CARES Act Paycheck Protection Program: How Payroll Loan Forgiveness Works
April 3, 2020 | Last Updated on: March 23, 2023
April 3, 2020 | Last Updated on: March 23, 2023
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.
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:
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:
Small businesses, 501(c)(3) nonprofit organizations, tribal business concerns and veterans organizations qualify if they:
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.
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.
No collateral or personal guarantees are required. However, the credit scores of applicants will be evaluated.
PPP loans come with no Small Business Administration guarantee fees.
Borrowers are required to make a good faith certification that:
Also, small businesses must prove they were in operation as of February 15, 2020 to be eligible to apply.
The maximum loan amount is either:
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.
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.
Eligible recipients are allowed to use PPP loan dollars to cover:
Expenses that aren’t allowed include:
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.
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.
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.
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.
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.
This is an area where you need to be careful and select the stimulus program options that are best for your business:
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.
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