What is the Paycheck Protection Program?
The Paycheck Protection Program is part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. This is a nearly $350-billion program intended to provide American small businesses with eight weeks of cash-flow assistance through 100 percent federally guaranteed loans.
- All small businesses are eligible
- The loan has a maturity rate of 2 years and an interest rate of 1%
- No need to make loan payments for the first six months
- No collateral or personal guarantees required
- No fees
- The loan covers expenses dating back to February 15, to June 30 2020
- The loan can be forgiven and essentially turn into a non-taxable grant
Do I qualify for the program?
Likely yes! This program is more extensive than the SBA disaster loan. Small businesses, sole proprietorships, independent contractors, and self-employed individuals can all qualify.
- Sole proprietorships will need to submit schedules from their tax return filed (or to be filed) showing income and expenses from the sole proprietorship.
- Independent contractors will need to submit Form 1099-MISC.
- Self-employed individuals will need to submit payroll tax filings reported to the Internal Revenue Service.
Further reading: Self-Employment and the Paycheck Protection Program
How does this differ from the SBA disaster loan?
The SBA also offers a Economic Injury Disaster Loan (EIDL)—oftened shortened to just SBA disaster loan. This is a separate, but similar, initiative. Here’s how they differ:
- No personal or business collateral is required. The SBA disaster loan may require collateral for loan amounts over $25,000.
- It’s ok if you also have access to credit elsewhere. To receive a SBA disaster loan you generally need to have no other source of credit.
- The funding covers a more restrictive set of purposes (details below). The SBA disaster loan can cover most operating expenses.
- Your loan can be forgiven if you follow the terms. The SBA disaster loan requires repayment.
How is this similar to the SBA disaster loan?
- You need to declare (in good faith) that the uncertainty of current economic conditions makes the loan necessary for your business.
- It’s free to apply.
- Your loan is long-term (maximum 10 years) and low-interest (maximum 4%).
- You have an extended deferment period (6-12 months, depending on your lender) before you begin repayment.
- There is no prepayment penalty.
Can I apply for paycheck protection and an SBA disaster loan?
Yes, you can. However, you can’t apply for an SBA disaster loan for the same purpose as the Paycheck Protection Program. That being said, when you apply for the SBA disaster loan, you can also request a $10,000 emergency grant, interest-free. If approved, the SBA will provide the grant within three days. You can apply for the loan and grant here.
What can I use the Paycheck Protection Program funds for?
You must acknowledge that the funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments. Funds you use for other purposes will not be eligible for forgiveness.
The funds can be used for:
- Payroll and commission payments
- Group health care benefits/insurance premiums;
- Mortgage interest payments
- Rent and lease payments
- Interest on any other debt obligations that were incurred before the covered period.
Tip: Create a new, separate draft account to hold the funding so it’s easier to keep track of these expenses when you’re preparing to apply for loan forgiveness.
What counts as “payroll costs”?
Payroll costs under the PPP program include:
- Salary, wages, commissions, or tips (capped at $100,000 on an annualized basis for each employee)
- Employee benefits including costs for vacation, parental, family, medical, or sick leave allowance for separation or dismissal; payments required for the provisions of group health care benefits including insurance premiums; and payment of any retirement benefit
- State and local taxes assessed on compensation
- For a sole proprietor or independent contractor: wages, commissions, income, or net earnings from self-employment, capped at $100,000 on an annualized basis for each employee.
In other words, most payroll costs are covered. However, the following scenarios are not covered:
- Payments made to independent contractors
- S corps and C corps owners who aren’t on payroll (shareholders distributions don’t count as payroll under this program)
How much funding can I receive?
The maximum amount you can receive is your monthly average payroll cost in 2019, multiplied by 2.5, up to a maximum of $10 million.
If you are a seasonal employer, the monthly average cost will be calculated differently. The lender will use a 12-week period beginning either February 15, 2019 or March 1, 2019, and ending June 30, 2019.
If your business did not exist before June 30, 2019, the lender will look at your costs in January and February 2020.
How do I apply?
The SBA itself doesn’t lend you the money, they just “back” the loan that the lender provides. You can apply for the Paycheck Protection Program through any SBA-approved lender—you can check out the SBA’s Lender Match tool to find a lender.
Sole proprietorships can apply starting April 3.
Independent contractors and self-employed individuals can apply starting April 10.
You are encouraged to apply early as there is a funding cap for this program. You have until June 30 to submit an application.
As part of your application, you’ll be asked to verify:
- That the uncertainty of current economic conditions makes it necessary for your business to continue operating that funds will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments;
- That the business does not have an SBA loan pending for the same purpose and uses of the Paycheck Protection Program loan
- That during the period beginning on February 15, 2020, and ending on December 31, 2020, the business has not received amounts under the Paycheck Protection Program for the same purpose or duplicative amounts applied for or received under a covered loan.
How can I get my loan forgiven?
In the 8 weeks following your loan signing date, all expenses related to the following can be forgiven:
- Payroll—salary, wage, vacation, parental, family, medical, or sick leave, health benefits
- Mortgage interest—as long as the mortgage was signed before February 15, 2020
- Rent—as long as the lease agreement was in effect before February 15, 2020
- Utilities—as long as service began before February 15, 2020
You’ll need to keep your records and have accurate bookkeeping to prove your expenses during the loan period.
The lender must make a decision within 60 days of your forgiveness application submission.
If you need help with bookkeeping, or with your PPP application, reach out to us at email@example.com.
What are the conditions for loan forgiveness?
The purpose of the Paycheck Protection Program is to, well, protect paychecks. You must commit to maintaining an average monthly number of full-time equivalent employees equal or above the average monthly number of full-time equivalent employees during the previous 1-year period.
The amount that can be forgiven will be reduced…
- In proportion to any reduction in the number of employees retained.
- If any wages were reduced by more than 25%.
If you rehire employees that were previously laid off at the beginning of the period or restore any decreases in wage or salary that were made at the beginning of the period, you will not be penalized for having a reduction in employees or wages, as long as you do this by June 30, 2020.
Note: These guidelines are based on the official 880-page bill. The SBA has been given 30 days to issue official guidance regarding loan forgiveness. We’ll share updates as soon as we learn of them.