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FAQs Regarding the PPP

Olshan's CARES Act FAQs appear in the below post.

Q1:What is the Paycheck Protection Program (“PPP”)?
A1: The CARES Act establishes a forgivable loan program under Section 7(a) under the Small Business Act (15 U.S.C. § 636). Under the PPP, an eligible borrower can borrow up to $10 million to pay covered payroll and other operational costs.

Q2: Who is an “Eligible Borrower” under the PPP?
A2: Any employer (including Section 501(c)(3) and other non-profit organizations) with 500 or fewer employees can borrow under the PPP. In addition, employers with more than 500 employees can borrow under the PPP if they can qualify under the general guidelines established by the Small Business Administration (“SBA”). When determining employee count, note that the CARES Act loosens the affiliation rules for businesses in the hospitality and restaurant industries (NAICS Codes beginning with 72) and businesses that receive financial assistance from a licensed Small Business Investment Company.

Q3: What if my business started after February 15, 2020 or if my business has no employees?
A3: You are not eligible to borrow under the PPP.

Q4: What is the formula for determining how much an employer can borrow under a PPP loan?
A4: An Eligible Borrower can borrow an amount equal to 2.5 times the Eligible Borrower’s Qualified Payroll Costs (as discussed in Q&A-5), up to a maximum of $10 million.

Q5: What are “Qualified Payroll Costs”?
A5: “Qualified Payroll Costs” are the total average monthly Payroll Costs paid by an Eligible Borrower during the one-year period ending on the PPP loan origination date. This formula is subject to adjustment for (i) borrowers that are seasonal employers, (ii) borrowers that were not in business during the period from February 15, 2019 through June 30, 2019 and (iii) borrowers with certain SBA loans made during the period beginning on January 31, 2020, and ending on the date on which covered loans are made available to be refinanced under the covered loan.

Q6: What are “Payroll Costs”?
A6: Payroll Costs include employee compensation, which includes healthcare costs, severance, retirement benefits, sick pay, vacation pay and other similar items.

Q7: What can an Eligible Borrower pay with the proceeds borrowed under a PPP loan?
A7: Even though the principal amount is calculated solely based on Payroll Costs, an Eligible Borrower can use loan proceeds to make payments for the following uses (“Permitted Uses”): Payroll Costs (subject to the income limitation discussed in Q&A-8), health care benefits, rent for real or personal property, utilities, interest on any mortgage and interest on any other debt incurred before February 15, 2020.

Q8: Are there any employee income limitations on the use of loan proceeds to pay Payroll Costs?
A8: An Eligible Borrower can use loan proceeds to pay any employee, without regard to annual compensation. However, no more than $37,500 can be used to pay an employee making more than $100,000 per year.

Q9: What is the maximum maturity of that portion of a PPP loan that is not forgiven?
A9: Unless forgiven (as discussed in Q&A-10), a PPP loan has a term of ten years, with interest at up to 4 percent. An Eligible Borrower has the ability to defer all principal and interest payments for at least six months.

Q10: How does loan forgiveness work?
A10: Principal and the underlying interest on a PPP loan will be canceled if and to the extent that an Eligible Borrower makes Cancellation Payments (as defined below) during the 8-week period (the “Covered Period”) beginning on the loan origination date. “Cancellation Payments” include payments of (a) Payroll Costs, (b) interest payments on secured obligations (real or personal property) incurred prior to February 15, 2020, (c) rent payments on real or personal property leases entered into prior to February 15, 2020 and (d) utility payments on services started prior to February 15, 2020.

The Cancellation Payments will be reduced if the Eligible Borrower engages in a disqualifying workforce or wage reduction, thereby proportionally decreasing the amount of the Cancellation Payments. After taken into account any Cancellation Payments (as adjusted for any disqualifying workforce or wage reductions), the unforgiven portion of the PPP loan is subject to the repayment terms outlined in Q&A-9.

Q11: How does a workforce reduction reduce Cancellation Payments?
A11: It appears that the PPP drafters intended to reduce Cancellation Payments (and therefore the amount of loan forgiveness) in proportion to any workforce reduction, based on the percentage reduction in workforce (unless rehired by June 30, 2020) determined by comparing the average number of full-time employees during the Covered Period to the average number of full-time equivalent employees during one of two alternative base periods chosen by the Eligible Borrower (either the period beginning on February 15, 2019, and ended on June 30, 2019, or the period beginning on January 1, 2020 and ending on February 29, 2020). However, the statutory language appears to contain a drafting error that excessively reduces the Cancellation Payments by miscalculating the proper reduction ratio.

Q12: How does a wage reduction reduce Cancellation Payments?
A12: If an employee making $100,000 or less suffers a wage decrease of more than 25 percent during the Covered Period (as compared to the last full calendar quarter prior to the Covered Period), the amount of the wage reduction for the Covered Period (but only to the extent in excess of the 25 percent reduction) reduces the amount of the Cancellation Payments.

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