How can I spend a Paycheck Protection Program loan?

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.

The Paycheck Protection Program (PPP) is intended to provide a way for small business owners to keep their workers on the payroll and maintain wages. The Small Business Administration (SBA) classifies PPP loans as 7(a) small business loans. First-time borrowers can apply for up to $10 million, with a maturity of 5 years and an interest rate of 1%. Second-time borrowers can apply for up to $2 million with the same maturity and interest rate. Note that the $10 million and $2 million caps apply together with any affiliates, as applicable.

Loans issued under the Paycheck Protection Program can be used for eligible payroll costs, mortgage interest, rent, utilities, operation 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.

At least 60% of the loan proceeds must be used for eligible payroll costs. And no more than 40% of loan proceeds may be used for eligible nonpayroll costs. PPP loans may be forgivable, in whole or in part, if certain requirements are met.

Eligible payroll costs include:

Eligible payroll costs include compensation to employees whose principal place of residence is in the United States, in the form of:

  • Salary, wages, commissions, or similar compensation;
  • Cash tips or the equivalent;
  • Payment for vacation, parental, family, medical, or sick leave;
  • Allowance for separation or dismissal;
  • Payment for the provision of employee benefits consisting of group health care or group life, disability, vision, or dental insurance, including insurance premiums, and retirement;
  • Payment of state and local taxes assessed on compensation of employees; and
  • For an independent contractor or sole proprietor, wages, commissions, income, or net earnings from self-employment, or similar compensation, subject to SBA rules.

Excluded payroll costs include:

  • Individual employee compensation in excess of 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 wages under the Families First Coronavirus Response Act

Excluded payroll costs may not count towards the 60% of funds that must be used for eligible payroll costs.

Eligible nonpayroll expenses include:

  • Interest payments on any business mortgage obligation on real or personal property that was incurred before February 15, 2020 (but not any prepayment or payment of principal);
  • Payments on business rent obligations on real or personal property under a lease agreement in force before February 15, 2020;
  • Business utility payments for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020;
  • Covered operations expenditures, covered property damage costs, covered supplier costs, and covered worker protection expenditures, as defined in SBA rules.
  • Interest payments for loans or other debts incurred before February 15, 2020.

For a comprehensive list of included and excluded costs, please refer to the latest guidance from SBA and Treasury.

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