What is the Paycheck Protection Program (PPP)?

Editor’s Note: The article below was originally published on April 23, 2020. It includes additional Paycheck Protection Program updates through the American Rescue Plan Act and other updates.

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.

A significant part of the COVID relief legislation is the Paycheck Protection Program, or PPP, which provides loans for small businesses granted by the Small Business Administration (SBA). The SBA PPP is a marquee program, as the U.S. government allocated a large portion of the funding to it. Some people refer to it as a Paycheck Protection plan.

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 PPP loan was recently extended two months, through May 31, 2021 as part of the PPP Extension Act of 2021. But it will close soon. Read on to hear specifics.

What is Paycheck Protection Program?

The loan was created so small business owners can get the loans they need to cover payroll, along with some utility and rent costs as well as certain COVID-related expenses during the eight to 24-week covered loan period beginning on the loan disbursement date.

paycheck protection program loan

The deadline for submitting 2021 loan applications is May 31, 2021.  Previously, it was set to expire March 31, 2021.

For the final 30 days of the program (from June 1 until June 30), the Small Business Administration may only process applications submitted prior to June 1, and it may not accept any new loan applications.

What is the loan term of PPP loans?

The loan term maximum is five years for loans made on or after June 5, 2020 [before the PPP Flexibility Act (PPPFA) of June 2020, it was two years], and payments are deferred until ten months after a loan forgiveness determination.

Who qualifies for the Paycheck Protection Loan?

While ultimate eligibility is determined by your lender, first-time borrowers can qualify for a Paycheck Protection Loan under the current 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
  • 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
  • Any business applying for the loan must have been in business prior to February 15, 2020

Interested in applying? Contact your local banking partner to submit your application. You can use information from your 2019 tax return (or 2020 tax return) to complete your application.

If you previously worked with us and need details from your tax return, contact your tax pro.

PPP modification with American Rescue Act of 2021

Under the American Rescue Act additional Paycheck Protection Program (PPP) funding was made available. In addition, the act expanded eligibility for certain nonprofit entities and Internet Publishing Organizations allowing them access to first and second draw loans

PPP Extension Act of 2021

As mentioned above, the PPP Extension Act of 2021 extended the coverage period for the Program. The program is now extended to May 31, 2021.

How much can you borrow?

Small businesses can borrow up to 2.5 times their average monthly payroll, up to $10 million. Additionally, second draw loans are limited to $2 million with most limited to 2.5 times their average monthly payroll, but businesses with an NAICS code of 72 (like hotels 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 after disbursement) and until December 31 for 2020 loans) 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 can deduct 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, S corporations, or non-profit organization.

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 end of the eight to 24-week covered period, 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 the Payroll Protection Program 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
  • Worker protection costs related to COVID-19
  • Uninsured property damage caused by looting or vandalism during 2020
  • Certain supplier costs
  • Certain expenses related to operations.

The Paycheck Protection Program application process

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

You should contact your lender 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.

Need help with small business taxes?

Uncertainty seems to be the norm during these challenging times. However, your small business tax and accounting needs shouldn’t be a point of stress.

Rely on our team of Block Advisors small business certified tax pros to get your taxes right and keep your business on track. Connect with us.

Looking for updates about the latest small business stimulus relief? Check out our Guide to 2020 small business tax and stimulus relief for details.

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