The Paycheck Protection Program loan provides up to eight weeks of financial assistance to small businesses that maintain their payroll during the COVID-19 pandemic. The loan is forgivable under certain circumstances.
Congress passed the Paycheck Protection Program (PPP) loan as part of the Coronavirus Aid, Relief and Economic Security (CARES) Act to provide fast and direct economic assistance for small businesses and to preserve jobs for Americans. This loan has allowed many small businesses to stay afloat during the sudden economic recession in 2020.
The program provided small businesses with funds to pay for:
- up to eight weeks of payroll,
- benefits costs for employees, and
- interest on mortgages, rent and utilities.
If the loan recipient uses the loan for these purposes and at least 60% of the forgiven amount is used on payroll expenses, the Small Business Administration (SBA) should fully forgive the loan. For unforgiven loans, payments will be deferred for six months.
How do you qualify for the PPP Loan, and what can you receive?
The Paycheck Protection Program offers small businesses a loan in a time of extreme need. The following types of entities may qualify for a loan:
- Small businesses that meet the SBA's size standards
- Sole proprietors, independent contractors and self-employed persons
- Any food services business with more than one physical location and fewer than 500 employees per location
- Any business, nonprofit, veterans or Tribal business organization with the greater of 500 employees or that meets the SBA's size standard
The amount you can receive depends on your payroll expenses, incurred and paid, during the previous 12-month period on employees who principally reside in the U.S. The amount is limited to a maximum annual amount of $100,000 per employee/payee.
After you determine your 12-month payroll expenses,
- Calculate the average monthly payroll costs.
- Multiply the amount by 2.5.
- Add the outstanding amount of any COVID-19 Economic Injury Disaster Loan (EIDL) received between January 31, 2020, and April 3, 2020, after subtracting the amount of any "advance" received under this loan.
- If the total payroll expenses for your business are $99,000 per year, your average monthly payroll cost would be $8,250 ($99,000 divided by 12).
- If you didn’t receive an EIDL loan, you can simply multiply that monthly average by 2.5 to request $20,625 in PPP loans.
What can the PPP loan be used for, and what are the terms?
According to the SBA, in order to receive full loan forgiveness, you must use the funds must be used for payroll costs, interest on mortgages, rent and utilities with at least 60% of the forgiven amount going toward payroll. The terms of this loan will be the same regardless of lender and borrower:
- PPP loans carry an interest rate of 1% on any unforgiven portion
- Loans issued prior to June 5, 2020, have a maturity of two years, while loans issued after have a maturity of five years
- Loan payments will be deferred for six months
- No collateral or personal guarantees are required to receive the loan
- No fees will be charged to borrowers to apply for or receive the loans
What are the stipulations for loan forgiveness?
Because the PPP loan focuses on delivering immediate economic assistance to small businesses affected by the sudden economic recession, forgiveness is based on the employer maintaining or quickly rehiring employees, as well as maintaining existing compensation levels.
If you use your loan for payroll and benefits costs, interest on mortgages, rent and utilities, your loan is eligible for loan forgiveness and you must apply to receive forgiveness.
Further, you must continue to pay your employees at normal levels during the 24 weeks following the origination of the loan.
Borrowers are eligible for loan forgiveness for the following costs:
- Eligible payroll costs. According to the SBA, borrowers are generally eligible for forgiveness for the payroll costs paid and incurred during the 24-week (168-day) or eight-week (56-day) Covered Period (or Alternative Payroll Covered Period). For each individual U.S.-based employee, the total amount of cash compensation eligible for forgiveness may not exceed a prorated annual salary of $100,000 during the Covered Period.
- Eligible non-payroll costs. This includes covered mortgage interest obligations (not including prepayment) on any business mortgage obligation on real or personal property incurred before February 15, 2020, covered rent or lease payments and covered payments on utilities like electricity, gas, water, telephone, transportation, or internet access.
Eligible non-payroll costs must be paid (or incurred and paid at the next regular billing date) during the Covered Period and cannot exceed 40% of the total forgiveness amount.
How does the PPP loan interact with other tax credits and deductions?
Usually, businesses can deduct expenses the forgivable loan covers, however the IRS has said that expenses paid from forgiven PPP loans will not be deductible. As a result, you may owe more taxes than you normally do.
What are the implications of taking a PPP loan?
Because the program targeted businesses and self-employed persons with the most need, program oversight will assess whether the loans issued were necessary.
- If you're a borrower who received under $2,000,000 from the program, you'll be exempt from this "necessary" component.
- If you received a loan above this amount and it was not deemed necessary, you'll likely be forced to repay but won't face a penalty or criminal exposure.
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