Going for a new PPP loan? SBA revises rules on employee and owner salaries, bonuses
The Small Business Administration’s Paycheck Protection Program is now up and running — at least for some lenders — and it comes with new rules on how much small businesses can pay their employees and still get full forgiveness. Small businesses are still limited to $100,000 salary caps, annualized over the period during which the business spends the PPP loan proceeds. But the covered period, which used to be a choice between either eight weeks or 24 weeks, is now any number of weeks between eight and 24, which means every small business will have to carefully watch its spending.
Experts agree that means the maximum amount a business can pay any employee is $46,154, which is 24 weeks worth of salary for a $100,000 annual paycheck, according to Sonia Desai, director in forensics and litigation services at Munsch Hardt Kopf & Harr PC. But that means if a small business exhausts its PPP funds in week 16, for instance, the maximum it could pay an employee and still get full forgiveness is no more than $30,769.
In short, employee pay is capped at $1,923 per week, for up to 24 weeks. And that rule applies to both first-time PPP loans and so-called “second draw” PPP loans for harder-hit businesses that already received an initial loan last year. Businesses must still spend at least 60% of the loan proceeds on payroll costs to get full forgiveness.
As for the business owners themselves, they are still operating under a lower salary cap that was established during the first round of the PPP last year, according to Vijay Khetarpal, president and CEO of Integrity Financial Group, a financial advisory firm. That lower cap is $20,833. That means if the PPP loan is spent fast, such as eight weeks, that cap lowers to $15,385, or $17,308 for a nine-week period.
Small-business owners need to keep those caps in mind as they work out how to spend any new PPP loan proceeds, according to Christina Moore, a partner at law firm Taylor English Duma LLP, based in Atlanta but with offices across the country. “They should be thinking about owner compensation caps just as they did in the first round of PPP loans,” Moore said.
Just as under the first round of PPP loans, bonuses and extra pay are allowed, as long as the caps are not breached. And small-business owners must note that it’s not just salary that is lumped into overall compensation — it includes payment for vacation, parental, family, medical or sick leave, as well as severance pay, employee benefits such as group health or life insurance, retirement payments, and even state and local taxes assessed on compensation for employees.
Although the SBA had published guidance before rolling out the program, Desai advised small businesses to track whenever the SBA may update its guidance or change aspects of the program. “The SBA has indicated that additional rules related to second-draw PPP loans will be published separately, so the forgiveness rules related to second-draw loans may or may not change from what we know now,” she said.
The reopened PPP window allows small businesses to apply for their first PPP loans, largely under the program’s original rules when it debuted last year, including a $10 million loan cap and a roughly 500-employee size limit, though that can change depending on the type of business and industry. PPP borrowers can spend up to 40% of loan proceeds on such business expenses as interest on mortgages, interest payments, rent and an expanded set of costs, including property damage, supplier costs and personal protective equipment.
Small businesses of up to 300 employees and that have seen at least a 25% quarterly revenue reduction in 2020 compared with the same quarter in 2019 will also be able to apply for a second PPP loan of up to $2 million, according to agency guidance. The program has also expanded to include news organizations, destination marketing organizations and nonprofits categorized as 501c(6), which includes local chambers of commerce and trade organizations.
We have already detailed some of the ins and outs of this upcoming PPP round and who qualifies. This is in addition to a separate $15 billion grant program for live venues and theaters — applicants can only apply and receive funds from one or the other.