What is the Paycheck Protection Program?

Editor’s Note: The article below was originally published on April 23, 2020. It includes updates from the Coronavirus Response and Relief Supplemental Appropriations (CRRSA) Act of 2021 as part of the Consolidated Appropriations Act of 2021 signed on Dec. 27, 2020. 

In light of the coronavirus (COVID-19) pandemic, lives have changed in many ways. Not only are millions of people affected by the virus, but it’s also taking a major toll on commerce. The American economy has been severely impacted by nation-wide closure, especially hitting small businesses and their owners and employees.

Because of this significant toll on businesses, in late March of 2020, the U.S. government passed the Coronavirus Aid, Relief, and Economic Security Act, otherwise known as the CARES Act, to help individuals and small business owners who are struggling financially due to the Coronavirus pandemic.

PPP loan

A significant program that is a part of the CARES Act is the Paycheck Protection Program, or PPP, which provides loans for small businesses granted by the Small Business Administration (SBA). This is one of the CARES Acts’ marquee programs, as the U.S. government allocated a large portion of the funding to this program.

This type of loan is just what small businesses need when profits take an unexpected turn. The loan is intended to help cover small business costs, including payroll costs and interest payments on current debt. The loan term maximum is five years for loans made on or after June 5, 2020 (before the PPPFA, it was two years), and payments are deferred until ten months after a loan forgiveness determination.

Who qualifies for the Paycheck Protection Loan?

First time borrowers can qualify for a Paycheck Protection Loan under the CARES Act eligibility rules if one of the following conditions is met:

  • The business has 500 or fewer employees;
  • The business meets the definition of a small business concern under the Small Business Act; or
  • As of March 27, 2020, the business’ tangible net worth is not more than $15 million and its average net income after federal income taxes for the previous two fiscal years is not more than $5 million.

They can borrow up to 2.5 times their average monthly payroll, up to $10 million.

The loan was created so small business owners can get the loans they need to cover 24 weeks of payroll, along with some utility and rent costs as well as certain COVID-related expenses through March 31, 2021 (previously this was Dec. 31, 2020).

Second draw qualifications: The December 2020 legislation makes some changes to these rules for second draw loans. Essentially, second draw loans are available for businesses that don’t employ more than 300 employees and that have a drop in revenue of 25% for any quarter in 2020 as compared to 2019.

Additionally, second draw loans are limited to $2 million with most limited to 2.5 times their average monthly payroll, but hotel and restaurants get 3.5 times average monthly payroll.

Other updates:

  • The PPP Flexibility Act extended the loan coverage period (from eight to 24 weeks and until December 31) and lowered the loan payroll threshold percentage (from 75% to 60%). Check the SBA’s PPP site for updates.
  •  Thanks to changes with the CRRSA, you will be able to deduct your qualifying expenses paid with proceeds from a forgiven PPP loan. Plus, your forgiven loan is not considered taxable income. State tax treatment may vary with regards to these expenses so check with your tax professional for your state’s rules.

Can self-employed people qualify for the PPP Loan?

While the SBA enacted parameters for the size of the company of applicants, other people wonder if the PPP loan is for self-employed persons? The answer is yes.

In addition, it applies to many traditional business entities, like sole proprietors, partnerships, corporations, corporations, S corporations, or non-profit organization.

Any business applying for the loan must have been in business prior to February 15, 2020.

What are benefits of the PPP loan?

Here are some benefits of getting a PPP loan:

  • Unlike many traditional business loans, PPP loans are 100% guaranteed, even without collateral or a personal guarantee. This means that the business owner doesn’t need to assume the debt obligation if they default on the loan.
  • The interest rate for PPP loans is fixed at 1% with a five-year maturity date. Most Small Business Administration loans have an interest rate of between 2.25% and 8%, on top of the prime.
  • All payments are deferred for ten months, after the loan forgiveness determination, but interest will continue to accrue throughout the deferment period.
  • The balance of PPP loans may be forgivable, meaning the entirety (or a portion of the loan) is forgiven or deferred for a period of time by the lender when certain conditions are met.

What can this loan be used for?

The Payroll Protection Program can be used for:

  • Employee salaries, up to $100,000 per employee
  • Certain employee health benefits (such as insurance premiums or paid sick leave)
  • A business’ real estate expenses, like mortgage interest, rent, and utilities
  • Interest on other business debts

Note: Small business employers must not lay off any employees, or they must rehire employees they’ve already laid off by December 31, 2020 (for those who received a loan in the first round). Some exceptions apply under the PPPFA. And the 500-employee rule applies per physical location for food service industry businesses.

The Paycheck Protection Program application process

Are you curious as to how the Paycheck Protection Program application works?

While the SBA will need to implement the new rules, you should contact your lender soon to submit an application for the PPP loan. The funds will get allocated quickly, so it’s best to get your application filled out, signed, and ready to go so you can submit it quickly.

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