May 5, 2020 Payroll en_US The Paycheck Protection Program (PPP) is a federal loan program that is 100% guaranteed approved loan for qualified small business owners in the U.S What is the Paycheck Protection Program?

What is the Paycheck Protection Program?

By Ken Boyd May 5, 2020

Note: The Paycheck Protection Program Flexibility Act (“PPP Flex Act”) was signed into law on June 5, 2020. The PPP Flex Act extends the availability of loans under the Paycheck Protection Program (PPP) and adjusts certain rules applicable to PPP loans. The information reflected here may therefore be outdated. We are working to update our resources to reflect these updates to the PPP, so be sure to check back soon. Please refer to the latest guidance from the SBA and Treasury to confirm current program rules and how they apply to your particular situation.

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Note: The information contained in this article only applies to small businesses and other eligible organizations. If you are an individual with self-employment income who filed or will file a 2019 IRS Form 1040 Schedule C, other rules apply.

The Paycheck Protection Program (PPP) is a cornerstone of the $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act. The first round of funding for the PPP authorized $349 billion in Small Business Administration (SBA) loans for small businesses and other eligible applicants. These funds were depleted within two weeks of the PPP’s announcement. The second round of funding, announced on April 24, authorized an additional $310 billion for the PPP. The goal of this loan program is to encourage businesses to keep workers employed and cover certain operating expenses during the coronavirus pandemic.

Under the PPP, small business owners and other eligible applicants can apply for low-interest SBA loans up to $10 million to cover eligible payroll costs, rent, and utilities, among other allowable uses. These loans may be forgiven, in whole or in part, if borrowers meet certain criteria, including but not limited to using the majority of the funds (at least 75%) for qualified payroll costs.

While other SBA loans generally require a personal guarantee and collateral, PPP loans require neither. The PPP also waives the Credit Elsewhere requirement that limits SBA guaranteed loans only to borrowers who are unable to obtain credit elsewhere on reasonable terms from non-federal sources.

Paycheck Protection Program loan eligibility

Small businesses as defined by the Small Business Act, are eligible for a PPP loan. The following are also eligible to apply: a business, a private 501(c)(3) nonprofit organization, 501(c)(19) veterans organization, or tribal business concern that employs no more than 500 people or meets the SBA employee size threshold for the relevant industry code, with exceptions for businesses in the accommodation and food service industries. Sole proprietorships, self-employed individuals, and independent contractors may also be eligible to apply.

Eligible businesses must have been in operation on February 15, 2020, and paying employees on that date. “Employees” includes full- and part-time workers.

As part of the loan application, applicants will need to certify, among other things, that

  • The uncertainty of economic conditions makes the loan request necessary to support the ongoing operations of the applicant.
  • The funds will be used to retain workers and maintain payroll (or to make mortgage interest, lease, and utility payments).
  • The applicant has not and will not receive another loan under the program.

For a more detailed list of eligibility requirements, review the PPP fact sheet. For a full list of the required certifications, review the borrower application form.

How much can an eligible small business borrow?

Note: Guidance on the PPP issued by the U.S. Department of Treasury and Small

Business Administration is evolving. The below information reflects guidance from

interim final rule effective as of April 15, 2020, and FAQs and other informal guidance

published as of April 15, 2020.

Eligible small businesses can borrow up to $10 million. The maximum loan amount is based on average monthly payroll costs for the applicable lookback period, multiplied by 2.5, plus the amount of any outstanding EIDL loan made between January 31, 2020, and April 3, 2020, that will be refinanced, minus any advance received.

The borrower application form calculates the loan amount using the following equation:

[Qualified average monthly payroll expenses x 2.5] + [EIDL, Net of advance (if applicable)] = [PPP loan request amount]

Most businesses may calculate average monthly payroll costs with payroll records from calendar year 2019 or the last 12 months. Seasonal businesses may calculate average monthly payroll costs with payroll records from February 15, 2019, or March 1, 2019, to June 30, 2019.

If your business does not have payroll records for February 15, 2019, to June 30, 2019, and is a new business, your loan may be based on payroll costs from January 1, 2020, to February 29, 2020.

Eligible payroll expenses include compensation to employees, whose principal residence is in the U.S., in the form of:

  • Salary, wages, commissions, or similar compensation, as well as cash tips or equivalent, capped at $100,000 on an annualized basis for each employee.
  • Allowance for separation or dismissal.
  • Payments required for the provision of group healthcare benefits and insurance premiums.
  • Payment of any retirement benefits.
  • Payment of state and local taxes assessed on compensation.

Payroll expenses for entities do not include

  • Individual employee compensation in excess of an annual compensation of $100,000 per year.
  • Compensation for employees who live outside the U.S.
  • The employer’s share of certain payroll taxes.
  • Qualified sick and family leave under the Families First Coronavirus Response Act.

What are the loan terms?

All PPP loans have identical terms:

  • Interest rates of 1%
  • Maturity of two years
  • First payment deferred for six months after approval, but will incur interest
  • No prepayment penalty
  • 100% guaranteed by the SBA
  • No collateral or personal guarantees from borrowers
  • No borrower or lender fees payable to the SBA

What can I pay for using Paycheck Protection Program funds?

Since the program is designed to help businesses keep employees on payroll, the primary use of Paycheck Protection Program funds should be used to cover payroll-related expenses. Eligible payroll expenses include:

  • Salaries
  • Wages
  • Commissions
  • Expenses
  • Vacation, sick, parental/family/medical leave pay
  • Retirement contributions
  • Group health coverage premiums
  • State and local taxes

Federal taxes are not included.

Paycheck Protection Program funds may also be applied to other qualified costs such as rent, mortgage interest payments, and utilities.

How are Paycheck Protection Program loans forgiven?

A PPP loan may be forgiven, in whole or in part, if you use the funds as directed by the SBA, including but not limited to meeting the following criteria:

  • Only loan proceeds spent on payroll and other permissible uses during the eight-week period following the disbursement of your loan are forgivable (costs incurred after the eight-week period are not forgivable).
  • Maintain the same number of employees on payroll for at least eight weeks.
  • Maintain employee salary levels.

The amount of the loan eligible for forgiveness may be reduced if:

  • More than 25% of the loan proceeds are used for eligible non-payroll costs
  • You reduce the number of full-time equivalent employees* you employ during the eight weeks following your loan disbursement.
  • You reduce the total salary or wages for any employee during the eight week-period after receiving your PPP loan

For more information about PPP loan forgiveness, refer to the SBA’s PPP site.

Lenders are responsible for determining loan forgiveness eligibility. To apply for loan forgiveness, you can submit a request to your lender. Lenders will have 60 days to accept or deny loan forgiveness. Normally, when a bank approves loan forgiveness, the borrower is taxed on the dollar amount of the forgiven amount, as if the loan was business income. Under the CARES Act, any loan amount that is forgiven will not be taxed as income.

What if the Paycheck Protection Program loan is not forgiven?

There may be a balance remaining on your PPP loan after any forgiveness is applied. The SBA will continue to guarantee the loan, but you will be responsible for repaying the balance. This balance is subject to the terms of your PPP loan, which are described above.

How to apply for the Paycheck Protection Program

You may apply for the SBA’s Paycheck Protection Program loan through an approved SBA lender or any participating federally insured depository institutions, credit unions, or Farm Credit System institution. You may also apply through non-traditional lenders approved by the SBA to lend PPP funds. Consult your local lender to see if it’s participating in the PPP.

Paycheck Protection Program vs. Economic Injury Disaster Loans

The Paycheck Protection Program provides small businesses with loans up to $10 million for the purposes of covering payroll costs, rent, mortgage interest, and utilities. Loans issued under the PPP have an interest rate of 1% with a maturity of two years. A PPP loan may be forgiven, in whole or in part, if the funds are used as directed by the SBA.

In comparison, the Economic Injury Disaster Loans (EIDLs) provide small businesses with working capital loans up to $2 million to pay fixed debts, payroll, accounts payable, and other bills that business owners can’t pay due to the economic impact of the coronavirus. The EIDL interest rate is currently 3.75% for small businesses with repayment plans up to 30 years. Borrowers can apply for a loan advance of up to $10,000 that does not have to be repaid.

When determining which loan is right for your business, consider eligibility requirements, how much capital your business needs, and how your business will use the funds.

Documents required to apply for a PPP loan

You may need the following documents to apply for a PPP loan (documentation requirements may vary by lender). Gather these documents before visiting your lender.

  • Articles of incorporation for each borrowing entity
  • By-laws or operating agreement for each borrowing entity
  • Copies of each owner’s driver’s license
  • Payroll expense verification
  • Certification that all employees live in the United States
  • A detailed list of employees who do not live in the U.S., with corresponding salaries
  • A trailing 12-month profit and loss statement
  • Proof of expenses like rent or mortgage payments, interest payments on debts, and utility payments

Potential borrowers must also provide payroll details to the lender to obtain loan approval. If you use accounting software or a payroll processor, you should be able to access the payroll data you may need. Otherwise, you should have documentation for:

  • Gross pay. This includes gross wages as well as paid time off, vacation pay, and family medical leave pay for the last 12 months.
  • Tax withholdings. This includes the last 12 months of federal, state, and local income taxes withheld.
  • 2019 FUTA taxes. This includes IRS forms 940 and 941 for federal unemployment taxes.
  • Health insurance premiums. This includes company-paid premiums for group health insurance for the last 12 months.
  • Retirement plan funding. This includes business contributions to employee retirement plans over the last 12 months.

Can I apply for a Paycheck Protection Program loan and an Economic Injury Disaster Loan?

Some small businesses and other eligible applicants may be eligible to apply for both programs. However, a business may not receive a loan under both programs for the same purposes. PPP applicants that received an EIDL loan between January 31, 2020, and April 3, 2020, and used those funds for payroll costs, must use the PPP loan to refinance the EIDL loan.

Where to go from here

Contact your bank and find out if they’re participating in the SBA lending program. If they don’t, ask for a referral for another institution. You can also contact non-bank lenders participating in the PPP. Then gather your records, and complete the application as soon as possible. A PPP loan can serve as a lifeline for your business. Explain the application process to your workforce, so they understand the direction you’re headed. Finally, give yourself some credit for taking action.

Additional PPP resources

The resources described above are made available to businesses within the United States of America.

Regulations and guidance from the SBA and the U.S. Department of Treasury on the PPP are evolving rapidly, and the information contained herein may be outdated.  Please refer to the latest guidance from SBA and Treasury to confirm current program rules.

Given the large demand for additional authorized Paycheck Protection Program funds, not every qualified Paycheck Protection Program applicant will receive a loan.

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Ken Boyd is a co-founder of and owns St. Louis Test Preparation ( He provides blogs, videos, and speaking services on accounting and finance. Ken is the author of four Dummies books, including "Cost Accounting for Dummies." Read more