The government will pay farmers with employees labor costs for the next eight weeks if they are willing to complete the paperwork and provide the records. Payment will be in the form of a loan with no payments due for six months and which will be forgiven if the money is actually used for approved purposes. However, there is a limit to the amount that can be borrowed.
The Paycheck Protection Program (PPP) is part of the Coronavirus Aid, Relief, and Economic Security Act (CARES). The purpose of the PPP is to provide low-interest loans to businesses to encourage them to retain employees during the COVID-19 emergency.
A Small Business Administration (SBA) Bulletin published in the Federal Register on April 2, 2020, provides details of the PPP. A downloadable version is available.
The amount that a business owner may borrow is based on his or her last year’s payroll. The amount is limited to 2.5 times the average monthly labor cost. For example, if a farmer paid employees $60,000 last year, he or she may borrow $12,500 (refer to the steps below). The maximum amount one business may borrow is $10 million.
Applicants should follow these steps:
Step 1: Aggregate payroll costs (defined below) from the last 12 months for employees whose principal place of residence is the United States.
Step 2: Subtract any compensation paid to an employee in excess of an annual salary of $100,000 and/or any amounts paid to an independent contractor or sole proprietor in excess of $100,000 per year.
Step 3: Calculate average monthly payroll costs (divide the amount from Step 2 by 12).
Step 4: Multiply the average monthly payroll costs from Step 3 by 2.5.
Step 5: Add the outstanding amount of an Economic Injury Disaster Loan (EIDL) made between January 31, 2020, and April 3, 2020, less the amount of any “advance” under an EIDL COVID-19 loan (because it does not have to be repaid).
Payroll costs consist of compensation to employees (whose principal place of residence is the United States) in the form of salary, wages, commissions, or similar compensation; cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips); payment for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, and retirement; payment of state and local taxes assessed on compensation of employees; and for an independent contractor or sole proprietor, wage, commissions, income, or net earnings from self-employment or similar compensation.
Independent contractors do not count as employees for the purpose of PPP loan calculations because they have the ability to borrow for their own purposes under the program.
Who is eligible?
You are eligible for a PPP loan if you have 500 or fewer employees and you the following:
- A small business concern as defined in section 3 of the Small Business Act (15 USC 632) and subject to SBA’s affiliation rules under 13 CFR 121.301(f) unless specifically waived in the Act; or a tax-exempt nonprofit organization described in section 501(c)(3) of the Internal Revenue Code (IRC), a tax-exempt veterans organization described in section 501(c)(19) of the IRC, a tribal business concern described in section 31(b)(2)(C) of the Small Business Act, or any other business.
- In operation on February 15, 2020, and either had employees for whom you paid salaries and payroll taxes or paid independent contractors, as reported on a Form 1099-MISC.
You are also eligible for a PPP loan if you operate under a sole proprietorship or as an independent contractor or eligible self-employed individual and if you were in operation on February 15, 2020.
You may be ineligible if you are engaged in any activity that is illegal, you are a household employer, you are a 20 percent owner with a criminal history, or you are delinquent or have defaulted on an SBA-guaranteed loan.
Loan Terms. The interest rate will be 100 basis points or 1 percent. The term of the loan will be two years. No collateral will be required, and you do not have to personally guarantee the loan. There will be no upfront guarantee fee payable to SBA by the borrower. You will not have to make any payments during the six months after the date you receive the funds. You may only apply for one loan.
Use of Funds. The proceeds of a PPP loan are to be used for the following:
- Payroll costs as defined above
- Costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave and insurance premiums
- Mortgage interest payments (but not mortgage prepayments or principal payments)
- Rent payments
- Utility payments
- Interest payments on any other debt obligations that were incurred before February 15, 2020
- Refinancing an SBA EIDL loan made between January 31, 2020, and April 3, 2020
If you use PPP funds for unauthorized purposes, SBA will direct you to repay those amounts. If you knowingly use the funds for unauthorized purposes, you will be subject to additional liability such as charges for fraud. If one of your shareholders, members, or partners uses PPP funds for unauthorized purposes, SBA will have recourse against the shareholder, member, or partner for the unauthorized use.
Small businesses and sole proprietors may apply for a PPP loan starting April 3, 2020. Self-employed and independent contractors may apply starting April 10. The loans must be made before June 30, 2020. Congress allocated $349 billion for the PPP, and loans will be made on a first-come first-served basis.
All SBA 7(a) lenders may make PPP loans. In addition, the Administrator (SBA) and Secretary (Treasury) determined that additional lenders will be needed to process the expected number of applications by June 30. Therefore, federally insured depository institutions, federally insured credit unions, Farm Credit System institutions, and financing providers that originate, maintain, and service business loans may qualify after they submit a lender agreement (SBA Form 3506). Ask your local lender if he or she has been approved to make PPP loans.
Loan forgiveness. The entire amount of the loan plus interest may be forgiven if the loan proceeds are used for “forgivable purposes.” Forgivable purposes include payroll costs, interest on mortgages, rent and utility payments incurred over the eight-week period following the date of the loan. The mortgage, rent, and utility payments must be for agreements dated before February 15, 2020. No more that 25 percent of the forgiveness amount may be for nonpayroll items. Payments to independent contractors are not forgivable purposes.
The amount forgiven will reduced if the borrower reduces the number of employees or salaries.
Application. To apply for a PPP loan, you must submit SBA Form 2483. The form contains several questions and requires you to certify that current economic uncertainty makes the loan necessary to support ongoing operations. You must also submit documentation verifying the number of full-time equivalent employees on payroll, which may include payroll processor records and payroll tax filings. Independent contractors must provide Form 1099- MISC and sole proprietors will have to show income and expenses.
Lenders. The interim final rule provides guidance for lenders which has not been included in this article. Lenders should consult the rule (referenced above) to determine their responsibilities.