COVID-19 Laws: Understanding the Paycheck Protection Program

May 14, 2020

COVID-19 Laws: Understanding the Paycheck Protection Program

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Wondering if your small business qualifies for relief? Let’s take a look at the Paycheck Protection Program to see if your situation meets eligibility requirements and take a deeper dive into how the process works.

The Coronavirus Aid, Relief and Economic Security (CARES) Act expands and modifies section 7(a) of the Small Business Act, an existing small business loan program. This expansion makes qualifying small businesses eligible for forgivable loans on historically favorable terms for both borrowers and lenders.

The CARES Act appropriated $349 billion dollars to create the Paycheck Protection Program (PPP) as a financial bridge to keep American small businesses operating and paying their employees during the COVID-19 pandemic.


What is the Max Loan Amount?
2.5 times average monthly payroll costs.

Who is Eligible?
Business and nonprofits with 500 employees or fewer that have been in operation since March 1, 2020 and can make the required certifications.

When Can I Apply?
Applications opened to small businesses and sole proprietorships beginning on April 3, 2020. Applications opened to independent contractors and self-employed individuals starting April 10, 2020. Applicants must apply by June 30, 2020, but the allocated funds will likely be exhausted by that deadline, so apply as soon as possible.

How Do I Apply?

  • Apply through a private lender.
  • All fees are waived.
  • No collateral is required.
  • Proof of payroll during the requisite period is required.

What is the Forgiveness of the Loan?

If certain criteria are met -- primarily, that you maintain the same number of employees calculated through payroll records -- then the full principal of the loan and interest is forgiven.

Now, let’s take a deeper look into each of the key areas mentioned above:

Loan Amount

A qualifying small business can borrow up to 2.5 times its average monthly payroll costs, calculated by averaging the borrower’s last 12 months of payroll costs; or $10 million, whichever is less.

For a business that was not operational in 2019, the maximum loan amount is 2.5 times the borrower’s average monthly payroll costs for January and February 2020, or $10 million, whichever is less. For seasonal employers, the maximum loan amount is 2.5 times the borrower’s choice of their average monthly payroll costs for the 12-week period beginning either February 15, 2019 or March 1, 2019 and ending June 30, 2019.

Payroll costs include:

  • Wages
  • Vacation, parental, family, medical and sick leave
  • Severance allowance
  • Health care benefits, including insurance premiums
  • Retirement benefits
  • Any applicable state or local payroll taxes

When calculating payroll costs, exclude:

  • Any individual employee’s wages in excess of $100,000 a year
  • Payroll taxes
  • Income taxes
  • Any wages paid to employees whose residence is outside of the United States
  • Any sick leave wages or qualified FMLA wages paid under the Families First Coronavirus Response Act


Size and Type of Entity

Businesses eligible for this loan include:

  • Those with 500 employees or fewer
  • Businesses falling within the North American Industry Classification System (NAICS) code 72, “Accommodation and Food Services,” that do not have more than 500 employees in a single physical location”
  • Independently owned franchises with fewer than 500 employees that are approved by the SBA
  • Trial businesses, independent contractors, gig economy workers, sole proprietors and self-employed businesses
  • Certain nonprofit organizations like 501(c)(19) veteran businesses and 501(c)(3) nonprofits, including religious organizations

Note: Nonprofit organizations are subject to the SBA’s affiliation standards.

Date in Operation

To be eligible, small businesses must have been in operation with either paid salaries and payroll taxes for employees or paid independent contractors on March 1, 2020.


In addition to meeting the above criteria, small businesses must certify all of the following in good faith:

  • Uncertain economic conditions because of COVID-19 pandemic make the loan necessary to fund the employer’s ongoing operations
  • The loan amount will be used to pay workers, payroll expenses, mortgage, rent or utilities
  • The employer has not already received a loan since March 1, 2020 for the same purpose

Loan Process and Permissible Uses

Application Procedure

A small business can apply for the loan through and receive funds from their existing SBA-authorized private lender. Fees are waived for both the borrower and lender. Unlike other SBA loans, the borrower doesn’t have to offer any collateral or personal guarantees. PPP loans are unsecured.

In most cases, loans are guaranteed by the SBA, which will require documentation proving the amounts necessary to calculate eligibility, maximum loan amounts and forgiveness criteria. The Small Business Administration will continue publishing more information on how to apply for a PPP loan.

Restrictions with Other Loans

Small businesses cannot take out both a PPP loan and an Economic Injury Disaster Loan (EIDL) related to the COVID-19 pandemic. If a small business took an emergency EIDL grant of up to $10,000, then a subsequent PPP loan will be reduced by the amount of the emergency EIDL grant. Small businesses may take out both a state bridge loan and a PPP loan.

Forgiveness and Repayment Terms

Expenses that Qualify for Forgiveness

If a small business keeps all of their employees or hires back any recently furloughed or terminated employees before June 30, 2020, certain expenses made during an eight-week period of the borrower’s choice between March 1, 2020 and June 30, 2020 with the principal of the PPP loan may be forgiven.

Forgivable expenses include:

  • Payroll costs, as defined above
  • Existing mortgage interest
  • Rent and utilities payments

In order for the full loan amount to be forgiven, no more than 25 percent of the principal may be used on non-payroll expenses. If the full principal of the PPP loan is forgiven, then the borrower is not responsible for interest accrued in the eight-week period. Borrowers must provide documentation of expenses for which they seek forgiveness. Loan forgiveness cannot exceed the principal amount. Any loan amounts forgiven are excluded from gross income for tax purposes. A lender must issue a decision no later than 15 days after receiving a loan forgiveness application from a borrower.

Forgiveness Reductions for Laying off Employees

If a small business lays off one or more employees, loan forgiveness will be reduced by a percent decrease in the number of employees laid off. Whether a small business has experienced a reduction in the number of employees is calculated by multiplying payroll costs by the average number of full-time equivalent employees per month for the eight-week forgiveness-eligible period divided by the employer’s choice by the average number of full-time employees per month from March 1, 2019 to June 30, 2019. For seasonal employees only, the average number of full-time employees per month from March 1, 2019 to June 30, 2019 can be used in this calculation.

If a small business’ total payroll expenses on employees making less than $100,000 annually decreased by more than 25 percent, then the loan forgiveness amount will be reduced by that amount.

PPP Loan Amounts Not Forgiven

If a small business takes out a PPP loan and does not have the full amount forgiven, the remaining amount of the PPP loan is subject to the following terms:

  • Payment Deferral: Six months while accruing interest
  • Interest Rate: 0.5%
  • Maturity Date: Two years
  • Prepayment Penalties: None

A recipient cannot also use the Employee Retention Tax Credit for the same period. A recipient can, however, still obtain the tax credit associated with the Expanded Emergency Leave Benefits.

The certification raising the most questions is that uncertain economic conditions due to the COVID-19 pandemic make the loan necessary to support ongoing operations.

The SBA continues to release guidance regarding PPP Loans. There is no clear guidance on this certification. The demand for this loan is substantial and initial funding was exhausted, which lead to additional funding. If you’re in need of legal guidance regarding an assessment on whether you’re eligible for the 7(a) loan or other COVID-19 response measures, contact Harris Shelton today at 901-525-1455.