Last Updated: 8/9/2020
Many small business employers will be able to receive loans of up to $10 million through the Paycheck Protection Program (PPP) authorized by the CARES Act. An update to the SBA’s existing 7(a) loan program, these loans are intended to be easier for small businesses to obtain. This article has been updated to reflect the changes outlined in the Paycheck Protection Program Flexibility Act signed on June 4, 2020.
NOTE: Applications for the PPP loan program closed on August 8, 2020.
It includes $310 billion for the PPP: $250 billion to replenish funding for the program and $60 billion set aside specifically for smaller institutions like credit unions and community banks. It also includes $60 billion in loans and grants under the Economic Injury Disaster Loan program. The new law also makes farms and ranches eligible for the loans. On April 24, 2020, an additional $484 billion of funding was added to replenish the PPP program and provide other funding to support small businesses.
The PPP will provide certain small businesses with funds to cover payroll costs, including benefits. Funds can also be used to pay interest on mortgages, rent, and utilities. Funds will be provided as loans that can be fully forgiven when used for these purposes.
Payroll costs covered by these loans will be capped at an annual salary of $100,000 for each employee. And at least 60% of the forgiven amount must be used for payroll — or the loan may only be eligible for partial forgiveness.
No collateral or personal guarantees are required for these loans.
Loan payments may be deferred for up to ten months. Neither the government nor lenders will charge small businesses any fees.
Forgiveness is based on the employer maintaining or quickly rehiring employees and maintaining salary levels. Forgiveness will be reduced if full-time headcount declines, or if salaries and wages decrease.
Under the CARES Act, a “qualified business” is any business that:
The maximum amount of the loan is set by formula (average monthly payroll cost prior to the COVID-19 pandemic times 2.5), subject to a maximum of $10 million.
Other key provisions:
The applicant is required to certify:
Although the CARES Act does suspend the ordinary requirement that borrowers must be unable to obtain credit elsewhere, you’ll still need to certify “in good faith” that the PPP loan request is necessary for you to maintain ongoing operations — or get back up and running. This means that small business owners must confirm their need for the loan by certifying that the lack of funds would be “significantly detrimental to their business”.
The SBA has offered additional guidance to say that any small business that receives a PPP loan of less than $2 million is considered to have certified the need for their loan if they act in good faith. The SBA determined that this safe harbor is appropriate because “borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment.”
Please note that employers may not take out a loan under the Economic Injury Disaster Loan Program (EIDL) and a PPP for the same purposes (to cover payroll costs). An employer may refinance an existing EIDL loan into a PPP loan by adding the amount of an EIDL to the sum of the payroll costs. However, any advance amount received under the EIDL Grant Program would be subtracted from the amount forgiven of the PPP loan.
Applicants may be ineligible if they have a loan from SBA or any other Federal agency that is currently delinquent or has defaulted within the last seven years and caused a loss to the government.
Loan amounts and eligibility will ultimately be determined by lenders. For different loan types, different thresholds may apply.
Yes. PPP loans cover payroll costs, including costs for employee vacation, parental, family, medical, and sick leave. However, the CARES Act excludes qualified sick and family leave wages when a reimbursable tax credit would be allowed under certain sections of Families First Coronavirus Response Act. Get more detail about the Paid Sick Leave Refundable Credit in the IRS guidance.
In general, employers can calculate their aggregate payroll costs using data either from the previous 12 months or from the calendar year 2019.
Seasonal businesses can use average monthly payroll for the period between February 15, 2019, or March 1, 2019, and June 30, 2019. A company that was not in business from February 15, 2019 to June 30, 2019 can use the average monthly payroll costs for the period January 1, 2020 through February 29, 2020.
Employers can use their average employment over the same time periods as above to determine their number of employees. However, employers can opt to use SBA’s usual calculation: the average number of employees per pay period in the 12 completed calendar months prior to the date of the loan application (or the average number of employees for each of the pay periods that business has been operational — if it hasn’t been operational for 12 months.
The SBA has clarified their guidance for determining the number of full-time employees. For purposes of loan eligibility, the CARES Act defines the term employee to include “individuals employed on a full-time, part-time, or other basis.”
So, you will need to calculate your total number of employees, including part-time employees, when determining their employee headcount for purposes of the eligibility threshold. For example, if you have 200 full-time employees and 50 part-time employees each working 10 hours per week, the SBA considers that a total of 250 employees for your PPP loan application.
Under the Act, payroll costs are calculated on a gross basis without regard to federal taxes imposed or withheld, such as the employee’s and employer’s share of Federal Insurance Contributions Act (FICA) and income taxes required to be withheld from employees.
As a result, payroll costs are not reduced by taxes imposed on an employee and required to be withheld by the employer, but payroll costs do not include the employer’s share of the payroll tax.
For example, an employee who earned $4,000 per month in gross wages, from which $500 in federal taxes was withheld, would count as $4,000 in payroll costs. The employee would receive $3,500, and $500 would be paid to the federal government. However, the employer-side federal payroll taxes imposed on the $4,000 in wages are excluded from payroll costs under the statute.
Applications for small businesses, sole proprietorships, independent contractors, and self-employed individuals to apply for PPP loans closed on August 8, 2020. If you have questions about the application process, click here.
Employers who have received a PPP loan may defer their payment and deposit of the employer’s share of social security tax that otherwise would have been made beginning on March 27, 2020. This is available through the date the lender issues a decision to forgive the loan in accordance with paragraph (g) of section 1106 of the CARES Act.
However, the amount of the deposit and payment of the employer’s share of social security tax that was deferred through the date that the PPP loan is forgiven continues to be deferred and will be due on the applicable dates outlined in our article about delayed employer payroll taxes.
Applicants may apply through any approved lender or any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. The SBA provides a list of approved lenders. Note that the SBA is actively approving new lenders, so you may want to check with your preferred lender to see if it is accepting SBA loan applications.
You can apply by completing the Paycheck Protection Program loan application and submitting it with the required documentation to an approved lender. Here’s a downloadable copy of the application.
Additional PPP borrower information is available from the Department of Treasury, or get a full rundown on the SBA’s website. For more information about how to manage your business during the COVID-19 outbreak, please take a look at our Resource Center.