Paycheck Protection Program (PPP) Loans
Article

Paycheck Protection Program (PPP) Loans

July 30, 2021

Updated August 09, 2022


UPDATE April 16, 2020: The SBA announced they are no longer accepting applications for the Paycheck Protection Program (PPP) loans due to funding limits being reached. See PPP loan updates for a timeline of milestone changes.

What is a PPP Loan?

The Paycheck Protection Program (PPP) was created through the Coronavirus Aid, Relief and Economic Security Act (CARES Act) to help qualified businesses, nonprofits and the self-employed during the COVID-19 pandemic crisis to continue paying their employees due to the economic fallout from the virus. Starting April 3, 2020, businesses could apply for the PPP Loan (also referred to as Small Business Interruption Loan, SBA 7(a) loan, or sometimes even incorrectly as *Payroll* Protection Program loan)  that held a maximum value of $10M based on monthly payroll costs.

What Can PPP Loans be Used For?

Once you have access to the cash, the allowable uses for first draw loans are outlined below ("(Note: Rules differ for second draw loans, see Second PPP Loan for full details.):

  • Payroll support (paid sick leave, family leave, and corresponding costs related to group health care)
  • Employee salaries
  • Mortgage payments
  • Rent/lease payments
  • Utilities
  • To pay off any other debt obligation entered into prior to February 15, 2020.

Watch a video answering many of the questions on use of funds and how they factor into PPP loan forgiveness.

For second draw loans, the expenses were expanded to include:

  • Covered operations expenditures – which include business software or cloud computing service, the processing, payment, or tracking of payroll expenses, human resources, sales and billing functions, or accounting or tracking of supplies, inventory, records and expenses.
  • Covered supplier costs – payments made to a supplier under a contract or purchase order for goods that are “essential to the operations of the entity” (leaving the definition of “essential” to the borrower). Note that the contract or purchase order must have been in place prior to the covered period of the existing PPP loan unless it was for perishable goods, which could be in place at any time.
  • Covered worker protection expenditures – any operating or capital cost incurred to comply with safety or sanitation requirements put in place between March 1, 2020 and the end of the national emergency (once declared). Such costs can include establishment of a drive-through window facility, new ventilation or filtration systems, physical barriers, expanded space or other assets relating to compliance with government requirements.
  • Covered property damage costs – for costs related to civil disturbances during 2020 that were not covered by insurance.
  • Payroll expenses – now expanded to include employer payments for group life, disability, vision or dental insurance, which were previously excluded.

In short, there are many more business expenses that may be used for forgiveness support with these new, expanded eligible expenses.

PPP Loan Requirements & Eligibility

Who is eligible for PPP loans? In general terms, most small businesses or nonprofit organizations are potentially eligible to receive a PPP loan if the organization employs 500 employees or fewer. The PPP loan rules are outlined below:

  • Business is one of the following:
    • For profit business
    • Sole proprietorship
    • Nonprofit
    • Veterans organization
    • Tribal business concern
  • Business has less than 500 employees (count full-time, part-time, or other basis employees - there are certain industries for which the SBA may allow more than 500 employees)
Expanded Eligibility Under New Biden Administration

President Biden announced a series of changes meant to help smaller businesses including allowing independent contractors and those who base their loan amount requests on their Schedule C or F net income to use gross revenue as the basis for their calculation instead, opening loan access to unprofitable businesses. Also, eligibility is expanded for those with federal student loan defaults, felonies unrelated to fraud and business owners who are not U.S. citizens but are lawful residents.

Extended Eligibility for Nonprofits

The American Rescue Plan Act extends eligibility for Paycheck Protection Program (PPP) loans to include additional nonprofits, referred to in the act as additional covered nonprofit entities. This new category of eligible organizations includes nonprofits listed under section 501(c) of the Internal Revenue Code but excludes 501(c)(3), 501(c)(4), 501(c)(6), and 501(c)(19) organizations. Further criteria for eligibility require:

  1. The additional covered nonprofit entity doesn’t receive more than 15% of its receipts from lobbying activities.
  2. Lobbying activities don’t comprise more than 15% of the organization’s total activities.
  3. The additional covered nonprofit entity’s lobbying activity costs didn’t exceed $1,000,000 during the tax year ending prior to February 15, 2020.
  4. The additional covered nonprofit entity employs no more than 300 employees.

In addition, 501(c)(3), 501(c)(6), and 501(c)(19) nonprofit organizations are eligible to receive a PPP loan if they employ no more than 500 employees per physical location. This will allow some 501(c)(3) organizations that didn’t meet the original 500-employee requirement to apply for PPP funding under this newly updated eligibility criteria. For other nonprofits, the eligibility limit is 300 employees.

President Biden is expected to sign the bill into law, which will provide much anticipated relief for many lenders and borrowers concerned about meeting the original application deadline. We still recommend to any nonprofit organization that may now be eligible and would like to pursue PPP funds that they reach out to their lender as soon as possible.

Ineligible Businesses

There were some concerns with businesses taking loans that didn’t truly need the loan. Due to this, the Treasury Department updated its FAQs to add item 31, which addresses businesses owned by large companies with adequate sources of liquidity to support the business’ ongoing operations should not qualify for a PPP loan. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.

The Treasury Department’s response to address this question was to indicate that in addition to reviewing applicable affiliation rules to determine eligibility, all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application. The Treasury Department response also indicated that any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith.

PPP Loan Calculator

How to calculate ppp loan amounts vary depending on the type of business. Generally, the maximum amount for a first draw loan is the lesser of average monthly payroll costs (see PAYROLL COSTS section below) during the 1-year period before the date on which the loan is made * 2.5, or $10,000,000.

PAYROLL COSTS

Includes:

  • Salaries, wages, commissions and other similar compensation,
  • Cash tips (or equivalent);
  • Pay for vacation, parental leave, family/medical/sick leave;
  • Allowance for dismissal or separation;
  • Payments for group health care benefits;
  • Payment of retirement benefit; and
  • Payment of state or local tax assessed on the compensation of the employees

Excludes:

  • Compensation in excess of $100K for individual employee, prorated for covered period;
  • Compensation for employee whose principal place of residence is outside of the US;
  • Qualified sick leave wages for which a credit is allowed under section 7001 of the Families First Coronavirus Response Act (Public Law 116-127); and
  • Qualified family leave wages for which a credit is allowed under section 7003 of the Families First Coronavirus Response Act (Public Law 116-127)

The most common calculation steps and formula is outlined below (covering S and C corporations). Refer to the sba.gov site for specific steps and calculations for your specific business type.

Step 1

Compute 2019 payroll costs by adding the following:

  1. 2019 gross wages and tips paid to your employees whose principal place of residence is in the United States, up to $100,000 per employee, which can be computed using:
    • 2019 IRS Form 941 Taxable Medicare wages & tips (line 5c-column 1) from each quarter,
    • Plus any pre-tax employee contributions for health insurance or other fringe benefits excluded from Taxable Medicare wages & tips,
    • Minus (i) any amounts paid to any individual employee in excess of $100,000, and (ii) any amounts paid to any employee whose principal place of residence is outside the United States;
  2. 2019 employer group health, life, disability, vision, and dental insurance contributions (portion of IRS Form 1120 line 24 or IRS Form 1120-S line 18 attributable to those contributions);1
  3. 2019 employer retirement contributions (IRS Form 1120 line 23 or IRS Form 1120-S line 17); and
  4. 2019 employer state and local taxes assessed on employee compensation, primarily state unemployment insurance tax (from state quarterly wage reporting forms).

Step 2

Calculate the average monthly payroll costs (divide the amount from Step 1 by 12).

Step 3

Multiply the average monthly payroll costs from Step 2 by 2.5

Step 4

Add the outstanding amount of any EIDL made between January 31, 2020 and April 3, 2020 that you seek to refinance. Do not include the amount of any advance under an EIDL COVID-19 loan (because it does not have to be repaid).

Alternately, you can try using this calculator to estimate your loan amount eligibility:

Eligibility Costs

Payroll

Borrowers are generally eligible for forgiveness for payroll costs incurred during the eight-week Covered Period (or an Alternative Payroll Covered Period). Payroll costs are considered paid on the day that paychecks are distributed, or the borrower originates an ACH credit transaction. Payroll costs are considered incurred on the day that the employee’s pay is earned. Payroll costs incurred but not paid during the borrower’s last pay period of the Covered Period (or Alternative Payroll Covered Period) are eligible for forgiveness if paid on or before the next regular payroll date. Otherwise, payroll costs must be paid during the Covered Period (or Alternative Payroll Covered Period). Count payroll costs that were both paid and incurred only once.

For each individual employee, the total amount of cash compensation eligible for forgiveness may not exceed an annual salary of $100,000, as prorated for the Covered Period. For owner-employees or self-employed individuals/general partners, the amount is capped at $15,385 per individual.

The language in the CARES Act and subsequent Interim Final Guidance referenced amounts paid and incurred and there was significant uncertainty as to whether borrowers should use cash or accrual methods to determine payroll costs. Ultimately, the SBA and Treasury settled on a modified cash method that allows borrowers to account for the payroll amounts that would accrue between the final paycheck within the eight-week Covered Period and paychecks that occurred after the eight-week Covered Period.

However, it also appears to open a loophole for borrowers with semi-monthly or monthly payrolls that are not eligible to opt for an Alternative Payroll Covered Period. By including both costs paid during the Covered Period and costs incurred but not paid at the end of the Covered Period, the calculation opens the door for a borrower to get more than eight weeks of payroll forgiven.

As an example, a borrower that received funds on April 28 has their standard Covered Period expire on June 22. During this period, as a semi-monthly payroll company, they will actually pay their employees four times: April 30, May 15 and 31, and June 15. But they will also have incurred payroll costs for the period from June 16-22. As the calculation instructions are written, all those costs are eligible for forgiveness. This may change with subsequent guidance.

Borrowers with a bi-weekly (or more frequent) payroll schedule may elect to calculate eligible costs using the eight-week period that begins on the first day of their first pay period following their PPP loan disbursement date. Borrowers that elect to use this method must apply the Alternative Payroll Covered Period only where the application specifically allows it but must use the regular Covered Period elsewhere.

Certain borrowers have the option to start the eight-week period for payroll costs on first payroll date after receiving their loan disbursement. This will allow borrowers to more easily track payroll as it will give bi-weekly payors exactly four payroll runs and weekly payors exactly eight.

Nonpayroll Costs

Eligible nonpayroll costs include payments of interest on covered mortgage obligations incurred before February 15, 2020; covered rent obligations in force before February 15, 2020 (both real and personal property); and covered utility payments for electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.

An eligible nonpayroll cost must be paid during the Covered Period or incurred during the Covered Period and paid on or before the next regular billing date, even if that date is after the Covered Period. These nonpayroll costs cannot exceed 25% of the total forgiveness amount.

The 75% payroll cost requirement is based on the loan forgiveness amount and not the total amount of the borrower’s loan. This alleviates both the math problem behind converting from a 2.5-month application period to an eight-week forgiveness period and the concerns of borrowers whose businesses may be unable to maintain pre-COVID-19 payroll levels due to the shelter-in-place restrictions or other economic impacts.

Is a PPP loan right for you? Proceed to PPP Loan Application & Deadline to get started. If you already have a PPP loan, check out PPP Loan Forgiveness to get your loans forgiven by the U.S. Treasury.

Overwhelmed by intricasies of the Paycheck Protection Program? Check out our PPP Loan Forgiveness Guidance services for help.


Questionnaires for Loans Greater Than $2 Million

On October 26, 2020, the SBA published a notice in the Federal Register seeking approval from the Office of Management and Budget (OMB) to collect information from PPP borrowers of $2 million or more via issuing two new forms:

These forms are loan necessity questionnaires and are divided into two distinct sections:

Business Activity/Nonprofit Activity Assessment – This covers metrics including 2020 second quarter (Q2) revenue compared to 2019, commencement of any new capital projects, mandatory shut-down orders and the impact on the business, and industry specific alterations caused by COVID-19 including the associated cash outlay to comply. The nonprofit form (3510) also requests information on comparative Q2 expenses for 2020 and 2019.

Liquidity Assessment – This covers information around available cash and cash equivalents, distributions to owners, prepayment of debt, compensation of employees and owners, value of shareholder’s equity on the books, participation in other CARES Act programs and information on who owns the entity including whether the company was publicly-traded. The nonprofit form (3510) also requests information around restrictions on using net income and cash or cash equivalents to pay for PPP eligible expenses, whether or not an endowment fund exists, information around non-cash investments, and details around the type of nonprofit.

Both sections request supporting documentation, include a catchall question for the borrower to submit additional relevant information to support their case, and conclude with a certifications section that should be reviewed with legal counsel similar to the original loan application. The questionnaires also indicate they must be returned by the borrower within ten (10) business days of receipt from the lender.

While the questionnaires may appear intimidating, they also clearly indicate that receipt of the questionnaire does not indicate the SBA is challenging the certification made during the loan application or the borrower’s eligibility for loan forgiveness. Instead, the questionnaires are intended to gather data to assist the SBA in their decision-making process.

However, the SBA continues to move the goal post on borrowers. The questionnaires are not limited to the borrower’s circumstances at the time of application consistent with the certification statement. Instead, several questions inquire about circumstances after receipt of the loan. This should come as a surprise to anyone following the PPP process since inception.

We anticipate all borrowers of $2 million or more will receive the questionnaire from their lender upon submitting their PPP forgiveness application. We recommend these borrowers review the questionnaire before your PPP loan forgiveness application submission as the ten (10) business day turnaround time is short given the length of the questionnaire and the anticipated time required to assemble the supporting documentation. We also recommend you consider how the catchall question at the end of each section can frame the case for your loan necessity in the most favorable light.

Guidance for Individuals and Partners with Self-Employment Income

The below Q&As cover the SBA's third interim final rule (regulation) related to the PPP. The interim final rule provides guidance for individuals with self-employment income who file a Form 1040, Schedule C and provides an update specific to the calculation of payroll costs for partners in a partnership.

Are individuals with self-employment income who file Form 1040, Schedule C eligible for a PPP loan?

Yes. The interim final rule confirms individuals with self-employment income who file a Form 1040, Schedule C are eligible for the PPP loan if they meet these four requirements:

  1. The business was in operation on 2/15/2020
  2. The business owner is an individual with self-employment income
  3. The business owner’s principal place of residence is the United States
  4. The business owner filed, or will file, a Form 1040, Schedule C for 2019
What if I haven’t prepared my 2019 Schedule C yet or I wasn’t in operation during 2019?

The interim final rule is clear — you MUST present a 2019 Schedule C to apply for a PPP loan since the amounts on this form are used to determine the maximum loan amount and to estimate eventual forgiveness. If you were not in operation during 2019, but in operation on 2/15/2020, the SBA indicates it will issue future guidance to address your situation.

Furthermore, if you haven't filed your 2019 tax returns or Schedule C yet, the guidance indicates you can prepare your 2019 Schedule C and include it with your PPP loan application, even if you don't file it until later. The guidance does not address what would happen if the Schedule C you ultimately file is different than the draft used for the PPP loan application, so we recommend you file for the loan with your final version.

How do I calculate my maximum loan amount?

The calculation of the maximum loan amount depends upon whether/not your Schedule C business has employees:

  • Business without employees – Utilize your 2019 Schedule C net profit (line 31) to determine the maximum loan amount. Like the employee payroll cost calculation, you must limit your net profit to $100,000 before determining the 12-month average and multiplying by 2.5 to determine your maximum loan amount. If your 2019 net profit exceeded $100,000, your maximum loan amount will be $20,833.
  • Business with employees – Begin with the calculation above for businesses without employees and add in employee payroll costs based upon 2019 amounts. Employee payroll costs include 2019 gross wages limited to an annualized $100,000, employer-paid health insurance premiums, employer-paid retirement contributions, and employer-paid state & local unemployment insurance taxes. Note the interim final rule is very prescriptive in question 1(b) on how to calculate the gross wages portion of employee payroll costs based upon 2019 Form(s) 941; review this with your advisor.
What documentation will a lender ask for?

We recommend you ask your lender as this may vary, but the interim final rule outlines the following documentation based upon whether/not you have employees:

Without Employees With Employees
2019 Form 1040, Schedule C 2019 Form 1040, Schedule C
2019 Form 1099-MISC for income received (if available) 2019 Form(s) 941, or equivalent payroll processor records, for all 4 quarters
2019 invoice, bank statement or books & records establishing you are self-employed (if 1099-MISC not available) 2019 state quarterly unemployment insurance tax filings
2020 invoice, bank statement or books & records that cover 2/15/2020 to establish you were in operations on 2/15/2020 Supporting documentation for 2019 payments of employer-paid health insurance & retirement contributions (if applicable)
Payroll statement or similar documentation from the pay period that covers 2/15/2020 to establish you were in operations on 2/15/2020.
What can loan proceeds be used for?

Individuals with self-employment income filing Schedule C may use the loan proceeds for the same items as other businesses with two important nuances:

  1. The loan proceeds can be used to replace owner compensation. Owner compensation is calculated based on the 2019 net profit reported on Schedule C, as discussed above, for businesses without employees.
  2. The loan proceeds can also be used for the same items as other businesses within the 8-week period post-loan disbursement, BUT the Schedule C business must have claimed a similar deduction on the 2019 Schedule C. The SBA explains the goal of this requirement is to be consistent with the borrower certification “to support the ongoing operations” thus preventing Schedule C businesses from expanding their expenditures due to receipt of the loan proceeds.
What is eligible for forgiveness?

The loan forgiveness will depend on the total amount spent on qualified expenditures during the 8-week period post-loan disbursement. Similar expenses must have been incurred on the 2019 Schedule C to qualify for forgiveness. The interim final rule provides two additional important details:

  1. If you have employees, employee payroll costs during the 8-week period are comprised of the following:
    1. Up to $15,385 of gross wages per employee
    2. Employer-paid health insurance
    3. Employer-paid retirement contributions, and
    4. State/local unemployment insurance taxes
  2. Owner compensation replacement, for forgiveness purposes, is limited to 8/52 of the 2019 Schedule C net profit with a maximum net profit of $100,000.

Remember that when applying for forgiveness, at least 75% of the forgiveness requested must have been used for payroll costs. Payroll costs for these purposes include employee payroll costs and owner compensation replacement. Confusion remains regarding the “75% requirement” due to the first interim final rule separately indicating in the flush language of question 2(r) that at-least 75% of the loan proceeds shall be used for payroll costs. This could imply that even for loan amounts for which forgiveness is not requested, at-least 75% must be used for payroll costs. Finally, question 1(g) of the interim final rule provides the documentation requirements anticipated to support forgiveness.

So if I have 2019 Schedule C net profit in excess of $100,000 but didn’t incur any qualified expenditures during 2019, I’m allowed to borrow $20,833 but only $15,385 can be forgiven?

Correct. This is something to consider when deciding how much to borrow if obtaining full loan forgiveness is important in your specific situation.

Is there anything else Schedule C businesses should consider?

The interim final rule warns individuals that their participation in the PPP may affect their eligibility for state-administered unemployment compensation or unemployment assistance programs, including other programs established under the CARES Act. No further guidance is provided on the issue aside from a single sentence.

What additional guidance was provided for partnerships?

This interim final rule confirms partners in a partnership may not submit a separate PPP loan application individually as a self-employed individual. Instead, the partnership applies for the PPP loan and includes the partners' self-employment income (capped at $100,000 per partner) as part of its payroll costs for both employees and partners. This is welcome news as there was no policy reason partnerships should be treated differently than other businesses.

At this point we’re all familiar with payroll costs for employees. The interim final rules define payroll costs for partners as the self-employment income of general active partners limited to the same $100,000 annualized cap applied to employees. If you’re wondering what a general active partner is, so are we, as the term is not defined.

Without a definition, we looked to the SBA discussion within this interim final rule for clues on what is intended. It appears the intent is to include partners actively involved in the partnership earning self-employment income. We do not believe the intent was to limit the eligible partners to general partners in a state law general partnership or limited partnership, as the SBA specifically mentions LLCs filing as a partnership within its discussion.

Finally, the interim rule only addresses forgiveness for Schedule C businesses, indicating part of the forgiveness is based upon 8/52 of the Schedule C net profit for 2019 limited to a maximum net profit of $100,000. It is unclear if the same methodology for forgiveness applies to the self-employment income of partners in a partnership, or whether the partnership will need to determine the partner's share of self-employment income during the 8-week period following receipt of the loan. We find the latter too burdensome to determine and verify and expect future guidance will clarify forgiveness for partners is calculated based on 2019 amounts, like Schedule C filers.




1 Note that employer contributions for group health, life, disability, vision, and dental insurance for S-Corporation employees who own more than a 2 percent stake in the business (or employees who are family members of such owners) are not included in this figure as such contributions are already included in gross wages

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