UPDATE: The Paycheck Protection Program Flexibility Act of 2020, which makes significant changes to the Paycheck Protection Program, was signed into law on June 5, 2020. This post is updated to reflect these changes.
As a result of the coronavirus outbreak, the U.S. government passed a large stimulus package titled Coronavirus Aid, Relief, and Economic Security (CARES) Act. A significant piece of the CARES Act is dedicated to supporting business operations and encouraging organizations to keep their employees employed. It’s the Paycheck Protection Program (PPP).
A guide to the Paycheck Protection Program
The Paycheck Protection Program is a relief program made up of federally-guaranteed loans through the U.S. Small Business Administration (SBA) for organizations affected by COVID-19. You may hear them referred to as paycheck protection or PPP loans. These loans are an expansion of the SBA’s 7(a) loan program.
Initially, the CARES Act provided $349 billion in PPP funding. The SBA ran out of these funds on April 16, 2020. Then, Congress passed a relief bill that added $310 billion to the paycheck protection program on April 23, 2020. President Trump signed this bill into law on April 24, 2020, bringing the total PPP funding to $659 billion. As of June 9, 2020, more than $130 billion is still available.
What’s the purpose of these loans?
This program encourages businesses to keep their employees on their payroll and continue business operations. Companies should use loan funds for payroll costs, mortgage interest, rent payments, and utilities. If they do, their loan is eligible for forgiveness.
Which organizations are eligible for a loan?
Businesses, nonprofits, veterans organizations, agricultural enterprises, and tribal businesses with fewer than 500 employees are eligible for a loan. Sole proprietors, independent contractors, and self-employed individuals can also apply.
If you have more than 500 employees, you may qualify for a paycheck protection loan if you meet the SBA’s size standards for your industry. View SBA size standards.
For this loan program, the SBA is waiving its affiliation standards for small businesses in the hotel and food services industries, franchises in the SBA’s Franchise Directory, or companies that receive financial assistance from small business investment companies licenses by the SBA. According to the SBA, “Small businesses in the hospitality and food industry with more than one location could also be eligible at the store and location level if the store employs less than 500 workers. This means each store location could be eligible.”
In addition, a business can qualify for a loan as a small business concern if it meets both tests in the SBA’s “alternative size standard.”
The two tests are:
- Maximum tangible net worth is less than $15 million
- Average net income after federal income taxes (excluding any carryover losses) for the two fiscal years before the date of the loan application is under $5 million
Who counts as an employee?
An employee is any individual employed on a full-time, part-time, or other basis.
Do I have to meet any other conditions to receive a loan?
Yes. Your lender will consider all of the following factors:
- If your business was in operation on Feb. 15, 2020
- If you paid employee salaries and payroll taxes
- If you paid independent contractors
Lenders won’t require you to obtain credit elsewhere first. And, they can’t require personal guarantees or collateral to grant the loan.
What’s the maximum loan amount?
For most organizations, your maximum loan amount will be limited to whichever of the following is less:
- The average total of monthly payroll costs during the one year before the loan date x 2.5
- $10 million
There’s another limit related to refinancing loans taken out on or after Jan. 31, 2020. However, we anticipate most organizations will adhere to one of the two limitations listed above.
Your maximum loan amount might be subject to slightly different limitations if your business wasn’t operating between Feb. 15, 2019, and June 30, 2019. And, if you run a seasonal business, your maximum loan amount will be the average total monthly payroll costs for the 12-week period beginning on Feb. 15, 2019, or March 1, 2019. You can select the beginning date of your 12-week period.
How do I calculate my average monthly payroll costs?
Some payroll costs are included. Some are excluded. To calculate your total payroll costs for a month, subtract your excluded costs from included costs. Do this for each month in a one-year period, add up the monthly totals, then divide that total by 12 to get your average monthly payroll cost.
What are payroll costs?
Payroll costs include:
- Salaries, wages, commissions, bonuses, hazard pay, or similar compensation
- Cash tips or equivalent
- Payments for vacation, parental, family, medical, or sick leave
- Allowances for dismissals or separations
- Payments for group health care benefits, including insurance premiums
- Retirement benefits
- State or local taxes imposed on employee compensation
- Compensation to or income of a sole proprietor or independent contractors that’s less than $100,000
The following items aren’t payroll costs. You should exclude these amounts from your payroll costs calculation.
- Any compensation you pay to an employee that exceeds $100,000 (prorated for the period Feb. 15, 2020, to June 30, 2020)
- Payroll taxes, railroad retirement taxes, and income taxes
- Compensation paid to an employee whose primary residence is outside the U.S.
- Qualified sick leave wages paid if a tax credit is allowed under the Families First Coronavirus Response Act
- Payments to independent contractors or sole proprietors (independent contractors and sole proprietors are eligible for this loan if they meet the requirements)
When can I apply for a paycheck protection loan?
Small businesses and sole proprietorships can begin applying on April 3, 2020. Independent contractors and self-employed individuals can apply on April 10, 2020. We encourage you to apply as soon as possible.
Loans are available until Aug. 8, 2020.
How do I apply for a loan?
You can apply through any existing SBA 7(a) lender or participating institution. The SBA works with about 1,800 local lenders to provide small business loans. Reach out to your local SBA Lender to learn more about applying for a paycheck protection loan. Here’s the revised application form.
When you apply for a loan, you have to make a good-faith certification that the current economic conditions justify the loan request so you can support ongoing operations. You must also acknowledge that you will use the funds to retain your employees and maintain payroll or make mortgage, lease, and utility payments. Finally, you have to certify that you don’t have an application currently pending for this type of loan, and you haven’t already received a PPP loan.
How does the loan forgiveness work?
All PPP loans are eligible for forgiveness. When you receive the loan, you have either eight weeks or 24 weeks to spend the funds on eligible expenses. Under the CARES Act, this time frame, known as the covered period, was eight weeks. The Paycheck Protection Program Flexibility Act of 2020 extended the covered period to 24 weeks or until Dec. 31, 2020, whichever occurs first. But, if you already received your PPP loan, you can elect to keep the eight weeks.
If you use the loan to pay eligible payroll costs and eligible nonpayroll costs, the total amount of these costs will be eligible for forgiveness. Payroll costs are listed above.
Eligible nonpayroll costs include:
- Payments of interest on any business mortgage obligations
- Rent, including rent payments under a lease agreement
- Interest on debt incurred before the covered period
Keep in mind, the PPP Flexibility Act of 2020 requires you to use at least 60% of the loan funds for your payroll costs. According to a joint statement issued by the Treasury and SBA, “If a borrower uses less than 60% of the loan amount for payroll costs during the forgiveness covered period, the borrower will continue to be eligible for partial loan forgiveness, subject to at least 60% of the loan forgiveness amount having been used for payroll costs.” Therefore, your loan forgiveness amount will be at least 60% of the amount you spent on payroll costs.
Initially, the SBA would forgive loans if at least 75% of the forgiven amount was used for payroll. If the 75% requirement wasn’t met, your loan forgiveness amount would be reduced. The 75% requirement is now reduced to 60%.
How do I request loan forgiveness?
Read our blog, Navigating The PPP Loan Forgiveness Process, for everything you need to know about the forgiveness process. If you’d like help estimating your loan forgiveness amount or working through the forgiveness application, contact us.
Please complete this form to view our PPP loan forgiveness services. After clicking submit, you will be redirected to a document that outlines our services and fees. If you’d like us to perform any of these services, please make your selections, complete page one of the form and email it to caresact at beenegarter dot com. Contact us if you have any questions.
What else should I know?
Any loans distributed through this program are subject to a 1% fixed interest rate. Loans issued after the PPP Flexibility Act of 2020 have a five-year loan term, while loans issued before the Act have a two-year loan term. You and your lender can mutually agree to extend your loan to a five-year term.
If your loan is partially forgiven, there’s no penalty for prepaying the remaining balance. You’re able to defer principal and interest payments until the SBA forgives your loan amount. Interest will continue to accrue during the deferment period.
Your loan forgiveness may be reduced if:
- You don’t use the funds for payroll costs, utilities, rent, etc.
- You cut employees’ salaries by more than 25% of the total wages they received in the most recent quarter before the loan period – Jan. 1, 2020, to March 31, 2020.
- You reduce your number of employees during this period.
If you reinstate wages or rehire staff by Dec. 31, 2020, or the date you submit your forgiveness application, your maximum loan amount may be forgiven. If you’re able to prove an inability to rehire staff, fill their positions, or return to the same level of business activity you experienced before Feb. 15, 2020, your loan forgiveness amount may not be reduced. If you extend an offer to rehire an employee and he declines, document it.
Is more COVID-19 assistance is available?
Yes! You can apply for a paycheck protection loan AND an economic injury disaster loan (EIDL). If approved for an EIDL, you can receive an advance up to $10,000 in as little as three business days. And, you don’t have to repay the loan. Learn more here. Plus, you’re eligible to delay payment on payroll taxes.
However, if you receive a paycheck protection loan, you’re disqualified from claiming the employee retention credit.
Originally published 4/8/2020. Updated 6/8/2020.
If you have additional questions about paycheck protection loans, we’re here to help. Let’s talk!