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LEGAL CORNER: The Latest on the PPP Loan and PUA Programs for Small Businesses, Sole Proprietorships and Independent Contractors
On March 7, 2020, Gov. Andrew Cuomo declared a state of emergency for New York State [see https://on.ny.gov/34jIVI4]. On March 13, 2020, President Trump then declared a national state of emergency [see https://bit.ly/2JMNC3N]. Since then, many have lost their lives to the COVID-19 virus. Additionally, many of the nation’s non-essential businesses have been forced to shut down operations, layoff or furlough employees and/or have their employees work from home.
Congress and the Federal Reserve have taken unprecedented measures with respect to monetary policy and the passage of stimulus and rescue packages. [see https://bit.ly/2RgfmSs]. The most significant of these measures was the passage of the $2-trillion rescue package known as the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) [see https://bit.ly/39OJU4k].
The CARES Act:
Assistance for Small Businesses, Sole Proprietorships
and Independent Contractors
The focus of the CARES Act is to provide broad based assistance to families, individuals and businesses. While the act’s scope is expansive, this article will focus on (1) the Paycheck Protection Program (the “PPP Loan Program”) under Section 1102 of the Act and (2) the Pandemic Unemployment Assistance Program (the “PUA Program”) established under Section 2102 of the Act [see also “Unemployment Insurance Program Letter issued on April 5, 2020 at https://bit.ly/2xUYB8A].
All small businesses, employees, independent contractors, and sole proprietors, including Realtors and real estate brokerage firms, should research all of these programs and determine which one is right for them. Both of the above programs, as well as other programs (e.g., SBA EIDL Loan) and assistance contained in the CARES Act, are each unique and provide different types of aid. While the PPP Loan Program provides loans to eligible businesses and individuals that may be fully forgiven, the PUA Program may offer independent contractors, particularly Realtors, who have historically been unable to apply for the unemployment insurance, benefits and economic relief not available under the PPP Loan Program.
The PPP Loan Program:
Eligible Businesses, Sole Proprietors and Independent Contractors
On April 3rd, lenders began accepting loan applications under the PPP Loan Program from small businesses. As of April 7th, more than 200,000 applications had been submitted. Congress also announced that an additional $250 billion could be added to the $350 billion already allocated under the CARES Act due to the high demand. The SBA issued the Interim Final Rule (the “PPP Rule”) detailing the requirements of the program [see https://bit.ly/3e2A7L3].
On April 10th, lenders started accepting PPP Loan applications from independent contractors, including Realtors, sole proprietors and individuals that are self-employed.
The PPP Loan Program is 100% guaranteed by the SBA and the full principal amount of the loans may qualify for forgiveness provided the loan proceeds are utilized for payroll and other qualified expenses (discussed below). Seventy-five percent of the total loan amount must be used for payroll expenses and the remaining 25% must be used for other qualified expenses. The interest rate on PPP Loans will be 1% and payments will be deferred for the first six months. If the loan qualifies for forgiveness, then no repayment will be required. For any amount that is not forgiven, the PPP Loan will have a two-year repayment term. As of now, borrowers seeking a PPP Loan should contact the bank with which they have their business banking relationship.
PPP Loan Eligibility
To be eligible, businesses must have less than 500 employees and have or had W-2 employees on payroll or have paid independent contractors (as reported on Form 1099-Misc). Independent contractors, sole proprietors or self-employed individuals, including Realtors and gig workers, are also eligible to apply for a PPP Loan beginning on April 10th. All applicants must have been in business on or before Feb. 15, 2020.
The CARES Acts allows lenders to rely on documentation submitted and certain certifications made by the borrower in order to approve a loan application. The following are some of the certifications required to be made by an applicant:
• The applicant must have employed W-2 salaried employees and paid payroll taxes for those employees.
• The applicant paid independent contractors, as reported on Form 1099-MISC.
• That the current economic uncertainty makes the loan request necessary to support the ongoing operations of the applicant.
• The funds will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments and utility payments.
• The applicant must certify that he/she/it has not and will not receive another loan under PPP Loan Program.
The applicant must also agree to submit documentation, for the eight-week period following the loan approval, verifying the number of full-time equivalent employees on payroll and total payroll costs. The borrower must also submit documents substantiating other covered expenses, such as mortgage interest payments, rent payments and utilities.
The borrower must certify that any information provided to the lender is accurate in all material respects. If the borrower makes any false statements when applying for the PPP Loan the borrower could be subject to imprisonment ranging from two to 30 years and/or fines ranging from $5,000 to $1 minion.
How to Determine the Loan Amount for PPP Loan
In order to determine the PPP Loan amount, businesses must determine what the full payroll costs are for all employees. The number of employees of a business are calculated by adding all individuals employed on a full-time, part-time, or other basis. These businesses may not include independent contractors paid by them in the employee count. Independent contractors must apply for a PPP loan on their own.
In order to qualify for the loan, applicants are required to provide the following documentation to the lender: (1) payroll processor records; (2) payroll tax filings; (3) 1099- MISC Forms, and/or (4) income and expenses from a sole proprietorship. For those individuals or businesses that do not have any of the above information they must provide bank statements or “other supporting documentation” that substantiates the “qualifying payroll amount.”
The PPP Loan Amount Formula and Covered Expenses
An applicant must calculate what the full payroll costs are for the previous 12-month period and divide that amount by 12 months. Once the average monthly payroll cost is calculated, that amount is then multiplied by 2.5. This provides the applicant with two full months of payroll costs plus an additional 25% for other covered costs, such as group health care benefits, mortgage interest payments (not including principal payments), rent payments, utility payments and interest payments on any other debt obligations incurred prior to Feb. 15, 2020.
“Payroll costs” for eligible businesses consist of salaries, wages, commissions, or similar compensation, tips, vacation pay, parental, family, medical, or sick leave pay, allowance for separation or dismissal; payment of employee benefits (e.g. group health care coverage, insurance premiums, and retirement), and payments of state and local taxes assessed on compensation of employees. For independent contractors or sole proprietors, “payroll costs” include the following types of compensation: “wages, commissions, income, or net earnings from self-employment or similar compensation.”
Pandemic Unemployment Assistance (PUA) Program
For many, the PPP Loan Program may not be the right option. Under the PUA Program, individuals who do not qualify for regular unemployment compensation and are unable to continue working as a result of COVID-19, such as self-employed workers, independent contractors, including Realtors, and gig workers, are now eligible for unemployment benefits. However, affected individuals may only seek benefits under either the PPP Loan Program or the PUA Program, not both. The PUA Program will be administered by the individual states. New York State provides detailed information on its website [see https://on.ny.gov/2y22Lvf].
These individuals would now be eligible for unemployment benefits for up to 39 weeks (which includes an additional 13 weeks through Dec. 31, 2020) under the CARES Act provided they certify that they are unemployed, partially unemployed, or unavailable or unable to work because of COVID-related issues, which include, among others, an individual being diagnosed with or is experiencing symptoms, an individual’s family member has been diagnosed with or is providing care for a family member who has been diagnosed with COVID-19; a child or other person in the household is unable to attend school or another facility due to COVID-19 closures; and/or an individual is unable to reach the place of employment because of a mandated quarantine.
The additional 13 weeks of unemployment compensation apply so long as the individual: (1) has no rights to regular unemployment compensation under any applicable state or federal law, (2) is not receiving unemployment compensation under Canadian law, and (3) is able, available, and actively seeking work. Further, New York State provides that if an individual can telework, receives paid sick leave or receives paid leave benefits, he or she would not be eligible to receive PUA benefits. An individual may also be eligible to receive an additional $600 per week in federal benefits in addition to the state’s unemployment benefit.
Seek Advice Before Choosing a Path
There are many benefits and programs available under the CARES Act. It is of utmost importance that individuals and businesses seek the advice of their legal, banking and accounting professionals before committing to a particular program. These are certainly difficult times, but everyone working together will get through this. The important thing is that everyone be safe and stay healthy.