Salt Lake City, Utah, USA

The Paycheck Protection Program Explained

The Paycheck Protection Program (PPP) is a cornerstone of the $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act. The program provides $349 billion in Small Business Administration (SBA) loans for small businesses with 500 or fewer employees. The goal of this loan program is to encourage businesses to keep workers employed during the coronavirus pandemic.

Typically, SBA loans are for businesses that cannot find credit through other lenders, but the CARES Act waives that requirement. And while SBA loans require borrowers to post collateral and sign a personal guarantee that they’ll repay the loan, PPP loans require neither. Instead, the federal government is providing loan guarantees to lenders.

All businesses—including nonprofits, veterans’ organizations, Tribal business concerns, sole proprietorships, self-employed individuals, and independent contractors—with 500 or fewer employees can apply. Businesses in certain industries with more than 500 employees that meet applicable SBA employee-based size standards can also apply.

Determining Paycheck Protection Program loan eligibility

Lenders must determine if a business was operating as of February 14, 2020, and if it was paying employees on that date. Proof of your payroll costs is the biggest factor in determining the size of your loan. “Employees” includes full- and part-time workers. Independent contractors paid through 1099s are also included in the payroll calculation. Criteria for loan eligibility include:

• The business has 500 or fewer employees. 
• The owner certifies that the uncertainty of economic conditions makes the loan necessary to continue operations during the pandemic.
• The loan proceeds must be used to fund payroll, rent or mortgage payments, interest on debt, and utility payments.

For a more detailed list of eligibility requirements, review the PPP fact sheet.

How much can an eligible small business borrow?

Eligible small businesses can borrow up to $10 million. The maximum loan amount is based on the business’s average total monthly payroll costs for the prior 12 months, multiplied by 2.5.

Loans will cover annual payroll, up to $100,000 per worker, but cannot exceed $10 million. If your business has operated for less than a year, your loan will be based on employee payroll between January and February 2020. The SBA is paying origination fees to lenders, so borrowers don’t receive additional fees.

What are the taxes and loan terms?

After eight weeks, borrowers must submit to lenders detailed reports on how they used funds. But to streamline the process and keep small businesses running, all PPP loans have identical terms:

• Interest rates of 0.5%
• Maturity of two years
• First payment deferred for six months after approval
• 100% guarantee by the SBA
• No collateral or personal guarantees from borrowers
• No borrower or lender fees payable to the SBA

What can I pay for using Paycheck Protection Program funds?

Since the program is designed to help businesses keep employees on the payroll, the primary use of Paycheck Protection Program funds should be used to cover payroll-related expenses. Eligible expenses include:

• Salaries
• Wages
• Commissions
• Expenses
• Vacation, sick, parental/family/medical pay
• Retirement contributions
• Group health coverage premiums
• State and local taxes

Federal taxes are not included, nor are payroll costs for employees making over $100,000 a year. However, the program covers the first $100,000.
Paycheck Protection Program funds may also be applied to administrative costs like:

• Utilities (electricity, gas, water)
• Communication (phone or internet access)
• Insurance premiums or other healthcare costs
• Rent, provided borrowers signed their lease before February 15, 2020

If small business owners use the PPP funds to cover qualified expenses over eight weeks, they may be eligible for loan forgiveness.

How is a Paycheck Protection Program loan forgiven?

Loans may qualify for forgiveness under some circumstances:

• The loan is only used to cover qualified expenses.
• You pay 100% of payroll dollars to employees during the eight weeks after the loan is approved.

The amount of the loan eligible for forgiveness will be reduced if:

• You reduce the number of full-time workers you employ over eight weeks.
• You reduce payroll costs by 25% or more.

Forgiveness is determined by the banks that grant the loans. Banks will have 60 days to approve or deny a business’s loan forgiveness request.

Normally, when a bank approves loan forgiveness, the borrower is taxed on the dollar amount of the loan, as if the loan was business income. The CARES Act does not tax the borrower when the loan is forgiven.

What if the loan is not forgiven?

If a portion of the loan is not forgiven because at least 75% of the loan did not cover payroll costs, the remaining loan must have a maturity date of 10 years or fewer. And the interest rate will be no more than 4%. There will be no penalty for loan prepayment, and the federal government will continue to guarantee the loan.

Does the Paycheck Protection Program cover sole proprietors and independent contractors?

Yes! Sole proprietors and independent contractors meet the definition of a small business under SBA size standards. Professionals in this category must also document their income and expenses.

You can document your income using bank statements and 1099s received from clients. Contractors may not receive 1099s for smaller payments. Expenses can be supported using bank statements and credit card documentation. Much of this information should be filed with your 2019 tax return.

How to apply for the Paycheck Protection Program

On April 3, 2020, small businesses and sole proprietorships can apply for these loans. On April 10, 2020, independent contractors and self-employed individuals can apply.

Complete the SBA’s Paycheck Protection Program sample application, and submit the document to any existing SBA-approved lender. Federally insured depository institutions, federally insured credit unions, and Farm Credit System institutions may also be participating as SBA lenders. Check with your bank to find out if they’re participating in the program.

When you apply for the loan, your lender will consider both your personal credit score and your FICO score. The SBA uses the FICO business score for all business loans. Both credit scores evaluate your use of credit and if you make debt payments on time. To maintain a good business score, you must pay vendors and suppliers on time.

You will need to have the following documentation to apply:

• Articles of incorporation for each borrowing entity
• By-laws or operating agreement for each borrowing entity
• Copies of each owner’s driver’s license
• Payroll expense verification
• Certification that all employees live in the United States
• A detailed list of employees who do not live in the U.S., with corresponding salaries
• A trailing 12-month profit and loss statement
• Proof of expenses like rent or mortgage payments, interest payments on debts, and utility payments.

Potential borrowers must also provide payroll details to the lender to obtain loan approval. You’ll also need to provide payroll data during the eight weeks after the loan is finalized. You’ll need to provide documentation for:

Gross pay. This includes gross wages as well as paid time off, vacation pay, and family medical leave pay for the last 12 months.
Tax withholdings. This includes the last 12 months of federal, state, and local income taxes withheld.
2019 FUTA taxes. This includes IRS forms 940 and 941 for federal unemployment taxes.
1099s. This includes 2019 payments to independent contractors.
Health insurance premiums. This includes company-paid premiums for group health insurance for the last 12 months.
Retirement plan funding. This includes business contributions to employee retirement plans over the last 12 months.

Your business will still have to withhold federal and state income taxes, Medicare, and Social Security. Check with a CPA to determine the dates to file payroll tax reports and submit withheld payments.

Where to go from here

Contact your bank and find out if they’re participating in the SBA lending program. If they don’t, ask for a referral for another institution. Then gather your records, complete the application, and submit the data to an SBA lender as soon as possible. A CARES Act loan can serve as a lifeline for your business. Explain the application process to your workforce, so they understand the direction you’re headed. Finally, give yourself some credit for taking action.

This content is for information purposes only and information provided should not be considered legal, accounting or tax advice, or a substitute for obtaining such advice specific to your business. Additional information and exceptions may apply. Applicable laws may vary by state or locality. No assurance is given that the information is comprehensive in its coverage or that it is suitable in dealing with a customer’s particular situation. EPAG is not responsible for updating or revising any information presented herein. Accordingly, the information provided should not be relied upon as a substitute for independent research. EPAG cannot warrant that the material contained herein will continue to be accurate, nor that it is completely free of errors when published. Readers should verify statements before relying on them.