Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act


NOTE—The Paycheck Protection Program Flexibility Act of 2020 amends the CARES Act and this article updates the information below>> click here to read more. 

The Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") was enacted and signed into law by the President on March 27, 2020.  The principal program for small business economic relief under the CARES Act is the Paycheck Protection Program ("PPP"). 

The PPP is intended to provide cash-flow assistance through Small Business Administration ("SBA") 100 percent guaranteed loans to employers who maintain their payroll during this emergency.  Businesses that maintain their payroll are eligible to have qualified portions of a PPP Loan forgiven.   In addition, all SBA fees are waived, and the borrower can have all PPP Loan payments deferred for six months to one year.  Eligible borrowers can apply for a PPP Loan between February 15, 2020 and June 30, 2020 (the "covered period").  PPP Loans are made by SBA-approved lenders, rather than the SBA itself, as discussed below.

The CARES Act amends the Small Business Act authorizing special Small Business Administration ("SBA") loans the proceeds of which can be used to cover payroll costs and other specified qualified expenses.  To be eligible for a PPP Loan a business must be either a small business concern (as defined in the Small Business Act, 15 U.S.C. § 636), or during the "covered period," in addition to small business concerns, any business concern, nonprofit organization under Section 501(c)(3) of the Internal Revenue Code, a 501(c)(19) veterans organization, or Tribal business concern if the business concern, nonprofit organization, veterans organization, or Tribal business concern  has only one physical location[1] and employs not more than the greater of (i) 500 employees; or (ii) if applicable, the size standard in number of employees established by the SBA for the industry in which the business concern, nonprofit organization, veterans organization, or Tribal business concern operates.[2]  Sole proprietors, independent contractors, and eligible self-employed individuals[3] are eligible for PPP Loans.

The maximum loan amount for which a business is eligible depends, in part, on whether the company was in business on February 15, 2019, but in no event will the loan exceed $10 million.  For a company in business during February 15, 2019 — June 30, 2019, the PPP loan amount will be equal to 250% of average monthly payroll costs incurred during the 1-year period before the date on which the loan is made.   A company that employs seasonal workers, may opt to choose March 1, 2019 as the time period start date. For companies not in business between February 15, 2019 — June 30, 2019, the PPP loan amount will be equal to 250% of average monthly payroll costs between January 1, 2020 and February 29, 2020.[4]  "Payroll Costs" means the sum of:

Compensation (salary, wage, commission, or similar compensation, payment of cash tip or equivalent);

Payment for vacation, parental, family, medical, or sick leave;

Allowance for dismissal or separation;

Payment required for the provisions of group Health Law benefits, including insurance premiums;

Payment of any retirement benefit; and

Payment of State or local tax assessed on the compensation of employees.[5]

For sole proprietors, independent contractors, and self-employed individuals, "Payroll Costs" means all compensation or income that is in an amount that is not more than $100,000 in 1 year, as prorated for the covered period.

Proceeds of a PPP loan may be used for qualified payroll costs and other qualified business expenses, which are limited to:

Payroll Costs (as described above)

Costs related to the continuation of group Health Law benefits during periods of paid sick, medical, or family leave, and insurance premiums;

Employee salaries, commissions, or similar compensations (see exclusions above);

Payments of interest on any mortgage obligation (which shall not include any prepayment of or payment of principal on a mortgage obligation);

Rent (including rent under a lease agreement);

Utilities; and

Interest on any other debt obligations that were incurred before the covered period.

To receive a PPP loan, Borrowers must submit a good faith certification stipulating: (1) that the loan is necessary to support ongoing operations under the current economic conditions; (2) that the funds will be used for payroll costs; (3) that the business does not have another loan pending under the SBA Paycheck Protection Program; and (4) that the business has not already received a loan under the SBA Paycheck Protection Program.  Personal guarantees and collateral are not required for a PPP loan and there is no recourse to individual shareholders, members, or partners of the borrower, unless the business uses the PPP loan proceeds for an unauthored purpose.  Further, for PPP loans, the affiliation rules are waived and the requirement that a small business be unable to obtain credit elsewhere is suspended during the covered period.

The CARES Act requires lenders to provide deferral of payment obligations under a PPP Loan of all principal and interest for all borrowers that were in operation on February 15, 2020 and have been adversely impacted by COVID-19, and the CARES Act specifies that it is presumed that all borrowers have been adversely impacted.  The payment deferral shall be for a period of not less than 6 months and not more than 1 year.  The SBA is required to provide lenders with guidance on the deferment process within 30 days of the enactment of the CARES Act.

A company with a PPP Loan is eligible for forgiveness of the PPP loan in an amount equal to the sum of the following costs incurred and payments made during the covered period:

Payroll costs;

Interest on any covered mortgage obligation (not including any prepayment or payment of principal on a covered mortgage obligation);

Payment on any covered rent obligation; and

Payment of covered utility payment.

Amounts forgiven are not to exceed the principal amount of the PPP loan. Additionally, the forgiveness amount will be compared to the amount spent during prior periods proportionate to maintaining employees and wages.

The amount to be forgiven will be reduced proportionally by any reduction in employees compared to the prior period as well as any reduction in payment to an employee beyond 25% of their prior compensation. Further, to incentivize employers to retain and re-hire employees, borrowers will not be penalized for having a reduced payroll at the beginning of the period if they re-hire workers to restore employment levels no later than June 30, 2020.

The reduction formula for fewer employees is the maximum available forgiveness multiplied by the average number of full-time equivalent employees ("FTEEs") per month — calculated by the average number of FTEEs for each pay period falling within a month — during the covered period divided by either (at election of the borrower), the average number of FTEEs per month employed from February 15, 2019 to June 30, 2019; or average number of FTEEs per month employed from January 1, 2020 until February 29, 2020; or, for seasonal employers the average number of FTEEs per month employed from February 15, 2019 until June 30, 2019.

The borrower must apply to its servicing lender for forgiveness of the PPP Loan. The application must include:

Documentation verifying the number of employees on payroll and pay rates, including IRS payroll tax filings and State income, payroll and unemployment insurance filings;

Documentation verifying payments on covered mortgage obligations, lease obligations, and utilities; and

Certification from a representative of the business or organization that is authorized to certify that the documentation provided is true and that the amount for which forgiveness is requested was used in accordance with the PPP guidelines for use.

The lender is required to issue a decision on an application for loan forgiveness within 60 days after the on date on which it receives the application.  The amount of loan forgiveness which would ordinarily for tax purposed be reported as income, shall be excluded from gross income of the borrower.

Any PPP loan amounts not forgiven are carried forward as an ongoing loan with max terms of 10 years, at a maximum interest rate of 4%. There is no prepayment penalty.  Principal and interest will continue to be deferred, for a total of 6 months to a year after disbursement of the loan.

All current SBA 7(a) lenders are eligible lenders for PPP. The Department of Treasury is directed to authorize additional lenders to make PPP loans.  The SBA is charged with issuing guidelines for PPP loans within 15 days of the enactment of the CARES Act. This summary is based on our current understanding of the program as the SBA is still finalizing guidance documents.

[1] During the covered period, any business concern that has more than one business location but employs not more than 500 employees per location and that is assigned North American Industry Classification System ("NAICS") code beginning with 72 shall be eligible for a PPP Loan.

[2] To see the SBA Table of Small Business Size Standards, See  Size Standards are based on NAICS Codes for each industry and type of work in that industry.  NAICS Codes for your business can be found at

[3] As defined in Section 7002(b) of the Families First Coronavirus Response Act.

[4] Companies that take out an SBA Economic Injury Disaster Loan ("EIDL") between February 15, 2020 and June 30, 2020 may refinance the EDIL in a PPP loan and receive the benefits of the PPP loan.

[5] Excluded from payroll costs for calculating a PPP loan amount are: individual employee salary in excess of  $100,000; taxes imposed or withheld under chapters 21, 22, and 24 of the IRS code; compensation of employees whose principal place of residence is outside of the U.S.; and qualified sick and family leave for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act


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