What is the Paycheck Protection Program?

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 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 third round of funding, released on January 6, 2021, appropriated an additional $284.45 billion to the program. 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 spending at least 60% of the forgiveness amount on eligible payroll costs (and no more than 40% on eligible nonpayroll 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.

Changes to the Paycheck Protection Program in 2021

The Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (“Economic Aid Act” or “the Act”) was signed into law on December 27, 2020. The relief package includes an additional $284.45 billion in funding for first-time and second draw PPP loans to help small businesses.

In addition to providing funds for first-time borrowers, the new legislation provides small businesses the opportunity to apply for a second PPP loan if they have fewer than 300 employees and can show a reduction of at least 25% in revenue in 2020 compared to their 2019 revenue, though borrowers not in business in 2019 may be able to use a different comparison period (in addition to other requirements). The maximum loan amount for PPP second-time borrowers is $2 million.

Additionally, although the IRS originally stated that borrowers whose PPP loans are forgiven would not be able to deduct expenses paid with the proceeds of a PPP loan, that position has been reversed. As a result, borrowers will be able to claim deductions in 2020 and 2021 for any expenses that are otherwise deductible, regardless of whether PPP proceeds were used to pay those expenses.

The law creates a further simplified PPP loan forgiveness application for loans of $150,000 or less. The PPP borrower will need to sign and submit a one-page certification, and fewer or no other documents. The law requires the SBA to establish this form within 24 days of enactment. This simplified loan forgiveness process is retroactive and will apply to PPP loans of $150,000 or less, including loans from the first round of funding. All borrowers must retain supporting documentation for their application.

Learn more about 2021 PPP changes and how they could impact your loan.

Paycheck Protection Program loan eligibility

In general, small businesses with fewer than 500 or fewer employees are eligible to apply for a first Paycheck Protection Program loan, and second time borrowers with 300 or fewer employees are eligible to apply for a second loan (among other requirements). Businesses must have been in operation on February 15, 2020, and experienced economic uncertainty to be eligible to apply.

For first PPP loans, eligible small businesses and organizations include:

  • Small businesses, 501 (c)(3) nonprofits, 501(c)(19) veterans’ organizations, and Tribal businesses (as described in sec. 31(b)(2)(C) of Small Business Act) that employ no more than 500 employees
  • Certain news organizations or nonprofit public broadcasting entities that employ no more than 500 employees per location
  • Housing cooperatives, eligible section 501(c)(6) organizations, or eligible destination marketing organizations that employ no more than 300 employees
  • Independent contractors, eligible self-employed individuals, and sole proprietors
  • Note: employees of an organization are counted together with any affiliates, if applicable.

For purposes of meeting the 500-employee, 300-employee, or applicable SBA size threshold, some businesses are exempted from applying the SBA’s affiliation rules. Those are:

  • Businesses in the accomodation and food service industries with fewer than 500 employees (or fewer than 300 employees for second draw loans)
  • Franchises that have been assigned a franchise identifier code by the SBA
  • Businesses that have received financial assistance from a Small Business Investment Company (SBIC)
  • Any nonprofit assigned a North American Industry Classification System (“NAICS”) code beginning with 5151 (Television and Radio Broadcasting)
  • Any business concern that is (1) majority-owned or controlled by a business concern with a NAICS code beginning with 511110 (Newspaper Publishers) or 5151 (Television and Radio Broadcasting) and (2) employs not more than 500 employees (or 300 employees for second loans) or the applicable NAICS size standard per physical location of such business concern

Some religious organizations may also be exempted from applying SBA affiliation rules for certain relationships that are based on a religious teaching or belief or otherwise constitute a part of the exercise of religion.

Small businesses in certain industries that have over 500 (or 300, as applicable) employees but meet the Small Business Administration’s size standards may still be eligible for a PPP loan.

Also, Applicants will be required to certify that current economic uncertainty makes the loan request necessary to support ongoing operations. Applicants must have been in operation on February 15, 2020, and either paid employees, paid independent contractors, or have been an eligible self-employed individual, independent contractor, or sole proprietorship with no employees.

How much can an eligible small business borrow?

First time loans through the Paycheck Protection Program are capped at $10 million per eligible applicant. Second time PPP loans are capped at $2 million. Both caps are applied to the borrower together with any affiliates, if applicable.

Loan amounts for eligible applicants are generally determined based on the business’s average monthly payroll costs from calendar year 2020, calendar year 2019, or the precise 1-year period before the date on which the loan is made and will be approximately 250% of that amount (or 350% of that amount for certain second time borrowers). Other calculations are also available to certain seasonal businesses, new businesses, farmers and ranchers, partnerships, and borrowers with income from self-employment.

First time borrowers that wish to apply for a PPP loan can refer to the Paycheck Protection Program Borrower Application Form. Second time borrowers that wish to apply for a PPP loan can refer to the PPP Second Draw Borrower Application. Applicants will be required to provide payroll documentation with their applications.

What are the loan terms?

Paycheck Protection Program loan terms include, but are not limited to:

  • Interest rates at 1%
  • You do not need to make payments until you file for forgiveness and the SBA pays your forgiveness amount to your lender or notifies your lender that you are not eligible for forgiveness (“Deferment Period”). If you do not apply for forgiveness within 10 months from the end of the maximum 24-week forgiveness covered period, your Deferment Period will end on the date that is 10 months after the last day of the maximum 24-week forgiveness covered period.
  • Interest continues to accrue on your PPP loan during your Deferment Period.
  • A maturity of 5 years.

What can I pay for using Paycheck Protection Program funds?

Since the program is designed to help businesses keep employees on payroll, at least 60% of Paycheck Protection Program funds must be used to cover eligible payroll costs (and no more than 40% of PPP funds may be used to cover eligible nonpayroll costs).

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:

  1. Salary, wages, commissions, or similar compensation
  2. Cash tips or equivalent
  3. Payment for vacation, parental, family, medical, or sick leave
  4. Allowance for separation or dismissal
  5. Payments required for the provisions of employee benefits consisting of group health care or group life, disability, vision, or dental insurance including insurance premiums
  6. Payment of any retirement benefit
  7. 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.

Learn more about eligible PPP loan expenses.

How is a Paycheck Protection Program loan forgiven?

In general, loans may be forgivable, in whole or in part, if the funds are used as directed by the SBA, including but not limited to the following criteria:

  • At least 60% of the forgiveness amount must be attributable to eligible payroll costs
  • No more than 40% of the forgiveness amount may be attributable to eligible non-payroll costs
  • Cash compensation for which forgiveness is sought may not exceed $100,000 annualized per employee.
  • Owner compensation forgiveness is subject to limits that vary depending on the type of owner. These are laid out in SBA guidance.
  • To be eligible for forgiveness, eligible costs must be paid during your covered period, or incurred during your covered period and paid by the next regular payroll date, billing date, or health insurance premium due date, as applicable. The covered period is a period running from 8 to 24 weeks from the time you receive your loan proceeds.
  • Your forgiveness amount may be reduced based upon reductions in full-time equivalent (FTE) employees or reductions in employee salaries or wages since the first quarter of 2020. Such forgiveness reductions may be avoided if borrowers rehire FTEs or restore employee salary or wage reductions on or before December 31, 2020, or conduct such rehiring and restoration of wages no later than the last day of the loan’s covered period for loans made on or after December 27, 2020, as described in SBA guidance

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.

What if the Paycheck Protection Program loan is not forgiven?

You do not need to make payments until you file for forgiveness and the SBA pays your forgiveness amount to your lender or notifies your lender that you are not eligible for forgiveness. If you do not apply for forgiveness within 10 months from the end of the maximum 24-week forgiveness covered period, your Deferment Period will end on the date that is 10 months after the last day of the maximum 24-week forgiveness covered period.

After you apply for forgiveness, the SBA will notify your lender if your application has been denied in whole or in part, and will remit your full or partial forgiveness amount to your lender; your lender would then notify you when your first payment is due. If the Deferment Period ends with an unforgiven balance on your loan, you must begin to make loan payments at that time. PPP loans have a 1% interest rate, and interest will continue to accrue during the Deferment Period.

How to apply for the Paycheck Protection Program

You may apply for 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. See the list of participating lenders

Documents required to apply for a PPP loan

Eligible businesses can complete the Paycheck Protection Program loan application or a Paycheck Protection Program Second Draw Borrower loan application and submit it to an approved lender. Applicants are required to provide documentation and information based on their business type. Such documents may include but need not be limited to:

  • Form 941 (or other tax forms containing similar information) and state quarterly wage unemployment insurance tax reporting forms from each quarter in 2019 or 2020 (whichever you used to calculate the loan amount), or equivalent payroll processor records
  • Evidence of any retirement and employee group health, life, disability, vision and dental insurance contributions
  • A payroll statement or similar documentation from the pay period that covered February 15, 2020, to establish you were in operation on February 15, 2020.

For second loans of more than $150,000, documentation sufficient to establish that the applicant experienced a reduction in revenue, which may include relevant tax forms, including annual tax forms, or, if relevant tax forms are not available, a copy of the applicant’s quarterly income statements or bank statements. (For a second loan of $150,000 or less, applicants must maintain this documentation and provide this documentation by the time the applicant applies for forgiveness or at SBA’s request).

Note that documentation requirements differ for partnerships and self-employed borrowers who file Schedule C or Schedule F.

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.

See frequently asked questions about the Paycheck Protection Program for more information.

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