CARES Act Paycheck Protection Program: How Payroll Loan Forgiveness Works

As of May 28, 2021, the Paycheck Protection Program has run out of funding. You can learn more about the PPP with our COVID-19 resource hub.

What Employers Need to Know About the Paycheck Protection Program

The Paycheck Protection Program (PPP) is an important part of the CARES Act that was recently passed by the House of Representatives and Senate and signed into law by President Trump. The CARES Act is the largest government stimulus program in United States history. The purpose of this new economic security act is to keep the U.S. economy going through the COVID-19 pandemic and protect the country’s most vulnerable citizens.

The Paycheck Protection Program component of the broader economic security (CARES) act is designed to help small businesses cover ongoing operations in the near term and encourage them to retain employees.

The primary goals of this new small business act is:

• keeping American workers paid during the coronavirus pandemic
• lowering unemployment in the near term so full time and part time workers (and those who rely on cash tips) don’t have to apply for unemployment insurance
• reducing financial stress on companies that have been forced to close and are earning less revenue
• ensuring businesses are adequately funded and staffed so they can reopen when the COVID-19 business closure period is over.

The PPP is a completely new $349-billion lending program run through the Small Business Administration (SBA). Loans are backed by a 100 percent government guarantee. By comparison, SBA 7(a) loans, the typical small business loans offered through the SBA, come with a 75 percent guarantee.

A unique factor of PPP loans is that they will be granted loan forgiveness if money from them is spent on government-approved expenses.

Here are answers to some common questions about the PPP. They will help you:

• understand Paycheck Protection Program loans, including the loan forgiveness feature
• decide whether a PPP loan is right for you
• understand the steps to take to apply and be approved for one.

Is my small business eligible for a PPP loan?

Small businesses, 501(c)(3) nonprofit organizations, tribal business concerns and veterans organizations qualify if they:

• Have no more than 500 employees or meet other industry-related size standards as defined by the SBA (your lender will let you know if you’re subject to SBA limits)
• Offer retail, lodging, hospitality, beverage, catering or food services and have a number of employees under 500 at a single location
• Are franchisees with an SBA franchise identifier code
• Are sole proprietors, self-employed individuals or independent contractors.

When can I apply for Cares Act coronavirus aid?

Paycheck Protection Program loans are now available and companies may start to apply immediately. Loans will be distributed on a first-come, first-served basis.

How do I apply for an SBA PPP loan?

Apply at one of the 1,800 plus financial institutions that offer SBA loans. The number will increase as more lenders are allowed in the program. Expect applications to be approved quickly, often in as little as one day. You may get access to funds on the same day you apply for a loan.

How much does it cost for small businesses to apply?

Do I have to put up collateral to get a PPP loan?

No collateral or personal guarantees are required. However, the credit scores of applicants will be evaluated.

Do I have to pay fees to secure the SBA guarantee?

PPP loans come with no Small Business Administration guarantee fees.

What else do I need to know about the Paycheck Protection Program loan application process?

Borrowers are required to make a good faith certification that:

• uncertain economic times make the loan necessary to maintain ongoing operations
• funds will be used for allowable purposes and that there are no other PPP loan applications pending.

Also, small businesses must prove they were in operation as of February 15, 2020 to be eligible to apply.

What is the top loan amount I can apply for?

The maximum loan amount is either:

• Two and a half times your average monthly payroll costs PLUS the outstanding total of certain SBA loans that were taken out between January 31, 2020 and the date of the new PPP loan (for refinancing purposes)

• $10 million.

Note: The date range for calculating average monthly payroll depends on the business type, seasonality and when it opened. Your loan provider will help you determine the right time period.

What payroll costs can be included when figuring out how much I can borrow through the SBA PPP?

Allowable payroll costs include gross employee salaries, bonuses, commissions, employer group benefits, retirement benefits and plan contributions and state payroll taxes. Individual compensation for purposes of this calculation is limited to $100,000 per year. Time off due to sickness and for family (Family Medical Leave Act or FMLA) reasons paid through the Families First Coronavirus Response Act (FFCRA) is NOT allowed.

What small business expenses can loan funds be used for?

Eligible recipients are allowed to use PPP loan dollars to cover:

• Payroll costs
• Group healthcare benefits, health insurance premiums and paid sick or medical leave
• Interest payments on mortgage obligations
• Interest on other debt obligations incurred before February 15, 2020
• Rent obligations on a physical location
• Utility payments.

What small business expenses can’t be paid from PPP loan dollars?

Expenses that aren’t allowed include:

• Individual employee salaries during the covered period that would be in excess of $100,000 per year when pro rated over a one-year period
• Compensation for employees whose primary residence is outside the United States
• Qualified sick or family leave wages paid under the Families First Coronavirus Response Act.

Do I have to pay a PPP loan back?

Borrowed money that’s used for payroll expenses, mortgage interest, rent or utility payments in the eight weeks following the date of PPP loan origination can be forgiven. That means business owners will not have to pay back borrowed money used for these expenses. Borrowers will be required to provide documentation of them in their loan forgiveness application. A decision on loan forgiveness will be made within 60 days of submitting the application.

Note: The forgiven amount will be reduced if an employer lays off employees or reduces wages by more than 25 percent. Laid-off employees must be rehired by June 30 for borrowers to recoup wages through loan forgiveness.

What is the covered period for Paycheck Protection Program loans?

The covered loan period — the time during which loan money must be used for the debt to be forgiven — is two months from the date the loan is originated. The program extends from February 15, 2020 through June 30, 2020.

What do I have to do to ensure PPP loan forgiveness?

The loan forgiveness amount includes everything you spend on allowable expenses over an eight week time frame (referred to as the covered period) following the date the loan is approved and the money from it is available to you (known as the loan origination). Expenses that are allowed and not allowed are detailed above.

What if I don’t use all the loan money during the two month covered period?

You’ll need to pay back unused loan dollars at a 0.5 percent fixed interest rate. You’ll get a deferral on the first payment for six months. It probably makes sense to pay back any unused funds soon after the covered period is over.

What if I took out an SBA Economic Injury Disaster Loan loan to help deal with the COVID-19 crisis?

If you took out an Economic Injury Disaster Loan Program (EIDL) loan after January 31, 2020 and did not use it for payroll expenses, it doesn’t prevent you from applying for a PPP loan. If you did use it to cover payroll, contact your loan provider or the SBA (or check out its resource center) to find out how to best handle the situation.

What impact could a PPP loan have on other stimulus program opportunities?

This is an area where you need to be careful and select the stimulus program options that are best for your business:

• PPP borrowers are not eligible for the CARES Act employee retention tax credit.
• There is no double dipping allowed. PPP loan dollars can’t cover the same expenses as those from an EIDL loan.
• Businesses with PPP loans are still eligible for payroll tax credits for sick leave and expanded family leave under the Families First Coronavirus Response Act.

Most experts believe PPP loans are good for small businesses. Your loan provider and tax advisor can help you decide if applying for one makes sense for you.