Paycheck Protection Program

If your business is in immediate need of cash, the federal government has rolled out several different programs to assist businesses, one of which is the Paycheck Protection Program. The Paycheck Protection Program (“PPP”) is a federally guaranteed loan to businesses to pay their payroll and certain other operating expenses. PPP has received the most attention since the passage of the CARE Act, mainly because the loan can be forgiven.

What Type of Business is Eligible for the Paycheck Protection Program?

Businesses with less than 500 employees qualify for the loan. This includes sole proprietors, self-employed individuals, independent contractors, and non-profits. The only other borrower requirement is that the business certifies that it needs the loan due to current economic conditions and that the business will use the money to keep people employed or make mortgage payments, lease payments, or utility payments.

How Much Money Can a Business Get under the Paycheck Protection Program?

The maximum loan businesses can get is 2.5 times the average total monthly payments for payroll costs for a 1-year period prior to the loan being made or $10 million, whichever is less.

For most businesses, the maximum loan will be based on average monthly payroll costs. Payroll costs are very specifically defined in the statute. It not only means salary, wage, commission, and similar compensation, but also:

  • cash tips or equivalent,
  • payment for vacation, parental, family, medical, or sick leave,
  • allowance for dismissal or separation,
  • payment for group health care benefits, including insurance premiums,
  • retirement benefits,
  • state and local taxes assessed on employees’ compensation, and, very importantly,
  • income of a sole proprietor or independent contractor.

There is a special limitation if compensation for an employee or sole proprietor is more than $100,000.

Examples are helpful. Let’s run through one. Brad’s Bakery (no affiliation), paid a total of $120,000 in payroll costs over the last 12 months. No one was paid more than $100,000. On average, Brad’s Bakery paid $10,000 per month in payroll costs. The maximum loan Brad’s Bakery would be eligible for is $25,000 ($10,000 average times 2.5).

I’m Here for the Free Money. Can We Get to that Part?

Of course. First, there’s no fee to apply. It’s waived by statute. Second, unlike other loans available, you do not need to personally guarantee the loan. Third, your business doesn’t need to provide any collateral.

Fourth – and here’s really where the “free” part comes in — if you use the loan funds to pay certain business expenses, the loan is forgiven – and that loan forgiveness isn’t even taxable. Here’s how it works: The important time-frame is the 8 week period starting on the origination date of the loan. Once that time starts, the business can use the money for rent, utilities, payroll, and mortgage interest. If you prove and certify the business used the loan money for this purpose, the loan is forgiven. In the case of Brad’s Bakery, if it receives the $25,000 loan and uses $15,000 for payroll and $10,000 to cover 2 months’ rent, it wouldn’t have to pay any of the money back.

What’s the Catch?

The whole point of the Paycheck Protection Program is to…wait for it…protect paychecks. If the business lays people off or cuts wages, the amount forgiven will be reduced. So if Brad’s Bakery fires half its employees and uses the money only to pay for rent and utilities, the entire loan will not be forgiven. If you’ve already laid people off, there’s a window where you could rehire them. The issue is another federal statute increased unemployment payments by $600 per week – which could be more than some employees were making before. They may be reluctant to return to work.

Sounds Good, But What Are My Other Options?

In addition to the Paycheck Protect Act, there’s also the Employee Retention Tax Credit and the Economic Injury Disaster Loan. Each has its pros and cons, and there’s no one sized fits all.

If you want to find out of the Paycheck Protection Program is right for you, give us a call at 201-381-4472.