Editor’s note: Regulations and guidance from the SBA and the U.S. Department of Treasury on the PPP are evolving rapidly. Please refer to the latest guidance from SBA and Treasury to confirm current program rules and how they apply to your particular situation. The information contained in this article only applies to certain small businesses and other eligible organizations. For example, effective April 20, 2020, if you filed or will file a 2019 IRS Form 1040 Schedule C, other rules apply.
The Paycheck Protection Program (PPP) is part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. PPP loans are intended to help small businesses continue paying payroll costs and certain operating expenses during the COVID-19 pandemic.
First-time borrowers can apply for a PPP loan of 2.5 times their average monthly payroll costs, up to $10 million (together with any affiliates, as applicable), to be used for eligible payroll costs, rent, mortgage interest, utilities, operations expenditures, property damage costs, supplier costs, worker protection expenditures, interest on certain other debt obligations, and refinancing an Economic Injury Disaster Loan (EIDL) made between January 31, 2020 and April 3, 2020 (though at least 60% of the loan proceeds must be used for eligible payroll costs).
Eligible borrowers can apply for a second PPP loan with the same loan terms as their first PPP loan. Second-time borrowers can apply for a PPP loan of 2.5 times their average qualified monthly payroll expenses, up to $2 million (together with any affiliates, as applicable). For borrowers in accommodation and food services, the maximum loan amount for a second PPP loan is 3.5 times their average monthly payroll costs, up to $2 million.
PPP loans may be forgivable, in whole or in part, if certain requirements are met.
Calculating the PPP loan amount
For the first PPP loans, a borrower’s maximum loan amount is based on their average monthly payroll costs, multiplied by 2.5, capped at $10 million (together with any affiliates, as applicable), subject to certain restrictions.
The Borrower Application Form calculates the loan amount using the following equation:
[Average monthly payroll x 2.5] + [EIDL (do not include any EIDL advance)] = [Loan request amount]
For second PPP loans, a borrower’s maximum loan amount is based on the lesser of their average monthly payroll costs, multiplied by 2.5 (or 3.5 for certain borrowers in accommodation and food services), capped at $2 million (together with any affiliates, as applicable), subject to certain restrictions.
The Second Draw Borrower Application Form calculates the loan amount using the following equation:
[Average monthly payroll] x [2.5 (or x 3.5 for NAICS 72 applicants)] = [Loan request amount]
What is included in payroll costs?
Not all payroll costs are included for purposes of calculating average monthly payroll costs. Excluded payroll costs should not be used in loan request calculations and will not be considered for loan forgiveness. It’s important to know the difference between included and excluded payroll costs so you calculate the loan request according to the PPP guidelines.
For both first and second PPP loans, payroll costs for small businesses include compensation to employees whose principal residence is in the U.S. in the form of:
- Salary, wages, commissions, or similar compensation
- Cash tips or equivalent
- Payment for vacation, parental, family, medical, or sick leave
- Allowance for separation or dismissal
- Payments required for the provisions of employee benefits consisting of group health care or group life, disability, vision, or dental insurance including insurance premiums
- Payment of any retirement benefit
- Payment of state and local taxes assessed on compensation
Payroll costs do not include employee or owner compensation over $100,000/year or compensation for employees who live outside the U.S. Payroll costs also do not include qualified sick and family leave covered by the Families First Coronavirus Response Act. Additional rules may apply to seasonal businesses, new businesses, farmers and ranchers, partnerships, and borrowers with income from self-employment.
Calculating average monthly payroll costs
There are several lookback periods that you may use to calculate average monthly qualified payroll costs. One lookback period you may use is a full calendar year:
- Aggregate eligible payroll costs from calendar year 2020 or calendar year 2019 for employees whose principal place of residence is in the U.S.
- Subtract any compensation paid to an employee in excess of an annual salary of $100,000
- Divide the difference in amounts calculated in Steps 1 and 2 by 12. This is your average monthly payroll costs.
The equation would look like this:
[Sum of total payroll costs for the chosen lookback period] / [# of months in lookback period] = [Average monthly payroll costs]
On the Paycheck Protection Program borrower application form for first loans, you will be asked to calculate your maximum loan amount by multiplying your average monthly payroll costs by 2.5 and adding any amount outstanding from an Economic Injury Disaster Loan (EIDL) made between January 31, 2020, and April 3, 2020, that you seek to refinance, less any advance under an EIDL COVID-19 loan.
On the Second Draw borrower application for second loans, you will be asked to calculate your maximum loan amount by multiplying your average monthly payroll costs by 2.5 (or 3.5 for certain borrowers).
In addition to using calendar year 2020 or calendar year 2019, borrowers may use the precise 1-year period before the date on which the loan is made. Other calculations are also available to certain seasonal businesses, new businesses, farmers and ranchers, partnerships, and borrowers with income from self-employment. The Treasury Department provides examples beginning on page 9 of the Consolidated Interim Final Rule.
Remember that there is a $10 million cap on first PPP loans and a $2 million cap on second PPP loans (together with affiliates), even if the above calculations result in a number greater than $10 million.
If you’re having trouble calculating your qualified payroll expenses or maximum loan amount, it’s always a good idea to speak with a financial adviser or accountant. Now is a good time to organize your payroll information to be ready to apply for PPP loan forgiveness in the future.
Regulations and guidance from the SBA and the U.S. Department of Treasury on the PPP are evolving rapidly. Please refer to the latest guidance from SBA and Treasury to confirm current program rules and how they apply to your particular situation. The resources described above are made available to businesses within the United States of America.
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