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Paycheck Protection Program

The Coronavirus Aid, Relief, and Economic Security (CARES) Act allocated $350 billion to help businesses keep workers employed amid the pandemic and economic downturn. Known as the Paycheck Protection Program, the initiative provides 100% federally guaranteed loans to small businesses.

Key Provisions for Employers

  • Most banks will become approved SBA lenders
  • Employer can apply for loan by certifying to need and intended use of funds
  • Borrow up to 2.5 times average monthly payroll costs at a rate of 0.5% per annum
  • Owner’s monthly compensation of up to $8,333 can be included in the payroll costs
  • Borrowed money can be used for payroll costs, rent, utilities and interest on debt
  • No personal guarantee necessary if money used for allowable purposes
  • No payments on loan for at least 6 months
  • Principal can be forgiven based on use of funds for 8 weeks from date of loan
  • Forgiveness can be reduced if payroll decreases, but re-hiring can help get more forgiven
  • Repayment of remaining (unforgiven) principal can be deferred for 2 years.

Phase 3 of the Coronavirus Aid, Relief and Economic Security Act (“CARES”), HR 748, was enacted on March 27, 2020.

Under Section 1102, Paycheck Protection Program (“PPP”), the SBA is authorized to make loans to small business concerns, the purpose of which is to retain employees and make certain other necessary business expenditures.

Section 1106, Loan Forgiveness, is intended to turn much or all of those loans into grants by forgiving repayment of principal, subject to reductions, if certain levels of employment are not maintained.

There is a fair amount of tracking that will need to be done in order to comply with rules relating to allowable uses of the funds and to compute how much forgiveness can be awarded. We therefore recommend that the business open a separate bank account for the deposit of the loan proceeds and to use only for the expenditures that are allowable under this Act.

How the Loan Is Managed


In order to apply for a PPP loan, a “small business concern” must file an application with a lender that is approved by the Administrator of the SBA. We are hearing that most banks will be approved, so you should check with your own bank first. The application must include a Certification that (a) the uncertainty of current economic conditions makes the loan necessary to support ongoing operations, (b) the funds will be used to retain workers and maintain payroll and/or make business mortgage payments, rent payments and utility payments, (c) there is no duplicating with any other such application pending, and (d) the business has not received any amounts from the PPP during the period of February 15, 2020 to December 31, 2020.

Note:    Only a “small business concern” is eligible.   For purposes of the PPP loans, a small business concern is a business, nonprofit organization, veterans organization or Tribal business concern that employs no more than 500 full-time and part-time employees (unless the SBA establishes a greater number for an industry). Businesses in the Accommodation and Food Services industry (NAICS codes beginning with 72), such as hotels, motels, restaurants, drinking establishments, etc. with multiple locations can have up to 500 employees at each location, and do not have to count employees affiliated with related entities. Sole proprietors, independent contractors and self-employed individuals may apply.

Maximum Amount of Loan

For most businesses, the maximum amount that can be borrowed under the Program is determined by the one-year period leading up to the date the loan is made. The business has to determine the monthly average of “payroll costs” incurred during that one-year period, then multiply that average by 2.5 (two-and-a-half times). That result, when added to the company’s outstanding balance of any other SBA loan, if any, cannot exceed $10 million.

Special Situations:

Seasonal employers – Can elect to use either the 12-week period beginning February 15, 2019 or the 4-month period of March 1, 2019 to June 30, 2019 to determine the monthly average of payroll costs.

Those applicants who were not in business between February 15, 2019 and June 30, 2019 – Should use the payroll costs incurred between January 1, 2020 and February 29, 2020 to determine the monthly average.

“Payroll Costs” for this purpose include (subject to Compensation Limit below):

  • Salary, wages, commissions, etc. of employees, including vacation, sick and family medical leave, severance pay, as well as payments to, and net earnings from self-employment of, independent contractors and sole proprietors;
  • Payments required for group health care, including insurance premiums;
  • Payments for retirement benefits; and
  • State/local (but not federal) employer taxes (State Unemployment Insurance, MCTMT, ECET)

Compensation Limits – The payroll costs that can be included for any employee (including an owner-officer or self-employed owner) is limited to total annual compensation of $100,000 (as prorated where applicable). That means that only the first $100,000 annual compensation (or $8,333 per month) can be counted. Certain compensation costs are excluded, namely (a) compensation of employees whose principal residence is outside of the US, and (b) sick leave or family leave wages for which a credit is being allowed under the Families First Coronavirus Response Act (Phase 2 of the stimulus package).

Allowable Uses of the Loans

Borrowers are permitted to use the PPP loans for any or all of the following during the period of February 15 through June 30, 2020:

  • Payroll Costs (as defined above);
  • Costs relating to continuation of group health care benefits during periods of sick or family leave, including insurance premiums. (These are in addition to those for active employees, which are included in payroll costs);
  • Interest (but not principal) on business mortgage obligations;
  • Rent and lease payments
  • Utilities
  • Interest (but not principal) on any business debt obligations that were incurred before February 15, 2020.

Special Considerations of the Paycheck Protection Program

Under the PPP, there are special rules that make borrowing more favorable:

Nonrecourse Loan Status – As long as the loaned funds are spent completely in accordance with the Allowable Uses (see above), then the loans will remain nonrecourse, without personal guarantees by the owner(s)

Credit Elsewhere – Although SBA loans are normally reserved for companies that cannot get financing elsewhere, that provision does not apply to loans made under the Paycheck Protection Program.

Other Loan Terms

Interest Charged – The rate of interest on a loan made under the PPP shall be 0.5% per annum.

Payment and Maturity – There will be a complete deferral of all payments (principal, interest and fees) for at least 6 months, but not more than 1 year.   The remaining principal (but not interest and fees) after any Loan Forgiveness (see below) may be deferred for 2 years from the date the applicant applies for forgiveness.   There will be no prepayment penalties on any payments.

Certain fees will be waived by the SBA.

Loan Forgiveness

Maximum Amount of Forgiveness

The maximum amount that can be forgiven is the sum of the following costs incurred and payments during the 8-week period after the loan origination date:

  • Payroll Costs (as defined above);
  • Payments of interest (but not principal) on a business mortgage;
  • Payments on rent obligations; and
  • Payments of utilities.

Note:   Although included in the list of Allowable Uses, amounts for costs related to continuation of group health benefits during periods of sick and family medical leave, and insurance premiums, and the interest on debt other than mortgages will not be forgiven.

Observation:   There is nothing in the text of the law indicating that employers will not be able to prepay certain covered costs.   Some may choose to do so during the 8 weeks following the start of the loan so as to maximize the amount of forgiveness. We will need to follow this closely as more information becomes available.

Limits on Amount Forgiven

There are 3 ways in which the amount of forgiveness can be limited or reduced:

  1. The forgiveness cannot exceed the principal amount of the financing – This means that the interest and fees cannot be forgiven.
  2. Reduction based on number of employees – For most employers**, this requires determining the average monthly number of “full-time equivalent employees” per month during (a) the 8-week period following the loan origination date, and (b) a choice between either the period of (i) February 15, 2019 to June 30, 2019 or (ii) January 1, 2020 to February 29, 2020.

The forgiveness amount is reduced by multiplying the applicable amount by the fraction represented by dividing (a) by (b), but it cannot be increased (can be no more than 100%).

Example: ABC Company uses the PPP funds only in ways that are qualified for forgiveness. ABC has 37.5 average full-time equivalent employees per month during the 8 weeks after the loan began. ABC elects to use February 15, 2019 through June 30, 2019 as the lookback period, when it had 50 average full-time equivalent employees per month. ABC would have its forgiveness reduced to 75% of the otherwise allowable amount.

(37.5 / 50 = 75%)

**Seasonal employers can use only February 1, 2019 through June 30, 2019 as the lookback period.

Re-Hiring Exemption

Under a special rule, if during the period of February 15 and April 26, 2020, there was a reduction of full-time equivalent employees (as compared to the number at February 15), and the employer eliminates that reduction no later than June 30, 2020, then the amount of forgiveness will be determined without regard to the reduction of full-time equivalents attributable to that period of February 15 to April 26, 2020.

Reduction based on salary and wages – This reduction is calculated using only the salaries and wages of those employees whose annual rate of pay did not exceed $100,000 at any time during 2019.   (Therefore, higher earning employees are excluded from this computation.) Computations are made on an individual employee-by-employee basis. A reduction is made if an employee’s salary during the 8-week period following the loan origination date is more than 25% less than that employee’s salary during the most recent full quarter before the origination date.

Example: DEF Company gets a PPP loan on April 9, 2020. During the first quarter of 2020, John had earned $15,000, Mary $20,000, and Paula $30,000. During 2019, Paula’s annual salary had been $115,000, while John’s and Mary’s annual salaries had never been more than $100,000. For this computation, only John and Mary are counted because Paula’s annual salary rate had been greater than $100,000 during 2019. The 8-week period that follows the loan origination will end on June 4, 2020. In the period between April 10, 2020 and June 4, 2020, John earned $12,000 and Mary earned $14,000.


$15,000 x 25% = $3,750. Since John’s salary was $3,000 less than the first quarter ($15,000 – $12,000), which is under $3,750, there is no reduction for John.


$20,000 x 25% = $5,000. Since Mary’s salary was $6,000 less than the first quarter ($20,000 – $14,000), which is greater than $5,000, then there is a reduction for Mary of $1,000 ($6,000 – $5,000).

Re-Hiring Exemption

Under another special rule, if during the period of February 15 and April 26, 2020, there was a reduction (as compared to February 15) in the salary or wages of 1 or more employees, and the employer eliminates that salary reduction for such employee(s) no later than June 30, 2020, then the amount of forgiveness will be determined without regard to the reduction of salary for such employee(s) attributable to that period of February 15 to April 26, 2020.

Other Provisions Regarding Loan Forgiveness

Certification – Employer-borrowers seeking forgiveness under this section must apply to the lender and include:

  • Documentation regarding full-time equivalent employees and pay rates for the applicable periods mentioned above;
  • Payroll tax filings with IRS and State income tax, payroll and unemployment insurance filings;
  • Canceled checks, receipts and account transcripts supporting payments for mortgage obligations, lease obligations and utilities.
  • A statement that the documentation is true and correct, and that the amount for which forgiveness is requested was used to retain employees, for interest on business mortgage obligations, and/or payments for rent or utilities.
  • Any other documents the SBA Administrator deems necessary.

Taxability – Forgiveness under this section shall be excluded from taxable gross income.

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