As a result of the coronavirus outbreak, the U.S. government passed a large stimulus package – 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).
Subsequent guidance from the SBA, IRS, and Treasury Department has clarified program details. Additional legislation packages have made greater revisions to the program. Here’s our comprehensive and up-to-date guide on the Paycheck Protection Program, including who can apply, how to calculate your loan amount, and more.
A summary of 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.
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, utilities, and other eligible expenses. If they do, the 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.
In addition, the following businesses may apply for a PPP loan:
- Housing cooperatives, eligible section 501(c)(6) organizations, or eligible destination marketing organizations that employ 300 people or less
- News organizations that employ 500 people or less
- Nonprofits that employ 300 or fewer employees and adhere to lobbying activity limitations
- Internet publishing organizations – those who use NAICS code 519130 – with no more than 500 employees per location
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 licensed 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 a business must pass 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
- For seasonal businesses, your business was in operation if it operated for any 12-week period between Feb. 15, 2019, and Feb. 15, 2020
- If you paid employee salaries and payroll taxes
- If you paid independent contractors as reported on a Form 1099-MISC
- If you’re an eligible self-employed individual, independent contractor, or sole proprietorship with no employees
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 a one-year period before the loan date x 2.5
- $10 million
If you run a seasonal business, your maximum loan amount will be the average total monthly payroll costs for any 12-week period beginning on Feb. 15, 2019, and ending Feb. 15, 2020. 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.
Many borrowers applied in 2020 and used 2019 as their one-year period. If you’re applying for your first PPP loan in 2021, you can use 2020 or 2019 as your one-year period.
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
- Employer payments for employee benefits including group health care or group life, disability, vision, or dental insurance
- Employer-paid retirement benefits
- Employer-paid state or local taxes imposed on employee compensation
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 on an annualized basis (prorated for the period during which the payments are made)
- Payroll taxes, railroad retirement taxes, and income taxes
- Compensation paid to an employee whose primary residence is outside the U.S.
- Qualified sick and family leave wages (if you plan to claim a tax credit for these wages 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)
Rules for partnerships
Partnerships may also include the net earnings from self-employment of individual general partners as reported on IRS Form 1065 K-1 in their payroll costs. These earnings may be reduced by:
- Section 179 expenses
- Unreimbursed partnership expenses
- Depletion claims on oil and gas properties
That total (net earnings minus the listed expenses) is multiplied by 0.9235 and capped at $100,000 per partner.
Rules for Schedule C filers
Schedule C filers may use 2019 or 2020 net profit on line 31 (capped at $100,000) to calculate the maximum loan amount. If you have employees, you can include the payroll costs listed above in your loan amount calculation.
Rules for Schedule F filers
Schedule F filers may use 2019 or 2020 gross income on line 9 (capped at $100,000) to calculate their maximum loan amount. If you have employees, you can include the payroll costs listed above in your loan amount calculation. However, the gross income on line 9 must be reduced by those expenses and certain other sales.
When can I apply for a PPP loan?
You can apply for the latest round of PPP loans as early as Jan. 11, 2021, using Form 2483. Loans are available until May 31, 2021, so you’ll want to apply as soon as possible. The Economic Aid Act set aside $35 billion for first-time borrowers. The American Rescue Plan added another $7.25 billion to the program.
How do I apply for a loan?
You can apply through any existing SBA 7(a) lender or participating institution. Reach out to your local SBA Lender to learn more about applying for a paycheck protection program loan. If you need help applying or calculating your PPP loan amount, contact us!
When you apply for a loan, you’ll make a good-faith certification that the current economic conditions justify your loan request to support ongoing operations. You must acknowledge that you’ll use the funds to retain your employees and use the funds on eligible expenses. You have to confirm that you were in operation on Feb. 15, 2020, and you haven’t permanently closed. 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.
Any loans distributed through this program are subject to a 1% fixed interest rate and five-year loan term.
How does the loan forgiveness process work?
All PPP loans are eligible for forgiveness. When you receive the loan, you have between eight and 24 weeks to spend the funds on eligible expenses. The time frame to use the loan funds is the covered period. The Economic Aid Act allows you to choose the end date of your covered period, as long as it’s between eight and 24 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
- NEW | Operations expenditures – payments for any business software or cloud computing service that facilitates business operations, product or service delivery, the processing, payment or tracking of payroll expenses, human resources, sales and billing functions, or accounting or tracking of supplies, inventory, records, and expenses
- NEW | Property damage – costs related to property damage, vandalism, or looting due to public disturbances that occurred during 2020 that wasn’t covered by insurance or other compensation
- NEW | Supplier costs – payments made to a supplier for the supply of goods that are essential to the entity’s operations at the time the payment was made. The contract or purchase order must have been in effect before the loan’s covered period.
- NEW | Worker protections – operating or capital expenses made to comply with CDC, OSHA, Department of Health and Human Services, or local or state requirements to maintain worker or customer safety related to COVID-19. Examples include the installation of drive-thru windows, air filtration systems, physical barriers such as sneeze guards, any health screening costs, and the expansion of additional indoor, outdoor, or combined business space.
Can my forgiveness amount be less than my full loan amount?
Yes. Your loan forgiveness may be reduced if:
- You don’t use the funds for payroll costs and eligible expenses.
- You cut employees’ salaries by more than 25% of the wages they received in the first quarter of 2020 – Jan. 1, 2020, to March 31, 2020.
- You reduce your number of employees during this period.
Keep in mind, you must use at least 60% of the loan funds for your payroll costs. You can learn more about loan forgiveness here.
Do any other COVID-19 benefits affect PPP loans?
If you claim the Employee Retention Credit and apply for a PPP loan, the qualified wages you used to claim the credit aren’t eligible for loan forgiveness. If you received an EIDL advance, that amount won’t reduce your PPP loan forgiveness amount.
Are you looking for more information on second draw PPP loans or how to increase your original loan amount? We cover both topics here.
Originally published 4/8/2020. Updated 3/31/2021.
If you have additional questions about PPP loans, we’re here to help. Let’s talk!