What is the Paycheck Protection program?
The Paycheck Protection Program (PPP), administered by the Small Business Administration (SBA), is meant to enable small businesses to keep employees on payroll during the COVID-19 crisis. With loans provided by participating lenders, the PPP includes generous terms for businesses that meet the criteria, such as:
- 100% federally-guaranteed loans to employers who maintain their payroll during the emergency
- Forgiveness of a portion of the loan (up to 8 weeks of "payroll costs" based on employee retention and salary levels)
- Deferment of principal and interest payments for the first six months of the loan (up to a maximum of a year)
- No SBA fees
How to apply for the PPP
The SBA's PPP page provides detailed information about the program and a search function to help you find a local lender. To get started, contact your local SBA District Office. Banks are scrambling to finalize their application process, with many banks accepting applications as of April 3. Applications will be accepted for loans under the PPP until June 30 of this year. (This deadline may be extended, but as of this writing, the program is open until June 30.)
Eligibility for PPP loans
The following types of U.S. business entities are eligible to apply for a PPP loan:
- Small businesses in operation before February 15, 2020
- Small businesses with fewer than 500 employees, certain nonprofits, veterans organizations, and tribal businesses (other size limits may apply, depending on the applicable size standard as provided by SBA)
- Individuals who operate a sole proprietorship or independent contractor (and other eligible self-employed individuals)
- Any business that employs not more than 500 employees per physical location and that is assigned an NAICS code beginning with 72, for which the affiliation rules are waived
- Affiliation rules are also waived for any business operating as a franchise that is assigned a franchise identifier code by the SBA, and any company that receives funding through a Small Business Investment Company (affiliation rules are complicated, so if they could apply to your business, you may want to ask a lawyer for advice)
Loan size limits
Depending on the needs of your business, the loan size will be calculated in different ways, subject to the maximum loan size of $10 million. Certain timelines also apply, including:
- If you were in business February 15, 2019 to June 30, 2019: Your max loan is equal to 250% of your average monthly payroll costs during that time period (if your business employs seasonal workers, you can opt to choose March 1, 2019, as your time period start date)
- If you were not in business between February 15, 2019 to June 30, 2019: Your max loan is equal to 250% of your average monthly payroll costs between January 1, 2020 and February 29, 2020
- If you took out an Economic Injury Disaster Loan (EIDL) between February 15, 2020, and June 30, 2020 and you want to refinance that loan into a PPP loan, you would add the outstanding loan amount to the payroll sum
What costs can be counted as payroll costs?
- Compensation (salary, wage, commission, or similar compensation, payment of cash tip or equivalent), subject to the $100,000 per-employee limit discussed below
- Payment for vacation, parental, family, medical, or sick leave
- Allowance for dismissal or separation
- Payment required for the provisions of group health care benefits, including insurance premiums
- Payment of any retirement benefit
- Payment of state or local tax assessed on the compensation of employees
What costs cannot be counted as payroll costs?
- Compensation paid to independent contractors (since they are eligible to apply for a PPP loan themselves)
- Compensation over $100,000 per employee
- Taxes imposed or withheld under chapters 21, 22, and 24 of the IRS code
- Compensation of employees who reside outside of the United States
- Qualified sick and family leave for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act
How can loan proceeds be used?
- Payroll costs (as described above)
- Costs of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums
- Employee salaries, commissions, or similar compensation (subject to limitations as described above)
- Payments of interest on any mortgage obligation (but not any payment or prepayment of principal)
- Rent (including rent under a lease agreement)
- Utilities
- Interest on any other debt obligations that were incurred before the covered period
Loan term, interest rate and fees
- 2 years
- 1 percent
- Zero loan fees
- Zero prepayment fee
- SBA will establish application fee caps for lenders that charge application fees
What is loan forgiveness, and how is it calculated?
Borrowers can apply for forgiveness on PPP loans up to the sum of the following costs incurred during the 8-week period after the loan is made. Forgiven loan amounts are not taxed as income.
- Payroll costs (excluding compensation over $100,000 or to non-U.S. employees)
- Payment of interest on any covered mortgage obligation (not including any prepayment or payment of principal)
- Payment on any covered rent obligation
- Covered utility payments
What if a small business reduces pay or cuts staff? Does this affect loan forgiveness?
The amount of the PPP loan that is eligible for forgiveness may be reduced if the borrower reduces pay by more than 25 percent for employees earning less than $100,000 per year or cuts its staff during the relevant period. These rules around loan forgiveness are complex and a full summary is beyond the scope of this article. Small business owners would be well-advised to ask an attorney for assistance in reviewing loan documents and understanding loan forgiveness provisions before executing the loan documents.
How do I get forgiveness on my PPP loan?
You must apply through your lender for forgiveness on your loan and provide:
- Documentation verifying the number of employees on payroll and pay rates, including IRS payroll tax filings and state income, payroll, and unemployment insurance filings
- Documentation verifying payments on covered mortgage obligations, lease obligations, and utilities
- Certification from an authorized representative of your business that the documentation provided is true and the amount being forgiven was used in accordance with the PPP's requirements for use
What happens after the forgiveness period?
Any loan amounts not forgiven are carried forward as an ongoing loan with maximum terms of 10 years, at a maximum interest rate of 4 percent. Principal and interest will continue to be deferred for a total of six months to one year after disbursement of the loan. The clock does not start again.
Ask a lawyer
If you have questions about government relief or need legal help due to the coronavirus pandemic, Rocket Lawyer is here for you. Get free legal advice and essential documents to safeguard your business in our Coronavirus Legal Center. You can also contact the Rocket Lawyer CARES support team toll-free at (877) 885-0088, Monday through Friday, from 6am to 6pm PST.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.
