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Paycheck Protection Program

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The Paycheck Protection Program (PPP) enables small businesses to cover certain payroll and other costs. Businesses with fewer than 500 employees are eligible to receive loans of as much as $10 million. Loans are calculated by multiplying an employer's monthly payroll times 2.5. The loans are completely forgiven, tax-free, if the funds are spent on payroll, rent and certain other expenses in the following funding of the loan.

This program is incredibly complex, and was developed under significant pressure. Limited funds were available to be allocated, and businesses have been aggressive in pursuing them. The Small Business Administration (SBA) struggled to give banks guidelines in timely fashion, because the CARES Act calls for disbursement more or less immediately. Banks were swamped with applicants, and initially catered to their proven customers to reduce the chances of holding the bag when the loans were forgiven. Underwriting was limited, and rushed. Multiple changes were made in application forms and standards, and deadlines were missed. Relative chaos ensued. A second round of funding was required and eventually many small businesses did get the loan.

Full examination of the CARES Act and its implementation is beyond the scope of this guide. Any business serious about this program must contact its accountant and banker, and be extremely proactive to find success in the near future. But here are the basics.

General Terms and Eligibility Requirements

The types of businesses and organizations eligible for a PPP loan include:

  • small business and other business concerns, 501(c)(3) nonprofits, 501(c)(3) veterans organization, tribal business concerns with fewer than 500 employees described in section 31(b)(2)(C) of the Small Business Act, or the applicable size standard in number of employees for the North American Industry Classification System (NAICS) as provided by SBA, if higher;
  • sole proprietors, independent contractors and eligible self-employed individuals;
  • any business concern that employs fewer 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 also are waived for any business concern operating as a franchise that is assigned a franchise identifier code by the administration, and any entity that receives funding through a small business investment company. (SBICs are privately owned outfits licensed and regulated by the SBA.) Affiliation rules are important when the SBA is deciding whether a business affiliation precludes it from being deemed “small.” Generally, affiliation exists when one business controls or has the power to control both businesses. Think of a fast food franchise.

Loan proceeds must be used for certain purposes including:

  • payroll costs;
  • costs related to the continuation of group health-care benefits during periods of paid sick, medical or family leave, and insurance premiums;
  • employee salaries, commissions, or similar compensation;
  • payments of interest on a mortgage obligation;
  • rent;
  • utilities;
  • interest on any other debt obligations incurred before the covered period.

Recipients of PPP loans may not use them to line their pockets. The idea is to keep businesses afloat for a couple of months while they must cease operations. The loan funds explicitly may not be used for:

  • employee/owner compensation more than $100,000;
  • taxes imposed or withheld under Chapters 21, 22 and 24 of the IRS Code;
  • compensation of employees whose principle place of residence is outside the U.S.;
  • qualified sick and family leave for which a credit is allowed under the FFCRA.

Loan Forgiveness

Borrowers have 24 weeks from the disbursement of their loan to use the PPP funds, or until Dec. 31, 2020, when the program is set to end. This is an extension from the original eight weeks borrowers had to use PPP funds. If the funds are used properly, the loan may be forgiven and does not have to be paid back.

The borrower must submit an application for loan forgiveness. In assessing eligibility, the lender will determine how the funds were spent in an eight-week period called "the covered period." The PPP loan forgiveness application is here:

That application must include:

  • verification of the number of employees on payroll and pay rates, including IRS payroll tax filings and state income, payroll and unemployment insurance filings;
  • verification of payments on covered mortgage obligations, lease obligations and utilities;
  • certification from a representative of the business or organization authorized to certify that the documentation provided is true and that the amount being forgiven was used in accordance with the program’s guidelines for use.

Loan amounts not forgiven are carried forward as an ongoing loan with a maximum term of 10 years, at a maximum interest rate of 4%. Principal and interest will continue to be deferred for six months to one year after disbursement of the loan.

A business may not apply for more than one PPP loan but may apply for other SBA assistance, including EIDLS, SBA 7(a) loans, SBA 504 loans and microloans, and also receive investment capital from a small business investment company.

A business may not use the PPP loan for the same purpose as its other SBA loan(s). For example, if a business uses its PPP loan to cover payroll for the covered period, it may not use a different SBA loan product for payroll costs in the same period, although it may be used to meet payroll for a different period or for different workers.

Borrowers have until Dec. 31 to rehire laid-off or furloughed employees if they are seeking loan forgiveness. This is a revision from the original date of June 30 to rehire workers. See the subsection below, Steps to Rehiring Workers for Loan Forgiveness, for guidance on rehiring.

Use of Paycheck Protection Program Proceeds

In order to obtain forgiveness, funds must be used properly. The main portion must be used for payroll. Borrowers must use at least 60% (legislatively revised from an original 75% requirement) of their PPP payroll funds for:

  • salaries and wages (capped at $100,000 per employee; payroll costs may not exceed eight weeks of compensation an owner/operator or self-employed individual/general partner received in 2019, capped at $15,385);
  • payments for vacation, parental, family medical or sick leave;
  • severance payments;
  • payments for the provision of group health-care benefits, including insurance premiums;
  • retirement benefits; and/or
  • state and local taxes assessed on employee compensation.

The remaining 40% of the PPP proceeds may be spent on:

  • interest on any debt or mortgage obligation whether for real or personal property that existed prior to Feb. 15, 2020;
  • rent under a lease agreement in force before Feb. 15, 2020;
  • utility payments including electricity, gas, water, transportation, telephone and internet access for which service began before Feb. 15, 2020.

Businesses that use more than 40% of the loan proceeds for purposes other then payroll costs will have to repay the amount spent and could be subject to additional charges imposed by the Small Business Administration (SBA).

Steps to Rehiring Workers for Loan Forgiveness

There is guidance from the Small Business Administration and the Department of the Treasury informing PPP borrowers how to make rehire offers in order to comply with the requirements of loan forgiveness:

Loan forgiveness requires businesses to:

  1. Provide the laid-off or furloughed employee an offer in writing to return to work.
  2. Offer the same salary, wages and number of hours the employee had prior to layoff or furlough.
  3. Receive a rejection of that offer.
  4. Document the offer and the rejection.
  5. Notify the California Employment Development Department (EDD) within 30 days that the offer was rejected.

Documentation is important. The employee's rejection of the offer needn't be in writing, but employers must document receipt of an oral rejection. Because the offer to return must include the same hours, salary or wage as the employee's prior work, employers should spell out the prior terms of employment and clearly state that the employee will be returning under those terms and conditions.

The guidance clarifies that there is no reduction in loan forgiveness if employees:

  • voluntarily resign;
  • voluntarily request and receive a reduction in hours; or
  • are fired for cause.

So all employee separations must be documented fully ,including the reason for separation and its date.

Partial Loan Forgiveness

Employers may rehire fewer workers or rehire workers with reduced hours and pay, but they will not be able to claim 100% loan forgiveness under those circumstances.

If a business rehires fewer employees, the reduction in loan forgiveness is determined by a complex formula. It's calculated by multiplying the amount of forgiveness by a fraction whose numerator is the borrower's average number of full-time equivalent (FTE) employees during the eight-week covered period. The denominator is either: (a) the borrower's average number of full-time equivalent employees between Feb. 15, 2019 and June 20, 2019; or (b) the borrower's average number of full-time equivalent employees between Jan. 1, 2020 and Feb. 29, 2020. Most borrowers may choose whichever is lower.

The application clarifies that average full-time equivalent employees should be calculated on a weekly basis based on a 40-hour workweek. Alternatively, borrowers may simplify the calculation by treating all employees who work 40 hours or more per week as one (1) and all other employees who work fewer than 40 hours per week as 0.5 FTE.

If a business reduces wages, the amount of loan forgiveness may be reduced as well. The calculation of the amount of loan forgiveness is complicated; it's outlined in detail in the PPP Schedule A worksheet attached to the application. The worksheet compares each employee's salary/wages during the covered period to the employee's wages/salaries between Jan. 1, 2020 and March 31, 2020.

A reduction in the number of employees or in wages/salaries can be cured and won't reduce the amount of loan forgiveness if, by June 30, 2020, the borrower eliminates the reduction in employees or the reduction in wages.

Note: There is no requirement that the employer rehire the same employees –– restoring the same number of employees is sufficient. The application clarifies that borrowers must increase their FTE employees' pay equivalent to what they paid in the period that included Feb. 15, 2020. Employers who have benefited from PPP loans are advised to regularly review SBA and Treasury guidance to ensure that they are meeting all requirements.The loan amount is determined in different ways:

  • For businesses open between Feb. 15, 2019 – June 30, 2019, the maximum is equal to 250% of the average monthly payroll costs. If the business is a seasonal employer, the maximum loan is equal to 250% of the average monthly payroll costs between Feb. 15, 2019 - June 30, 2019. A business may choose March 1, 2019 as the start date.
  • For businesses not open between Feb. 15, 2019 - June 30, 2019, the maximum is equal to 250% of the average monthly payroll costs between Jan. 1, 2020 - February 29, 2020.
  • If the business took out an Economic Injury Disaster Loan (EIDL –– reference below) between Feb. 15, 2020 - June 30, 2020, and the business wants to refinance it into a PPP loan, the business would add the outstanding loan amount to the payroll sum.

For further information please see

See Also

< Enhanced Unemployment Table of Contents Emergency Economic Injury Disaster Loans & Emergency Economic Injury Grants >

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