What You Need to Know about the Paycheck Protection Program, or PPP

In this unprecedented time, governments around the world have been forced to take actions to protect their economies and citizens. With unemployment reaching record-breaking highs across the United States, the US government quickly passed an economic stimulus bill intended to bring relief to the country.

The law is called the CARES (Coronavirus Aid, Relief, and Economic Security) Act. One provision of the program is aimed specifically at small businesses, many of which have been forced to shut down during the crisis. With valuable income lost and employees going without pay, small businesses all over have been forced to consider the unthinkable: closing down for good.

To help small businesses, the CARES Act offers a program called the Paycheck Protection Program (PPP). Here is what you need to know about it.

What Is the PPP?

Back by the Small Business Administration (SBA), this nearly $350-billion program offers small businesses the opportunity to receive up to eight weeks of assistance by providing 100-percent federally-guaranteed loans. The program was intended to achieve two main goals for small businesses.

First, it would cover short-term expenses during the worst part of the coronavirus crisis. Second, it would give businesses an incentive to keep their employees on staff. This will allow businesses to stay afloat as well as help employees to pay their bills during the crisis. Though it seems new, the PPP is actually just a new addition to the existing SBA 7(a) loan program through the Small Business Administration (SBA).

Eligibility for the Program

To be eligible for the Paycheck Protection Program, small businesses must meet the SBA’s size standards. Generally, this means having fewer than 500 employees. However, businesses in the hotel and food service industry sometimes qualify even if the number of employees exceeds this total, and nonprofits are also considered eligible.

Additional eligibility extends to 501(c)(19) veterans’ organizations, independent contractors, and individuals running sole proprietorships. One loan is available per business, determined by the taxpayer identification number (TIN).

How Does It Work?

Through the Paycheck Protection Program, loans are put into different categories depending on the length of time the business remains operational from the determined beginning of the crisis (set as February 15) through June 30. If a business was not operable after February 15 (closed due to the crisis or went out of business because of it), it will receive a maximum loan amount of 2.5 times the average monthly payroll expenses for the months of January and February.

Companies remaining operational from February 15 through June 30 can receive a maximum amount of 2.5 times the average monthly payroll expenses for this time period. Seasonal workers for the period between March 1 and June 30 will receive that same maximum amount for that specific time period. Maximum awarded amounts cannot exceed $10 million.

The PPP uses the following eligible payroll expenses to calculate the amount of a PPP loan: payment of state and local taxes imposed on employee compensation; payment of group healthcare benefits, including insurance premiums; payment of vacation, medical, sick, and family leave; payment of retirement benefits; an allowance for dismissal or separation of employees; and compensation, including salaries, commissions, wages, or cash tips.

There are a few exceptions that are not considered eligible payroll expenses. The PPP will not cover: salary compensation over $100,000 for any individual employee; compensation for any employee who principally resides outside of the US; sick and family leave already provided for under the Family First Coronavirus Response Act; or taxes imposed under chapters 21, 22, and 24 of the Internal Revenue Code (IRC).

How Can the Funds Be Used?

Funds provided under the PPP can be used to cover payroll expenses, employee compensation, rent, utility costs, interest on mortgage obligations (exclusive of prepayment fees and the principal), continuing group healthcare benefits, and any interest of debt incurred before the covered period. However, three quarters of the approved loan amount must be payroll expenses.

Loan Forgiveness

One notable aspect of the PPP is that up to eight weeks of the loans incurred under this program could be forgiven in full if three specific requirements are met. This essentially turns the PPP loan into a non-taxable grant.

To qualify for loan forgiveness, a small business receiving a PPP loan must use the loans to offset no more than eight weeks of payroll expenses (the maximum time allowed to fully offset payroll expenses), the loans must be used only for the intended purpose, and businesses must retain their employees at salary levels that are comparable to where they were prior to the crisis.

If this eligibility is met, businesses can receive loan forgiveness for up to eight weeks of the loan. Amounts exceeding this must be repaid under a maximum repayment window of up to ten years and a top interest rate of 4 percent, and without any prepayment penalties or loan fees associated with the loan.

Government officials are certainly hoping that the PPP loans will help to keep the American economy from experiencing some of the harmful effects caused by the crisis and help keep Americans at work, hopefully stemming the increase in unemployment filings.