time when the term “funemployment” emerged since so many Americans lost hope in finding work and decided to purposefully take an extended break while collecting a paycheck during this difficult time.
But the money that went to tax cuts and public works seemed like it just disappeared into thin air. When the federal government announced years later that the bailout money for many of the largest financial institutions had provided huge returns, I'm not sure any one of us saw a penny. At least the economy recovered.
With the Paycheck Protection Program (PPP) part of the $2 trillion CARES Act, however, I truly believe this will be one of the most impactful rescue packages the government has ever implemented. The other one was FDR's New Deal between 1933 and 1939.
The PPP promises to lend out and forgive
$349 billion $659 billion (due to another round that passed on April 24) to small businesses with under 500 employees if these small businesses keep their payroll.
If you're not a small business owner, you might be thinking who cares about small businesses. However, I assure you that providing direct relief to small business owners is paramount for our economy.
According to the Small Business Association, over 99 percent of America's ~33 million firms are small businesses that employ roughly 59 million Americans or 47.5% of the employees. The vast majority (88 percent) of employer firms have fewer than 20 employees, and nearly 40 percent of all enterprises have under $100k in revenue.
In other words, small businesses are our country's heart and soul! Companies like Apple, Coke, and Clorox get all the headlines, but it is the small business we must do our best to protect.
What Is The Paycheck Protection Program?
Here is the PPP factsheet from the Treasury's website. There are many articles about the PPP, so I thought it best to highlight what it says verbatim below. I'll then clarify several confusions and provide an example that shows how a small business can benefit.
The Paycheck Protection Program (“PPP”) authorizes up to
$349 billion $659 billion in forgivable loans to small businesses to pay their employees during the COVID-19 crisis. All loan terms will be the same for everyone.
The loan amounts will be forgiven as long as:
- The loan proceeds are used to cover payroll costs, and most mortgage interest, rent, and utility costs over the 8 week period after the loan is made; and
- Employee and compensation levels are maintained.
Payroll costs are capped at $100,000 on an annualized basis for each employee. Due to likely high subscription, it is anticipated that not more than 25% of the forgiven amount may be for non-payroll costs. Loan payments will be deferred for 6 months.
Who Can Apply For The Payroll Protection Program?
All businesses – including nonprofits, veterans organizations, Tribal business concerns, sole proprietorships, self-employed individuals, and independent contractors – with 500 or fewer employees can apply.
Businesses in certain industries can have more than 500 employees if they meet applicable SBA employee-based size standards for those industries.
For this program, the SBA’s affiliation standards are waived for small businesses (1) in the hotel and food services industries ; or (2) that are franchises in the SBA’s Franchise Directory; or (3) that receive financial assistance from small business investment companies licensed by the SBA.
What Do I Need To Apply?
You will need to complete the Paycheck Protection Program loan application and submit the application with the required documentation to an approved lender that is available to process your application by June 30, 2020. Click HERE for the application.
You will also need to provide your lender with payroll documentation.
Your business bank should have contacted you about the PPP process. If they have not, I highly suggest reaching out to them ASAP to apply.
Do I need to first look for other funds before applying to this program?
No. We are waiving the usual SBA requirement that you try to obtain some or all of the loan funds from other sources (i.e., we are waiving the Credit Elsewhere requirement).
How long will this program last?
Although the program is open until June 30, 2020, we encourage you to apply as quickly as you can because there is a funding cap and lenders need time to process your loan.
How many loans can I take out under this program?
What can I use these loans for?
You should use the proceeds from these loans on your:
- Payroll costs, including benefits;
- Interest on mortgage obligations, incurred before February 15, 2020;
- Rent, under lease agreements in force before February 15, 2020; and
- Utilities, for which service began before February 15, 2020.
What counts as payroll costs? Payroll costs include:
- Salary, wages, commissions, or tips (capped at $100,000 on an annualized basis for each employee);
- Employee benefits including costs for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payments required for the provisions of group health care benefits including insurance premiums; and payment of any retirement benefit;
- State and local taxes assessed on compensation; and
- For a sole proprietor or independent contractor: wages, commissions, income, or net earnings from self-employment, capped at $100,000 on an annualized basis for each employee.
Does the PPP cover paid sick leave?
Yes, the PPP covers payroll costs, which include employee benefits such as costs for parental, family, medical, or sick leave. However, it is worth noting that the CARES Act expressly excludes qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act (FFCRA) (Public Law 116–127).
How large can my loan be?
Loans can be for up to two months of your average monthly payroll costs from the last year plus an additional 25% of that amount. What's the maximum PPP loan a business can get? That amount is subject to a $10 million cap. If you are a seasonal or new business, you will use different applicable time periods for your calculation. Payroll costs will be capped at $100,000 annualized for each employee.
How much of my loan will be forgiven?
You will owe money when your loan is due if you use the loan amount for anything other than payroll costs, mortgage interest, rent, and utilities payments over the 8 weeks after getting the loan.
Due to likely high subscription, it is anticipated that not more than 25% of the forgiven amount may be for non-payroll costs.
You will also owe money if you do not maintain your staff and payroll.
Number of Staff: Your loan forgiveness will be reduced if you decrease your full-time employee headcount.
Level of Payroll: Your loan forgiveness will also be reduced if you decrease salaries and wages by more than 25% for any employee that made less than $100,000 annualized in 2019.
Re-Hiring: You have until June 30, 2020 to restore your full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020.
How can I request loan forgiveness?
You can submit a request to the lender that is servicing the loan. The request will include documents that verify the number of full-time equivalent employees and pay rates, as well as the payments on eligible mortgage, lease, and utility obligations.
You must certify that the documents are true and that you used the forgiveness amount to keep employees and make eligible mortgage interest, rent, and utility payments. The lender must make a decision on the forgiveness within 60 days.
What is my interest rate?
1.00% fixed rate.
When do I need to start paying interest on my loan?
All payments are deferred for 6 months; however, interest will continue to accrue over this period.
When is my loan due?
In 2 years.
Can I pay my loan earlier than 2 years?
Yes. There are no prepayment penalties or fees.
Do I need to pledge any collateral for these loans?
No. No collateral is required.
Do I need to personally guarantee this loan?
No. There is no personal guarantee requirement. However, if the proceeds are used for fraudulent purposes, the U.S. government will pursue criminal charges against you.
What do I need to certify?
As part of your application, you need to certify in good faith that:
- Current economic uncertainty makes the loan necessary to support your ongoing operations.
- The funds will be used to retain workers and maintain payroll or to make mortgage, lease, and utility payments.
- You have not and will not receive another loan under this program.
- You will provide to the lender documentation that verifies the number of full-time equivalent employees on payroll and the dollar amounts of payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities for the eight weeks after getting this loan.
- Loan forgiveness will be provided for the sum of documented payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities. Due to likely high subscription, it is anticipated that not more than 25% of the forgiven amount may be for non-payroll costs.
- All the information you provided in your application and in all supporting documents and forms is true and accurate. Knowingly making a false statement to get a loan under this program is punishable by law.
- You acknowledge that the lender will calculate the eligible loan amount using the tax documents you submitted. You affirm that the tax documents are identical to those you submitted to the IRS. And you also understand, acknowledge, and agree that the lender can share the tax information with the SBA’s authorized representatives, including authorized representatives of the SBA Office of Inspector General, for the purpose of compliance with SBA Loan Program Requirements and all SBA reviews.
The two limitations are that the total amount cannot be larger than $10 million and the maximum income limit allowed to qualify is $100,000 per employee.
Paycheck Protection Program Confusion
Now that you've read the same thing as I have, I think you will agree that the Paycheck Protection Program is pretty amazing. But of course, there is some confusion!
For example, there is confusion regarding the $100,000 income limit per employee used in the PPP calculation.
If an employee makes over $100,000, is 100% of the employee's salary ineligible for calculation? I think the answer is no. The employee's salary will be pro-rated up to $100,000 for inclusion.
If an employee makes $240,000 starting on Oct 1, 2019, how is that employee's salary included in the calculation? Given the employee made $60,000 gross in 2019, I believe 100% of the employee's salary is included in the calculation since it is below $100,000.
There is also some confusion on whether 8 weeks worth of payroll and other expenses gets forgiven or 2.5X of one month's payroll. Given a month has 4 weeks and change, 2.5X one month = 10 weeks, not 8 weeks. I think the benefit answer is 2.5X monthly payroll if 100% of the PPP money goes towards paying salaries. If 75% of the benefits are used to pay for salaries, the answer is 8 weeks of salary coverage because the remaining 25% goes to paying rent, mortgage, utilities and other costs to keep the lights on.
Finally, there is confusion about the maximum amount of PPP per employee as well as the guidance that at most 25% of PPP goes towards non-payroll expense. Based on my calculations, I think the maximum PPP benefit is about $11,110 per employee X 2.5 = $27,777 to account for a 25% lift in other expenses besides salary. Some people erroneously believe that the total is only $8,333 X 2.5 = $20,833 per employee based off a total $100,000 annual compensation. This is wrong.
From the SBA: “When calculating payroll costs, the exclusion of an employee salary that is greater than $100,000 annually applies only to cash compensation and not to non-cash benefits such as contributions to retirement or defined-benefit plans, payments for group healthcare coverage, including insurance premiums, or state and local taxes.”
Whatever the true number is, just know that it is easier to get approved for less with a known limit that is lower that what you submitted, than it is to get approved for more. If your payroll provider spits out more than $8,333 X 2.5, I would submit that amount in the PPP application.
Here's how to calculate how much you can borrow from the Paycheck Protection Program. However, you should have a payroll provider like Gusto calculate your numbers for you. Then you can easily submit the documentation to your bank.
- Get the payroll amount for the last 12 months, including salaries and benefits
- Deduct the payroll taxes
- Divide the number by 12
- Multiply the number by 2.5
The final figure is the amount you can submit for the Paycheck Protection Program. Don’t get hung up with trying to get the perfect maximum amount. Double check the numbers that your payroll provider has given you and submit.
Paycheck Protection Program Example
One of the businesses I worry about most is our preschool because teachers rock. Many of our teachers live very humbly due to the high cost of living in San Francisco. If our preschool shuts down for an extended period of time, I worry our teachers will not get paid.
Parents were asked to pay full tuition for the months of March and April, despite the school being closed. I'm fine with this. However, we have been told that if the school is still closed in May, we will not have to pay May tuition. Instead, we could offer donations instead.
Before the Paycheck Protection Program was unveiled, I was worried about our preschool. Now, I am not.
Thanks to the PPP, our preschool is eligible to have 2.5X of its monthly payroll and other expenses covered. If that's the case, then our preschool should be able to afford for the school to be closed and receive zero tuition for all of May and June before again feeling financial strain starting in mid-July.
Based on my survey in The Economy Or Maybe Your Life, the majority of the 2,000 voters were willing to shelter in place for two months to combat the virus. Based on the latest coronavirus data, it sure looks like the curve is flattening in most cities. Therefore, the PPP should keep our preschool afloat in time for it to open again no later than mid-July.
Below is a Paychecks Protection Program loan example I created for my preschool. I estimate there are 10 employees who average $75,000 a year in salary. They all get subsidized health insurance and some 401(k) matching.
The owners of the preschool can apply for the PPP and get $172,917 from the federal government. If they leave their payroll exactly as it is for at least 8 weeks after the loan is granted, the preschool can submit proof of documentation to its lender to have the entire $172,917 forgiven. Wonderful!
The PPP Is A Big Win For The Economy And Investors
If the PPP actually successfully lends out and forgives $659 billion to small businesses and self-employed individuals, this is the biggest win for the economy and for investors.
Before doing my analysis that the S&P 500 would bottom somewhere between 2,200 – 2,400, the PPP program had not been introduced. I had assumed there would be some type of rescue package but not one this good. With this new information, I have even higher conviction in my call. If the S&P 500 gets below 2,400 again, given there were plenty of rallies and then sell-offs during the previous financial crisis, I will be buying again. I’m not chasing the ramp.
Here are some more thoughts about the PPP benefitting businesses :
- Low operating profit margin businesses, mostly due to high payroll and good benefits, that are able to stay in business are helped the most. This is because the PPP covers the majority of operating expenses. However, businesses with low operating margins are also most at risk of shutting down. Business examples: restaurants, nonprofits and private schools.
- High operating profit margin businesses that pay their employees up to $100,000 with great benefits will also greatly benefit. Such businesses can stay operational for a very long time and the PPP is like an unexpected gift. However, due to a high operating profit margin, these businesses are likely taking a much larger revenue hit. Business example include: discretionary software.
- The business owner that perhaps benefits the least from the PPP is an S-Corp that underpays himself to save on payroll taxes. For 2020, the maximum taxable income for payroll taxes is $137,700. It was $132,900 for 2019. A common strategy for an S-Corp owner is to pay himself the lowest amount of salary possible to avoid paying as much Social Security + Medicare tax equal to 15.4%. The rest of the income is paid in FICA tax-free distributions.
- There's a chance a business could receive 2.5 months of payroll plus other expenses while starting up their business or recovering most of their revenue before 2.5 months. In this scenario, these businesses that see a quicker-than-expected revenue recovery win the most.
- If you were recently laid off by a small business, I encourage you to ask your boss to apply for the PPP and have him or her hire you back for 8+ weeks at your full previous salary by the deadline. There is a lot of prep work you can do before the economy opens. There is not a lot of downside for the business owner, mostly upside for doing a good thing.
- Better to submit an application for a little too much based on the guidelines, than too little. If you end up borrowing too much, you’ll have more cash to keep your business going. You‘ll also have two years to pay the loan back at only a 1% interest rate. If you borrow too little, life could be more difficult.
There's no reason why the PPP won't work, especially since 2020 is an election year. Too much is at stake.
Good luck all small business owners! As of April 17, 2020, many readers who are small business owners have said they have finally received their PPP loans. Below is a sample a reader sent me about his approval.
In 2021, there is a second Paycheck Protections Program (PPP) for small businesses that have seen more than a 25% YoY drop in profits. With Joe Biden as President, a new $1.9 trillion rescue package has been announced. He said there will be another stimulus package in the second half of 2021 as well!