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What is the Paycheck Protection Program and What Do Businesses Need to Know About Loan Forgiveness?

The CARES Act's Paycheck Protection Program made loans available to small businesses to encourage them to retain or rehire employees that have been furloughed. The loans will be forgiven if certain requirements are met.

New: Under the Consolidated Appropriations Act, 2021, that was signed in to law Dec. 27, 2020, some provisions of the Paycheck Protection Program (PPP) have been revised, including the ability for businesses to apply for a new PPP loan or even a second-draw PPP loan. A new article has details about the law, and the article below will be updated when new guidance is available.

While small businesses responded to the disruption caused by the COVID-19 pandemic since March of 2020 — temporarily closing operations, reducing staff, and then attempting to reopen under myriad guidelines and requirements from legislation intended to mitigate the spread of the virus — the federal government provided opportunities to apply for financial relief.

Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, businesses could apply for loans through the Small Business Administration’s Paycheck Protection Program (PPP) — and have portions of the loan proceeds used toward eligible costs forgiven in full.

The PPP loan application closed Aug. 8, 2020, and many lenders are now processing PPP loan forgiveness applications.

Helpful Tips About Applying for PPP Loan Forgiveness

You’re not alone in this: more than five million loans have been issued under PPP. Businesses have been able to apply for forgiveness since August, but only recently has the SBA begun approving them. Check with your lender to see whether they have started accepting PPP loan applications.

It is important that you apply for forgiveness of the loan with the same lender that issued the loan.

Businesses will submit their loan forgiveness application to their lender. Applications can be submitted even before the end of the borrowers covered period, but each lender might have different requirements as to when they will accept an application. To avoid having to start repayment of any unforgiven portion of a PPP loan, borrowers must apply for forgiveness within 10 months of the end of the covered period (based on loan disbursement date).

Loan Forgiveness Applications

Depending on your circumstances, you can use one of three loan forgiveness application forms issued by the U.S. Treasury Department and the SBA.

The circumstances that dictate which form to use are:

  • Type of business
  • Loan amount
  • Reduction in staffing, salary or wages

There is a full form, an EZ form, and now a form for loans of $50,000 or less — Form 3508S. The EZ Form can be used by self-employed individuals with no employees or by those who kept employee count and salaries and wages at certain levels. Those who use the full or EZ forms must calculate forgiveness amount. The 3508S is intended to make the process less administratively and financially burdensome for eligible applicants, including not reducing the forgiveness amount if the business decreased staff or salaries and wages. All the forms require businesses to make certifications and submit and retain documentation.

Go to our Loan Forgiveness Center to use the Loan Forgiveness Estimator. Also, check out our robust section of frequently asked questions about loan forgiveness.

Loan Necessity Questionnaires

The SBA began sending questionnaires to lenders the week of Oct. 26, 2020, to have them distributed to any borrowers (and their affiliates) who received a PPP loan with an original principal amount of $2 million or more. The intent of the questionnaire is to collect additional information that SBA loan reviewers will use to evaluate the good-faith certification borrowers stated on their PPP loan application about the economic uncertainty that made the loan request a necessity.

There are two forms — SBA Form 3509 will be sent to For-Profit borrowers and SBA Form 3510 is for Non-Profit borrowers.

Borrowers have 10 business days from the time they receive the questionnaire to complete the form and submit it to the lender servicing the loan in addition to any required supporting documents. The SBA may still request additional information after all material is submitted.

If a borrower fails to complete the form and provide the required supporting documents by the deadline, the SBA could determine any of the following:

  • The borrower was ineligible for the PPP loan
  • The borrower was ineligible for the PPP loan amount
  • The borrower was ineligible for any forgiveness amount claimed

The SBA could then seek repayment of the loan or pursue other available remedies.

Borrowers should contact their lender with ant questions and Paychex clients who took PPP loans of $2 million or more should continue working with the lender servicing the loan.

Note: This is the eighth update to this article, including on Oct. 9 to reflect the SBA release of Form 3508S, on Aug. 9 to address a procedural notice around forgiveness applications, as well as July 24, June 23, and June 17 to include information on the Interim Final Rule, and originally on June 5 to include details of the PPP Flexibility Act of 2020.

Original article with updates is below

What is the Paycheck Protection Program?

The Coronavirus Aid, Relief, and Economic Security (CARES) Act added PPP loans to provide economic relief to small businesses nationwide adversely impacted by the COVID-19. The PPP is administered by the Small Business Administration (SBA) with support from the Department of the Treasury.

Designed to provide quick access to loans from the SBA for companies with 500 or fewer employees, the PPP's intention was to help with payroll and operating costs during short-term business disruption caused by the COVID-19 pandemic. The PPP loan application period, which had been extended from July to August, closed Aug. 8. However, other funding options are available.

The PPP provided significant financial incentives for small businesses to hold on to current employees and bring back workers who had been laid off or furloughed, even before their business was fully back up to speed.

How does the Paycheck Protection Program work?

Generally, businesses with 500 or fewer employees were eligible for up to $10 million in loans, which can be used for covered payroll and other expenses, such as insurance premiums, mortgage interest, rent, or utilities.

The borrower can use the loan to pay any eligible expenses incurred during their covered period.

To receive the loan, a financial institution must confirm that the borrower was in operation as of Feb. 15, 2020, had employees, and determine the maximum amount of the loan.

Under the CARES Act, the original covered period was eight weeks. The PPP Flexibility Act significantly increased the covered period to 24 weeks but continued to give borrowers whose loan was before June 5, 2020 (the effective date of the PPP Flexibility Act) the option of selecting the original eight-week period. Check out our FAQs for more details on the covered period and alternative covered period.

What kind of expenses does the loan cover?

The loan covers the following payroll and non-payroll costs:

Payroll costs include:

    • Cash compensation including employee salaries, commissions, or similar compensation. Bonus and hazard pay also are included. For each employee, the total cash compensation eligible for forgiveness may not exceed $100,000, annualized for the covered period for each employee (for 24 weeks, this would be a maximum of $46,154 per individual, or for eight weeks, a maximum of $15,385 per individual.
    • Employer paid benefits such as employer paid group health costs, including insurance premiums and employer paid retirement contributions. Employer paid benefits include cost related to continuation of group health care benefits for furloughed employees and employees during periods of paid sick, medical or family leave
    • 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. Any qualified sick leave equivalent amount for which a credit is claimed under section 7002 of the Families First Coronavirus Response Act (FFCRA) is excluded.

Non-payroll costs include:

  • Payments of interest on any mortgage obligation incurred before Feb. 15, 2020 (not including mortgage principal or interest pre-payments)
  • Payment of rent under a lease in force prior to Feb. 15, 2020
  • Utilities payments for which service began before Feb. 15, 2020 (electricity, gas, water, transportation, telephone, and internet access)
  • Interest payments on any other debt obligations that were incurred before the covered period

Non-payroll costs must be paid or incurred during the Covered Period (either 24 or eight weeks if elected by an eligible borrower) even if the borrower elects the Alternative Covered Period for payroll costs.

The loan does not cover:

  • Compensation of an individual employee in excess of an annual salary of $100,000, as prorated during the covered period (for 24 weeks, a maximum of $46,154 per individual, or for eight weeks, a maximum of $15,385 per individual).
  • Any compensation of an employee whose principal place of residence is outside the U.S.
  • Qualified family leave or sick leave wages under the Families First Coronavirus Response Act.

Am I eligible for a loan under the Paycheck Protection Program?

Small businesses with 500 or fewer employees were eligible. Businesses with more than 500 employees are eligible in certain industries.

Specifically, you may be 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
  • An individual who operates as a sole proprietor
  • An individual who operates as an independent contractor
  • An individual who is self-employed and regularly carries 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

Some special rules may also make you eligible if you are:

  • In the accommodation and food services sector (NAICS 72). The 500-employee rule is applied on a per physical location basis.*
  • Operating as a franchise or receive financial assistance from an approved Small Business Investment Company, the normal affiliation rules do not apply.

* The 500-employee threshold includes all full-time employees, part-time employees, and employees of any other status (i.e. employees currently on leave, temporary employees, day laborers supplied by a temp agency).

Is other funding still available?

Yes. Paychex has established partnerships with lenders capable of fulfilling a variety of funding options to suit your business needs. You should also consult with your local lender as to whether it is participating. All loans will have the same terms regardless of the lender or borrower. A list of participating lenders, as well as additional information and full terms, can be found at www.sba.gov.

How much can I borrow

Loans can be up to 2.5 times the borrower's average monthly payroll costs, not to exceed $10 million.

What will lenders be looking for in my loan application?

Lenders will be looking for whether the applicant was in operation on Feb. 15, 2020, and had employees for whom they paid salaries and payroll taxes.

Lenders will also ask applicants for a good-faith certification that:

  • The uncertainty of current economic conditions makes the loan request necessary to support ongoing operations
  • The borrower will use the loan proceeds to retain workers and maintain payroll or make mortgage, lease, and utility payments
  • The borrower does not have ab application pending for a loan duplicative of the purpose and amounts applied for here
  • The borrower has not received a loan duplicative of the purpose and amounts applied for from Feb. 15, 2020 to Dec. 31, 2020

Will my loan be forgiven?

Recipients of a loan made under the Paycheck Protection Program may be eligible for loan forgiveness in an amount equal to the sum of the following costs incurred, and payments made, during your covered period:

  • Payroll costs (including employee benefits)
  • Interest payments on any covered mortgage obligation incurred before Feb. 15, 2020
  • Payment of rent under a lease in force prior to Feb. 15, 2020
  • Utility payments for which service began before Feb. 15, 2020

You must submit the PPP Loan Forgiveness Application to the lender that is servicing your loan. Payments of loan principal, interest, and fees may be deferred until the date on which the loan forgiveness amount is remitted to your lender. Loans made after June 5, 2020 will have a loan term of five years. Loans made before June 5, 2020 have maximum terms of two years, however the borrower may renegotiate the maturity terms of loan to five years with their lender.

To maximize loan forgiveness, at least 60% of the loan proceeds must be used for payroll.

Limits:

  • Forgiveness amount cannot exceed the principal amount of the loan.
  • Forgiveness amount is subject to reductions based on (1) reduction in the number of FTEs; and/or (2) reduction in the amount of salary or wages, with an important exception for rehires.

What are the loan terms?

Terms of the loan are as follows:

  • No personal guarantee or collateral is required.
  • Loans are 100% guaranteed by the government.
  • No “credit elsewhere” tests (normally required for SBA loans).
  • No borrower fees or prepayment penalties.
  • Loans are non-recourse against owners/shareholders so long as used for authorized purposes.
  • The PPP Flexibility Act established a loan maturity period of five years following an application for loan forgiveness, instead of the current two-year deadline set by the SBA. The five-year loan maturity period applies only to PPP loans made on or after June 5, 2020 (the effective date of the PPP Flexibility Act), although borrowers and lenders could agree to extend current loans.
  • Payments of loan principal, interest, and fees may be deferred until the date on which the forgiveness amount is remitted to your lender.
  • The interest rate on your loan is 1% which will begin when you receive your loan.
  • If an eligible recipient fails to apply for forgiveness of a covered loan within 10 months after the last day of the covered period the recipient shall make payments on the principal, interest and fees on the loan beginning on the day that is not earlier than the date that is 10 months after the date of such covered period.
  • Loan maximum is calculated as follows:

[Average total monthly payments for payroll costs incurred during the 1-year period before the date on which the loan is made] X 2.5*

* Not to exceed $10 million; special rules for seasonal businesses and new businesses.

Note that the Small Business Administration (SBA) issued a procedural notice indicating they will begin accepting Paycheck Protection Program (PPP) loan forgiveness applications from lenders on Aug. 10. This date is subject to extension if any new legislative amendments to the forgiveness process necessitate changes to the SBA’s system. Borrowers may submit their PPP loan forgiveness applications to lenders before the end of their eight- or 24- week covered period, provided the borrower has used the loan proceeds for which the borrower is requesting forgiveness and the borrower’s loan forgiveness application accounts for any salary reductions in excess of 25 percent for their full covered period.

Reduction Exemptions for Those Who Borrowed $50,000 or Less

On October 8, 2020, the SBA released a revised and simplified PPP Loan Forgiveness Application Form 3508S, including detailed instructions on how to complete the application. In parallel, the SBA and Treasury issued an Interim Final Rule on Additional Revisions to Loan Forgiveness and Loan Review Procedures Interim Final Rules.

Any borrower of a PPP loan of $50,000 or less, other than any borrower that together with its affiliates received loans totaling $2 million or greater, may use SBA Form 3508S (or lender’s equivalent form) to apply for loan forgiveness.

A borrower that uses SBA Form 3508S (or lender’s equivalent form) is exempt from any reductions in the borrower’s loan forgiveness amount based on reductions in full-time equivalent (FTE) employees or reductions in employee salary or wages that would otherwise apply.

When a borrower submits SBA Form 3508S or lender’s equivalent form, the lender shall (1) confirm receipt of the borrower certifications contained in the SBA Form 3508S or lender’s equivalent form, and (2) confirm receipt of the documentation the borrower must submit to aid in verifying payroll and nonpayroll costs, as specified in the instructions to the SBA Form 3508S or lender’s equivalent form.

Providing an accurate calculation of the loan forgiveness amount is the responsibility of the borrower, and the borrower attests to the accuracy of its reported information and calculations on the Loan Forgiveness Application. The borrower will not receive forgiveness without submitting all required documentation to the lender.

Self-Employed and the PPP FAQs

On April 14, 2020, the SBA released an Interim Final Rule providing guidance for individuals with self-employment income who file Form 1040, Schedule C. Below are answers to frequently asked questions regarding the PPP eligibility for the self-employed, freelancers, independent contractors and sole proprietors.

The application process for a PPP loan closed on Aug. 8, 2020, but for those who applied and were given a loan number on Aug. 8 or before that date can use the following information about the loan and use of funds.

I have income from self-employment and file a Form 1040, Schedule C. Am I eligible for a PPP Loan?

You were eligible for a PPP loan if you met the following criteria:

  • You were in operation Feb. 15, 2020;
  • You are an individual with self-employment income (Self-employment may include freelancers, gig workers, independent contractors, or a sole proprietor);
  • Your principal place of residence is in the United States
  • You filed or will file a Form 1040 Schedule C for 2019

If your business is a partnership or you are a sole proprietor, then that business is eligible for only one loan under the PPP, not two separate ones. Instead, the self-employment income of general active partners may be reported as a payroll cost, up to $100,000 annualized, on a PPP loan application filed by or on behalf of the partnership.

What if my business was not in operation in 2019?

As of April 2020, the SBA says it will issue additional guidance for those individuals with self-employment income who were not in operation in 2019 but in operation Feb. 15, 2020, and will file a Form 1040 Schedule C for 2020.

Are there any other restrictions on how I can use PPP loan proceeds?

Yes. At least 60% of the PPP loan amount should be used for payroll costs. For purposes of determining the percentage of use of proceeds for payroll costs (but not for forgiveness purposes), the amount of any refinanced Economic Injury Disaster Loan will be included.

What amounts shall be eligible for forgiveness?

According to the SBA, the full principal amount of the loan and any accrued interest can be forgiven for funds used to pay for covered payroll costs during the covered period. The SBA has determined that for 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 weeks) of 2019 net profit (up to $15,385) for an eight-week covered period of 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. Any qualified sick leave equivalent amount for which a credit is claimed under Section 7002 of the Families First Coronavirus Response Act (FFCRA) is excluded.

For example, if you reported making $52,000 to the IRS in 2019, you would be forgiven for $8,000 of self-employment income as long as that income represented at least 60% of your total loan. The other 40% can be forgiven if it's spent on eligible costs and expenses.

More resources

COVID-19 Support Center

Does My Business Qualify for a Paycheck Protection Loan? prepared by Jackson Lewis

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* This content is for educational purposes only, is not intended to provide specific legal advice, and should not be used as a substitute for the legal advice of a qualified attorney or other professional. The information may not reflect the most current legal developments, may be changed without notice and is not guaranteed to be complete, correct, or up-to-date.

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