What is the paycheck protection program?

The Paycheck Protection Program, often referred to as the PPP is a loan program under the CARES Act that introduced assistance to small businesses to protect payroll for their employees during the coronavirus economic shutdown.

The program aims to provide small businesses with eight weeks worth of cash-flow assistance to use primarily for payroll and other specific business expenses. These PPP loans are backed by the SBA (Small Business Administration, and you can read more about these loans here.

The loans are backed by the Small Business Administration (SBA) You can read the bill in its entirety here.

Qualifications and Funding

All small businesses are eligible for PPP Funding and these loans are more extensive than the standard Economic Injury Disaster Loans (EIDL) available through the SBA during economic downturns.

With the PPP, eligible businesses include:

  • Sole Proprietorships
    To qualify for the PPP, sole proprietors will need to submit the Schedule C from their most recent tax return to show the net profit from the sole proprietorship.
  • Independent Contractors
    To qualify, independent contracts will need to submit both their Schedule C and Form 1099-MISC to show income earned.
  • Self Employed Individuals
    Self-employed individuals will need to submit copies of payroll tax filings they’ve reported to the IRS.

How can PPP Funds Be Used?

In order for the PPP Funds to be forgiven under the CARES Act, they must be used in a specific way, and you must be able to provide supporting documentation to your lender proving how the funds were used.

To qualify for loan forgiveness, at least 75% of the PPP funds must be used for payroll and employee benefits costs.  You are allowed to use up to 25% of the funds on mortgage interest payments, rent and lease payments, and utilities. 

You aren’t required to use any of the funds for anything other than payroll, but some businesses may find it beneficial to use a portion, up to 25%, on some of these additional expenses.

By following these guidelines, and providing proof of usage, you’ll be able to have the PPP loan forgiven, effectively turning the funds into a tax-free grant.

What Counts as Payroll Costs?

  • Salary, wages, commissions, & tips (capped at $100,000 on an annualized basis for each employee)
  • Employee benefits including costs for vacation, parental, family, medical, or sick leave allowance for separation or dismissal; payments required for the provisions of group health care benefits including insurance premiums; and payment of any retirement benefit
  • State and local taxes assessed on compensation
  • For a sole proprietor or independent contractor: wages, commissions, income, or net earnings from self-employment, capped at $100,000 on an annualized basis for each employee.

In other words, most payroll costs are covered. However, the following scenarios are not covered:

  • Payments made to independent contractors
    (Remember above, independent contractors are eligible to apply for their own PPP loan)
  • S corps and C corps owners who aren’t on payroll
    (shareholders distributions don’t count as payroll under this program)


Staffing requirements

There are some staffing requirements that must be met to qualify for full loan forgiveness. 

Here is the calculation you can use to determine if you’ve met this requirement:

First, determine the average number of full-time equivalent employees you had for:

The 8-week period following your initial loan disbursement, (A)

February 15, 2019 to June 30, 2019, (B1)

and January 1, 2020 to February 29, 2020. (B2)

Take A and divide that by B1. Do the same with B2. Take the largest number you obtain. If you’re a seasonal employer, you must divide by B1.

If you get a number equal to or larger than 1, you successfully maintained your headcount and meet this requirement.

If you get a number smaller than 1, you did not maintain your headcount and your forgivable expenses will be reduced proportionately.

There is a new exemption included on the rules for rehiring under the CARES Act.   That says, employees who were laid off or put on furlough may not wish to be rehired.  This is becoming more common as many employees are collecting increased amounts of unemployment. If the employee rejects your re-employment offer, you may be allowed to exclude this employee when calculating your loan forgiveness. To qualify for this exemption:

  • You must have made a written offer to rehire the employee in good faith
  • You must have offered to rehire for the employee for the same salary/wage and number of hours as before they were laid off
  • You must have written documentation of the employee’s rejection of the rehiring offer
  • IMPORTANT NOTE: Some employers are finding that former employees are declining rehiring with the expectation they will continue on unemployment.  However, former employees who reject offers for re-employment may no longer be eligible for continued unemployment benefits.

How To Apply for the PPP

The PPP is not being funded directly from the SBA as with typical EIDLs and other SBA loans.  Instead, the PPP is being funded through banks and other SBA Lenders.  

The first round of funding for the PPP ran out rather quickly, but a second round of funding was made available shortly after.  At the time of this writing, there are still some PPP Funds available for small businesses.  However, most business owners are finding a significant wait list for processing with big banks, and some larger banks, such as Wells Fargo, are no longer accepting PPP applications.

That said, it’s best to first contact the bank or banks you currently have relationships with to find out if they’re accepting PPP loan applications.  It will be important to know that your application will be processed with the SBA quickly, and not sit in a holding pattern with the bank you apply with.  If the bank you have a relationship with is unable to assist you in this matter, there are some other options available.  

Companies like Nav, Kabbage, and Divvy are working as brokers, connecting business owners to lenders who are able to process these applications. Additionally, companies like PayPal are also processing some of these loans.