CARES Act: Paycheck Protection Program Loans

CARES Act: Paycheck Protection Program Loans

*NOTE: This Act is currently evolving and has daily changes. This article was written with the most current information as of 04-09-2020.


The Coronavirus Aid, Relief, and Economic Security (CARES) Act is working to help alleviate the strain many businesses and individuals have under the current circumstances by providing $376 billion in relief for American workers and small businesses. There are many parts to the CARES Act. If you are running a business, particularly with employees, it is highly recommended that you visit the U.S. Small Business Administration website Also, you may want to speak with your attorney or human relations professional to discuss the requirements. Of the many different funding/loan programs and employee protection guidelines, this article is going to look specifically at one particular loan: Paycheck Protection Program Loans.

What is the Paycheck Protection Program Loan

SBA 7(a) Paycheck Protection Program is a forgivable loan to assist businesses affected by COVID-19 with payroll costs, mortgage interest, rent, and utility payments during the eight-week period following loan disbursement. Payroll includes amounts paid for salary, wages, commissions, paid time off, medical leave, severance, group health benefits (including premiums of health, dental, and vision plans), retirement benefits paid by the employer, state or local taxes on employee compensation, and compensation to sole proprietors and independent contractors. Loans are available through June 30, 2020, subject to availability of funds.

These loans require no collateral, and there is no prepayment penalties on remaining balances. The funding pool is expected to be fully utilized relatively quickly, so sign up is recommended sooner rather than later.

Eligibility for the program requires less than 500 employees unless you meet certain circumstances. You must have been operational as of 2/15/2020 and paid salaries and payroll taxes for employees or paid an independent contractor on a Form 1099-Misc. The borrower must certify the loan is necessary due to the uncertainty of current economic conditions caused by COVID-19. This may include events such as supply chain disruptions, a decrease in sales, labor issues, or other significant detrimental changes due to COVID-19.

The loan will have an interest rate of 1% for a two-year term. Amounts used for the expenses listed above are eligible for forgiveness. 75% of the forgiven costs must be for payroll. For example, if you receive a $10,000 loan and spend $6,500 on payroll and $2,000 on utilities, mortgage interest, and rent during the eight weeks, what is forgiven and what is required to be paid back? To start the requested $8,500 of expenses to be forgiven in full must be 75% payroll or $6,375 of payroll. Our example has $6,500; we meet that requirement. The full amount of $8,500 would be forgiven, leaving us with $1,500 to pay off in two years at 1% interest. Forgiven loan amounts are not considered taxable income.

PPP Loan Borrowing Calculation

Loans can be up to 2.5 times the borrower’s average monthly payroll costs incurred during the year prior to the loan date. There is a cap of $10 million. Annual gross salaries are capped at $100,000 for each employee. This means if you have an employee with an annual salary of $125,000, only $100,000 of that employee's salary will enter into the calculation. If your annual payroll was $150,000, the average would be $12,500. Take that average payroll of $12,500 times the 2.5, and your maximum loan is $31,250. There are special rules for self-employed individuals.

Who is Handling Application for this Loan

These loans are being handled by local lenders, banks, and lending institutions that are registered with either the Small Business Administration to handle small business loans or lenders that have been identified by the U.S. Treasury to assist with the application and management. The application form can be found on the SBA website. The local lender will be in charge of handling the application and will be the contact for subsequent reporting requirements.

Some Points of Consideration

It is worth noting that application for some loans under the act disqualify you from applying for others. One such example is the Employee Retention Tax Credit. Backup reporting on expenses during the eight weeks will be required to be submitted into the lender handling the loan if utilizing the forgiveness attribute. Any reductions in employees retained as compared to the prior year will reduce the loan amount forgiven. Current interpretations of the Act are that expenses used for the loan forgivness are eligible to be expensed on tax returns. Many businesses are struggling due to the current COVID-19 situation. If you need help, please utilize this and other opportunities.

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