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On Friday, March 27, 2020, the Paycheck Protection (Loan) Program (PPL) for small businesses was approved as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. This new law is intended to help small business owners in an unprecedented way.
On June 5, 2020, the Paycheck Protection Program Loan Flexibility Act was signed into law and loosened the rules for business owners to qualify for loan forgiveness. This post has been updated to reflect these changes.
First, while the Paycheck Protection Program Loan will be initially set up by banks and approved by the SBA under section 7 (a), unlike other SBA loan programs, the PPL is guaranteed 100% by the SBA.
Second, if the proceeds of the loan are used by business owners as Congress, the Senate and President Trump intended, the loan will be forgiven.
Essentially, how the paycheck protection loans work for small business owners depends on whether loan proceeds are used properly. If so, the loan becomes a grant from the federal government to help you get your business back in business as soon as possible.
In this post, we will cover the following about the Payroll Protection Loan program:
- How to qualify for the Paycheck Protection Loan?
- What type of Employees are eligible for the PPL?
- How much is the maximum amount of PPL available for my business?
- What’s included in Payroll Costs when calculating the maximum PPL?
- Which Payroll Costs do NOT qualify for the PPL?
- What can I use the loan proceeds for?
- What’s the Recipient Good Faith Certification?
- Do I have to personally guaranteed the PPL?
- What are the costs associated with the PPL?
- When do I have to start making PPL payments?
- How do I get PPL forgiveness or make the PPL a Grant?
- How do I apply for a Paycheck Protection Loan for my business?
How to qualify for the Paycheck Protection Loan
In order to qualify for the PPL, the business must have been in operation on February 15, 2020 and had employees being paid wages, salary and payroll taxes OR paid independent contractors and reported those payments on federal form 1099-MISC.
What type of Employees are eligible for the PPL
The PPL eligible business may not have employed more than 500 employees as of February 15, 2020. The term employee includes individuals who work on either a full-time or part-time basis.
The Accommodation and Food Services businesses may measure the employee count based on each physical location.
And for those individuals who operate their business as sole proprietors (filing a tax return on a Schedule C) or as a self-employed business owner, they also may be eligible to receive a Paycheck Protection Loan.
How much is the maximum amount of PPL available for my business
During the period from February 15, 2020 and ending on June 30, 2020, the maximum PPL amount is the LESSER of:
- The AVERAGE TOTAL MONTHLY PAYMENTS by the business owner for PAYROLL COSTS incurred during the one-year period before the date on which the loan is made MULTIPLIED BY 2.5;
- PLUS any outstanding loan amounts that were made beginning on January 31, 2020 and ending on the date the business owner receives the PPL, which may be eligible to be refinanced under the PPL
OR
- $10,000,000.
What’s included in Payroll Costs when calculating the maximum PPL
Under the Paycheck Protection Loan Program, Payroll Costs include the following:
- Salary, Wages, Commissions and similar forms of compensation;
- Payment of cash tips or equivalents;
- Allowances for dismissal or separation payments;
- Payment of vacation, parental, family, medical or sick leave;
- Group Health Care Benefits, including insurance premiums;
- Retirement Benefits paid by the employer;
- State and Local Taxes assessed on employee compensation paid by the business;
- The sum of payments of any compensation to or income of a Sole Proprietor or Independent Contractor that is wage, commission, income, net earnings from self-employment or similar compensation and that is in an amount not exceeding more than $100,000 in one year, as prorated for the period beginning on February 15, 2020 and ending on June 30, 2020.
Which Payroll Costs do NOT qualify for the PPL
Under the Paycheck Protection Loan Program, Payroll Costs do NOT include the following:
- the compensation of an individual employee in excess of an annual salary of $100,000 as prorated for the period beginning on February 15, 2020 and ending on June 30, 2020:
- taxes imposed or withheld under FICA (Social Security and Medicare), Railroad Retirement Act, and IRC Chapter 24;
- any compensation of an employee whose principal place of residence is outside of the United States;
- qualified sick leave or family leave wages for which a credit is allowed under the Families First Coronavirus Response Act. (This means business owners can’t double-dip).
What can I use the loan proceeds for
The business owner who receives a Paycheck Protection Loan may use the proceeds between February 15, 2020 and June 30, 2020 for:
- payroll costs;
- any costs related to continuing group health care benefits;
- employee salaries, wages, commissions or similar forms of compensation;
- rent payments;
- utilities;
- interest payments on any mortgage obligation;
- interest on any other form of debt obligation that was incurred before the period.
What’s the Recipient Good Faith Certification
In order to obtain the PPL, the business owner will be required to sign a certification stating the reason for the loan is related to the uncertainty of the current economic conditions, confirming they don’t have another loan application pending for the same purpose, acknowledging the funds will be used to retain workers and maintain payroll, meet mortgage, rent and utility obligations, and during the period beginning on February 15, 2020 and ending on December 31, 2020, they’ve not received loan proceeds under the PPL for the same purpose.
Do I have to personally guarantee the PPL
No. The Paycheck Protection Loan Program does not require the business owner to personally guarantee the loan. And there are no collateral requirements either.
The SBA will have no recourse against any individual shareholder, LLC members or partner of the business receiving the PPL proceeds for nonpayment unless the loan proceeds are not used for the authorized purposes.
What are the costs associated with the PPL
There are no fees whatsoever to the business owner for the Paycheck Protection Loan program between February 15, 2020 and June 30, 2020.
When do I have to start making PPL payments
The PPL has a loan payment deferral of not less than six months and not more than one year between February 15, 2020 and ending on December 31, 2020.
However, if the loan proceeds are used as the PPL program intended, the PPL may be forgiven and converted to a grant.
How do I get PPL forgiveness or make the PPL a Grant
If the business owner spends the loan proceeds on certain expenses during the eight weeks following receipt of the loan, the loan will be forgiven.
The expenses that will qualify for loan forgiveness include the following:
- Payroll Costs as defined above;
- Interest payments on mortgage obligations of the business incurred before February 15, 2020;
- Rent payments made under a lease agreement in existence before February 15, 2020;
- Utility payments (electricity, water, gas, transportation, telephone, internet access which service began before February 15, 2020
How do I apply for a Paycheck Protection Loan for my business
The SBA has established the procedures for business owner applicants to go through their local banks which are authorized as an SBA lender.
What happens when My payroll costs are slightly less than 75% of the loan amount? but untilities, Etc make up the balance? We have an employee on Disability leave and 1 absent due to covid19 FFp
The way the PPP is set up, it was designed that you could borrow more than you might use in the 8 week period. You MAY get forgiveness only for the amounts that qualify. If you used only 50% of the funds you borrowed, BUT you met all the terms of the PPP program (same number of FTEs in June as in February and everyone’s pay was at least 75% of their February pay) then only that 50% can be forgiven and the rest must be repaid.
As for the FTE Count, please see the repayment document for rules as to who you don’t have to count (Resignations, layoffs not related to business declines, etc)
The complete SBA guidelines and calculation methods for forgiveness can be found here: https://www.sba.gov/sites/default/files/2020-05/3245-0407%20SBA%20Form%203508%20PPP%20Forgiveness%20Application.pdf
I am a commercial pilot flying part 135. Covid19 has prevented reduced my flying by 90%. My employer has not furloughed me because he would have to retrain me. Some weeks I have made no income. I can’t draw unemployment because I have not been laid off. Is my employer supposed to cover my paycheck. He applied and received the pay roll protection.
Hi, Tim.
Your employer is SUPPOSED to use PPP funds to keep the employees paid (well, at least for 8 weeks). The employer is not REQUIRED to use the money for this purpose, but if the employer does not keep its employees at the 75% minimum pay (compared to mi February) then he will have to repay all or a portion of the funds as it was a loan.
If your pay has dropped below a certain level, you should be entitled to Covid unemployment benefits, but each state sets its own rules. Of course, if you are being paid minimum wage, that’s not enough to put food on the table and you might resign. Resigning due to a drastic cut in pay is considered to being laid off, again, see a labor lawyer in your state for specific advice.
Can my employer take my accrued PTO time and give me a 20% reduction in my hourly rate if they received the PPL?
Hi Maureen,
The business’ receipt of a PPP Loan does not impose any rules around whether the business may or may not increase its employees compensation rate.
The PPP Loan forgiveness rules will require the business to maintain its employees’ compensation rates to at least 75% of what they were paid in quarter one of 2020.
All the best Maureen!
Is garbage removal considered a utility expense, and does ALFLAC premiums fall under health insurance premiums? What about the expense of having a culinary water line run to your business if it was contracted prior to Feb 15 but not put in until April? Would machinery payments fall under the ppp?
Hello, and thanks for your questions about the PPP.
One of the problems with the PPP is that the SBA has not provided crystal clear guidance on a LOT of the requirements for the loan forgiveness. To answer your question, anything the LOOKS like a utility payment will probably count toward that use, but right now NOBODY is certain. Not us tax pros, not the bank, and not even the SBA itself.
Machinery and equipment payments do NOT fall into the PPP guidelines, except for the interest on loans taken out before Feb 15.
AFLAC payments, if I am not mistaken, are paid by the employee. If there are any premiums paid by the employer, then it would be counted as a PPP qualifying payment. If you are self-employed, then it goes into a great big gray area!
Let’s all survive this thing!
Hello, another question please. About forgiveness, if the disbursed loan is not completely used by end of 8 weeks and all the $$ were used for payroll checks, can I repay the loan balance left and apply for 100% forgiveness ??
Hi Karen,
I am sorry to say, no. Under the forgiveness rules, in order to qualify for 100% forgiveness, your business must spend the money as intended.
Here’s a PPP Loan Calculator which may be helpful to you to plan how to properly spend the proceeds.
All the best…
What constitutes a utility? Electric, Gas, Water, Sewer , phone, garbage disposal?
Hi Elisa,
According to the current SBA guidelines, utilities eligible for forgiveness include electricity, gas, water, transportation, telephone and internet services for which service began before February 15, 2020.
All the best…
HAVE QUALIFIED FOR PPP AND AM TRYING TO DETERMINE IF PAYMENT OF PAYROLL TAXES ARE ABLE TO BE USED BY THESE FUNDS. BOTH EMPLOYER SHARE AND EMPLOYEE SHARE-
Hi Karen,
The payroll taxes paid by the employer during the eight weeks following the PPP Loan proceeds receipt are not to be included in the computation to determine the amount of loan forgiveness.
Only the gross payroll amount, up to the maximum amount of $100,000 on an annualized basis per employee may be used. This means the payroll taxes withheld by the employer would be included. Again, it’s the gross payroll amount to be included in the forgiveness computation.
Congratulations on your PPP Loan application success!
We have an LLC business…sole proprietor, no wages are collected for owner, we have 1 1099 sub contractor. How would we complete the PPL application…
Hi Libby,
As a single-member LLC, you file a Schedule C every year.
For the PPP Loan application, your substantiation is your Schedule C for the year 2019.
You will take the net income on your Schedule C, divide that amount by 12 and then multiply it by 2.5 to determine your PPP Loan request amount.
All the best…
I can’t find a lender for PPL. I belong to a credit union that is not able to offer the PPL. I am a sole proprietor with no employees. I meet all the criteria. I followed the list that Forbes put out and filled out a form at Ready Capitol but they are asking for my form 941, and I don’t have one (since I have no employees.) What to do?
Thank you. Please do not share my information with any third party.
Hi Tess,
If you are a sole proprietor, you’d use your Schedule C net profit to calculate the total payroll costs. Start with that amount and then…
IF YOU HAVE EMPLOYEES IN YOUR BUSINESS, you’d take the gross wages paid to them, which is reported on quarterly forms 941 for last year, and add that amount to the net profit shown on Schedule C.
You’d add your employees group health insurance premiums paid by the company and any retirement contributions your company paid to the amount too.
Whatever those amounts total up to would be divided by 12 and then multiplied by 2.5 to determine your PPP Loan amount request.
Hope this helps…
I’m a c-Corp I have 28 employees on payroll and two on a 1099
Are the 2- 1099 employees included in the forgiveness part
Hi Lou,
As the SBA Guidance is written today, independent contractors paid and reported on a 1099 are not costs that will be included in the forgiveness formula.
Two important points…
1. A person who is paid as an Independent Contractor (and reported on a 1099) should not be someone that is truly an employee. If a person is working for your business full-time and does not truly offer his or her services to others, they should be technically categorized and paid as an employee. The IRS loves to examine payments made and reported on 1099s when they audit a business. Because if the independent contractor is truly acting as an employee, the business owner will be responsible for additional payroll taxes, fines and interest expense. Making certain your independent contractors are properly classified is important.
2. The SBA has been rolling out every couple of days updated guidance on the PPP Loan matters. They have not clarified much about the way in which the PPP Loan forgiveness will be handled so far.
We’re all going to have to stand by until more is known about the forgiveness process.
All the best…
Are workman s comp premiums and state unemployment taxes eligible under the paycheck protection act?
Hi Sharon,
The SBA guidance does not allow for the inclusion of worker’s compensation insurance premiums. It does include group health insurance premiums paid by the business on behalf of the employees.
According to the SBA’s PPP Loan Frequently Asked Questions dated 4/14/020, the amount of payroll costs may include the payment of state and local taxes assessed on compensation of the business’ employees.
If your business’ state unemployment tax is assessed on the employee’s compensation, then it would seem the tax could be included in the total payroll costs computation.
All the best…