Paycheck Protection Program


By: Colleen Lyons

March 28, 2020

One of the most significant new programs for businesses under the CARES Act is the new Paycheck Protection Program (“PPP”).  This program will be administered by the Small Business Administration (“SBA”) and is designed to help eligible businesses continue to pay operational costs like payroll, health benefits, rent, mortgage payments, insurance premiums and utilities.  The SBA is expected to issue more detailed regulations in the coming days.  What follows is a summary overview of this new program.

Who is eligible?

Eligible businesses include the following:

  • Businesses with 500 or fewer full-time and part-time employees;
  • Businesses within the SBA small business size threshold;
  • Certain self-employed individuals (sole proprietors and independent contractors);
  • Certain accommodation and food services businesses (NAICS Code 72) with 500 or fewer employees per location and less than $500 million in gross annual receipts in 2019;
  • Any business assigned a franchise operator code by the SBA, and any business that receives assistance under the Small Business Investment Act.

Eligible businesses may be any business concern, any 501(c)(3) non-profit organization, any 501(c)(19) veterans’ organization, or any Tribal business.

What can PPP loan proceeds be used for?

PPP loan proceeds may only be used for costs incurred between February 15, 2020 and June 30, 2020 (the “covered period”) for the following:

  • “Payroll Costs” which are broadly defined to include compensation to employees such as salary, wages, commissions, cash tips, paid leave, payments for group health benefits, retirement benefits, state and local payroll taxes and compensation to sole proprietors or independent contractors up to $100,000 in one year, prorated for the covered period.  Certain  costs are excluded from the definition of “Payroll Costs” including individual employee compensation above $100,000 per year prorated for the covered period, compensation to employees whose principal place of residence is outside of the US and sick and family leave wages for which credit is allowed under the Families First Coronavirus Act.
  • group health care benefits during periods of sick, medical or family leave, and insurance premiums;
  • employee salaries, commissions or similar compensation;
  • payments of interest but not principal on mortgage obligations;
  • rent/lease agreement payments;
  • utilities; and
  • interest on any other debt obligation incurred before February 15, 2020.

What is the maximum PPP loan amount?

The maximum PPP loan amount is capped at the lesser of:

  • 2.5 times the average total monthly Payroll Costs as described above incurred during the one year period before the date the loan was issued, or in the case of a seasonal business, the average total monthly payroll costs for the 12 week period beginning February 15, 2019 or from March 1, 2019 and ending June 30, 2019; or
  • If recipient was not in business during the period beginning February 15, 2019 and ending on June 30, 2019, 2.5 times the average total monthly payroll costs during the period beginning on January 1, 2020 and ending February 29, 2020; or
  • $10,000,000.

Certain loans made under the SBA’s Disaster Loan Program on or after January 31, 2020 may be refinanced as part of this new PPP loan program.

Who can make a PPP Loan?

Any lender authorized to make loans under the SBA’s current Business Loan Program are automatically approved to make and approve loans under this new program; additional private sector lenders may be designated by the Treasurer Secretary and the SBA Administrator.

Determination of PPP Loan Forgiveness

The following costs paid by a PPP loan recipient during the 8-week period beginning on the date of the origination of the PPP Loan are eligible for forgiveness:

  • Payroll Costs as defined above;
  • payments on interest but not principal on any mortgage obligation;
  • payments of rent; and
  • utilities payments.

The amount of eligible costs actually forgiven is subject to reduction in certain instances as follows:

  • Reduction in the number of employees: The amount eligible for forgiveness will be reduced by the quotient obtained by dividing the average number of full-time equivalent employees per month employed by the loan recipient during the covered period, by either the average number of full-time employees employed by the loan recipient during the period (i) beginning on February 15, 2019 and ending on June 30, 2019 or (ii) beginning January 1, 2020 and ending on February 29, 2020.
  • Reduction in salary and wages: The amount eligible for forgiveness will also be reduced to the extent that the wages of any employee with an annualized rate of pay that is less than $100,000 during any pay period in 2019 are reduced by more than 25% of the total salary or wages paid during the most recent full quarter during which the employee was employed before the covered period.

Under certain circumstances, if either of the reductions referenced above occur during the period from February 15, 2020 to April 26, 2020 (30 days after the enactment of the Act) and not later than June 30, 2020 the loan recipient has eliminated the reduction in full-time equivalents or the reduction in wages, the amount eligible for forgiveness shall not be reduced.

The amount of eligible costs forgiven shall not exceed the principal amount of the PPP loan and shall be excluded from gross income for federal tax purposes.

The recipient of the PPP loan shall be responsible to apply for loan forgiveness by providing supporting documentation and evidence of payments to their lender.  More detailed regulations concerning these forgiveness provisions will be issued by the SBA within 30 days following enactment.

What terms apply to the portion of any PPP Loan not forgiven?

  • Payments on principal, interest and fees with respect to the PPP loan will be deferred for at least 6 months and up to one year after the loan is issued.
  • Interest rate shall not exceed 4%
  • Maximum loan maturity is 10 years.
  • There is no requirement for any collateral or personal guarantees and there will be no recourse against any individual shareholder, member or partner for non-payment except to the extent the PPP loan proceeds are not used for an authorized purpose.
  • All prepayment penalties are waived.

Application Procedures and Requirements

The Act provides that the application will include a requirement for the business to certify, among other things, (i) that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient; and (ii) acknowledge that the funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments and utility payments.

We will continue to monitor this evolving area and provide additional guidance as the SBA is expected to issue additional regulations, including application forms, within the next fifteen days.