Paycheck Protection Program

In Depth Guide of What it is & Does Your Business Quality for Forgiveness?
Denise Elizabeth P
Denise Elizabeth P
Senior Financial Editor & Contributor
Last Updated: April 22, 2021
Date Published: April 19, 2021

Many small businesses suffered temporary closures, staff reductions, and the many effects of a hurting economy during the COVID-19 Pandemic.

In an attempt to stay afloat and re-open their doors, they were faced with a slough of government mandates and safety guidelines to prevent further spread of the virus.

In an effort to provide some financial relief, the federal government created a few loan programs for these unprecedented times.

Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, loans were made available to businesses through the Small Business Administration’s Paycheck Protection Program (PPP).

Portions of the loan proceeds are meant to be allocated toward eligible costs that can be forgiven in full with the proper documentation.

Paycheck protection program

What is the Paycheck Protection Program (PPP)?

The Paycheck Protection Program (PPP) was created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act to provide economic relief to businesses in the United States who have been impacted by COVID-19.

The Small Business Administration facilitates the administration of the PPP with support from the Department of Treasury.

The Paycheck Protection Program was designed to give companies with 500 or fewer employees access to quick loans from the SBA.

The intent of the PPP was to help small businesses continue to make payroll and meet their operating costs during the COVID-19 pandemic.

The PPP loan period was originally available through July, has been extended through August and then again through March 31, 2021.

With the need still there, the PPP was extended once again through May 31, 2021.

Businesses who applied for the PPP received significant financial help to retain employees and possibly bring back employees who were laid off or furloughed during the COVID-19 closures.

How does Paycheck Protection Program work?

The PPP made up to $10 million available to businesses with 500 or fewer employees.

The money allocated through the PPP can be used to cover payroll costs as well as other operating expenses, including insurance premiums, mortgage interest, rent, and utilities.

The borrower will receive an approved amount of money to be used on eligible expenses during a covered period of time.

The original covered period under the CARES Act was 8 weeks but the Flexibility Act increased the covered period to 24 weeks, with the option for borrowers who received a loan prior to June 5, 2020 to keep the original 8 week period.

Who qualifies for paycheck protection program?

Small businesses with 500 of less employees are eligible for the paycheck protection program.

More specifically, you are eligible if you are:

  • A small business with not more than 500 employees
  • A small business that otherwise meets the SBA’s size standard
  • A 501(c)(3) with 500 or fewer employees
  • Sole proprietors, independent contractors, and self-employed persons who regularly carry on any trade or business
  • A tribal business concern that meets the SBA size standard
  • A 501(c)(19) veterans’ organization that meets the SBA size standard
  • Any business with a NAICS code that begins with 72 (Accommodations and Food Services) that has more than one physical location and employs less than 500 per location

There are First Draw PPP loans and Second Draw PPP loans available.

A First Draw PPP loan means you have not received a PPP loan before, therefore First Draw PPP loans are available to you.

Second Draw PPP loans are for those that have previously received a PPP loan and are eligible for a Second Draw loan .

NOTE: The Paycheck Protection Program ends on May 31, 2021.

All eligible entities can apply through a participating lender until then.

What are the PPP Loan Terms?

The following are the PPP loan terms:

  • PPP loans have an interest rate of 1%.
  • Loans issued prior to June 5, 2020, have a maturity of two years.
  • Loans issued after June 5, 2020, have a maturity of five years.
  • Loan payments will be deferred for borrowers who apply for loan forgiveness until SBA remits the borrower’s loan forgiveness amount to the lender. If a borrower does not apply for loan forgiveness, payments are deferred 10 months after the end of the covered period for the borrower’s loan forgiveness (between 8 and 24 weeks).
  • No collateral or personal guarantees are required.
  • Neither the government nor lenders will charge small businesses any fees.

What Expenses does the PPP loan cover?

The following payroll and non-payroll expenses are covered by the Paycheck Protection Loan:

  • Payroll Cost – This includes all cash compensation such as wages paid, including tips, commissions, bonuses, and hazard pay, or similar compensation. The total cash compensation for each employee cannot exceed $100,000. For the 8 week loan period this would be $15,385/individual and $46,154/individual for the 24 week period.
  • Employer-paid benefits such as insurance premiums, group health costs, sick leave, medical leave, family leave and employer paid retirement.
  • Employer assessed state and local taxes on cash compensation.
  • Compensation to owner-employees/self-employed individuals/general partners. Individuals with self-employment income who file a Schedule C, PPP self-employment loan forgiveness is limited to a proportionate eight-week share (8/52) of 2019 net profit (up to $15,385) for an eight-week covered period or 2.5 months’ worth (2.5/12) of 2019 net profit (up to $20,833) for a 24-week covered period, as reflected in the individual’s 2019 Form 1040 Schedule C.
  • Non payroll costs such as Operating costs incurred or in force prior to February 15, 2020 such as utility payments, mortgage, rent or lease payments, business software, accounting services, and interest payments on any debt obligations that were incurred before the covered period of time.
  • Property damage as a result of looting, more specifically related to public disturbances in 2020.
  • Personal protective equipment for workers such as health screenings, masks and gloves, plexiglass installation, barriers, and expansion of outdoor dining.

What Expenses does the PPP loan NOT cover?

The PPP borrower must use their PPP funding for approved expenses only and there are some expenses that the loan does not cover:

  • PPP loans do not cover compensation of an individual employee in excess of an annual salary of $100,000, as prorated during the covered period: 8 week loan period would be $15,385 per individual and $46,154 per individual for the 24 week period.
  • An employees principal place of residence must be in the United States in order to be eligible.
  • PPP loans do not cover qualified family leave or sick leave wages under the Families First Coronavirus Response Act.

Is the paycheck protection program still available?

The SBA is offering PPP Loans until May 31, 2021.

PPP Loan Forgiveness

How does the PPP loan forgiveness work?

In order to receive PPP forgiveness, the PPP loan program has several requirements that need to be met and they are surprisingly somewhat lenient.

It is good to understand the PPP loan forgiveness requirements so that you can follow and adhere to them where applicable and we will cover them in this next section.

Funds Must be Spent within Loan Period

Your loan is calculated based on a specific period of time (8 or 24 weeks as mentioned above).

In order to be forgiven, you must spend your funds within the given period of time.

Any funds that are not spent during the allotted time period will not be forgiven.

Employee Retention

The primary goal of the PPP Loan is to help small businesses retain their employees if they have been financially affected by COVID-19.

This would make sense then that the requirement for loan forgiveness is that you must maintain the headcount of your full-time employees.

For example, if you had 3 full-time employees on payroll when you applied for the loan, you should have 3 full-time employees on payroll when the loan period ends.

If employee were laid off before you received your funds, you can use the given period of time to re-hire and bring your workforce back up.

There are two exceptions to this rule:

  • The business could not find qualified employees
  • Employees turned down a good faith offer to return to their jobs

Furthermore, at least 60% of the proceeds are to be spent on payroll costs.

Maintain Your Payroll

During your loan period, your payroll must remain the same as when you applied for funding.

If salaries or wages are decreased, you may be required to pay back a portion of your loan.

To be eligible for loan forgiveness, you can’t reduce the salary of any full-time employee earning less than $100,000/year by more than 25%.

If salaries or wages were cut due to financial hardships caused by COVID19, you have 24 weeks to restore salaries and wages to their original cost.

Keep track of Incurred Costs

In addition to costs that have already been paid, expenses incurred during the loan period are also eligible for loan forgiveness.

For example, say you pay your employees on April 10th for work completed February 1 through February 7th. Your loan deadline falls on April 1st.

Even though this payday will fall after the loan, payroll costs were incurred and therefore are eligible for forgiveness.

When to Apply for Loan Forgiveness

Once all of the loan proceeds have been used up, a borrower can then apply for loan forgiveness.

Borrowers can apply for loan forgiveness any time up to the maturity date of the loan.

PPP Loan payments are deferred until the last day if the 10 moth covered period.

If borrowers do not apply for loan forgiveness within the 10 months after the last day of the covered period, then the loan will no longer be deferred and the borrower will begin making payments to their PPP lender.

PPP Loan forgiveness

How to Apply for Loan Forgiveness

1. Contact your PPP lender and complete one of the following forms:

SBA Form 3508, SBA Form 3508EZ, SBA Form 3508S, or a lender equivalent

Your PPP lender will let you know which form is required and they will provide additional guidance as needed.

Each lender may have a different PPP loan forgiveness application, so this is why you will need to contact your PPP lender for the specifics.

2. Payroll Documentation

Along with your loan application, you will need to gather and provide payroll documentation for all periods that overlapped with Covered Period and Alternative Payroll Covered Period.

These items include:

  • Banks statements or third-party payroll statements showing the amount of cash compensation paid to employees
  • Tax forms or third-party payroll reports such as Payroll tax filings on Form 941
  • State quarterly business and individual employee wage reporting and unemployment insurance tax filings
  • Statements showing any employer contributions to employee health insurance or retirement plans
  • For self-employed individuals, provide a Form 1040 Schedule C and invoices, bank statements, etc proving that you are self-employed.

3. Non-Payroll Documentation

You will need to gather any documentation for expenses that were incurred during the covered loan period.

You will also need to show any obligations or services that existed before February 15, 2020.

The following is a list of items to get you started:

  • Business mortgage interest statements which include lender amortization schedule and receipts verifying payments
  • Business rent or lease payments including a copy of current lease agreement and proof of rent or lease payments made
  • Business utility statements showing proof of payments made during loan period

4. Submit the forgiveness form and supporting documents to your PPP lender

Once the forgiveness form provided by your PPP lender has been completed and all of your supporting forgiveness eligible payroll and non-payroll expenses have been gathered, you will want to submit them to your PPP lender for review.

It is recommended that you contact your PPP lender with any questions or for guidance on any documents that you are unsure about.

You can also verify which non-payroll expenses are eligible outside of the list mentioned above, as that is not all-inclusive.

5. Follow up with your PPP Lender

Once submitted, the SBA will do a review of your loan, and this may take some time.

Your lender will notify you of the review and the SBA loan review decision.

If at any time you are not sure of your loan forgiveness status, you can contact your PPP lender to follow up.

When a decision is made, you have the right to appeal certain SBA loan review decisions.

Your PPP lender is responsible of notifying you of the forgiveness amount paid and any payments that will be due on your part.

They will let you know if your loan is forgiven in full, partially, or not at all and if applicable, when your loan payments will begin.

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  1. SBA.gov "Paycheck Protection Program" Page 1. April 19, 2021

  2. SBA.gov "First Draw PPP Loans" Page 1 . April 19, 2021

  3. SBA.gov "Second Draw PPP Loans" Page 1 . April 19, 2021

  4. SBA.gov "How and When to Apply" Page 1 . April 19, 2021

  5. Treasury.gov "Paycheck Protection Program Loan Forgiveness" Page 1. April 19, 2021