How the Paycheck Protection Loans Work

 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.