The Coronavirus Aid, Relief, and Economic Security (CARES) Act introduced the Paycheck Protection Program (PPP) to provide crucial financial assistance to small businesses grappling with the economic fallout of the COVID-19 pandemic. Understanding how to navigate the application process for the CARES Act Paycheck Protection Program is essential for small business owners seeking to secure these vital funds. This guide breaks down the steps, eligibility requirements, and key information you need to know to apply effectively for this program.
Understanding the Paycheck Protection Program (PPP)
The Paycheck Protection Program, a key component of the CARES Act, was designed to offer direct incentives for small businesses to keep their workers on the payroll. Through the U.S. Small Business Administration (SBA), the PPP provided forgivable loans to eligible businesses to help cover payroll costs, rent, utilities, and other essential operational expenses. The program aimed to mitigate the economic disruption caused by the COVID-19 emergency by enabling businesses to maintain their workforce during periods of mandated shutdowns and reduced economic activity.
Eligibility: Is Your Business Qualified for the PPP?
Determining your eligibility is the first crucial step in understanding how to apply for the CARES Act Paycheck Protection Program. The PPP had specific criteria that businesses needed to meet to qualify for a loan. Generally, you were eligible if your business met the following conditions:
Business Size and Type
- Small Business Concern: You must be a small business concern as defined by section 3 of the Small Business Act, generally meaning 500 or fewer employees, or meeting the SBA’s size standards for your specific industry. This includes adherence to SBA’s affiliation rules, unless specifically waived under the CARES Act.
- Industry-Specific Size Standards: Businesses operating in certain industries could be eligible if they met the applicable SBA employee-based size standards for that industry, even if they had more than 500 employees.
- Other Eligible Entities: Eligibility was extended beyond traditional small businesses to include:
- Tax-exempt nonprofit organizations described in section 501(c)(3) of the Internal Revenue Code (IRC).
- Tax-exempt veterans organizations described in section 501(c)(19) of the IRC.
- Tribal business concerns described in section 31(b)(2)(C) of the Small Business Act.
- Sole proprietorships, independent contractors, and self-employed individuals.
Operational and Payroll Requirements
- In Operation by February 15, 2020: Your business must have been in operation on or before February 15, 2020.
- Payroll or Independent Contractors: You must have either had employees for whom you paid salaries and payroll taxes or paid independent contractors, as reported on Form 1099-MISC. Sole proprietors, independent contractors, and self-employed individuals also needed to be in operation on February 15, 2020.
Ineligibility Factors
Even if you met the general eligibility requirements, certain factors could make you ineligible for a PPP loan:
- Illegal Activities: Businesses engaged in any activity illegal under federal, state, or local law were ineligible.
- Household Employers: Individuals employing household employees like nannies or housekeepers were not considered businesses under this program and were ineligible.
- Criminal History of Owners: Businesses were ineligible if an owner of 20 percent or more equity was incarcerated, on probation, on parole, currently facing criminal charges, or had been convicted of a felony within the last five years.
- Prior Defaults on Federal Loans: If you or any business owned or controlled by you had a currently delinquent or defaulted SBA or other federal agency loan within the last seven years that caused a loss to the government, you were ineligible.
Calculating Your Maximum PPP Loan Amount
Understanding how to calculate the maximum loan amount is crucial when considering how to apply for the CARES Act Paycheck Protection Program. The PPP loan amount was capped at $10 million and was based on a payroll-based formula. Here’s a step-by-step guide to calculating your maximum loan amount using the most common methodology:
- Aggregate Payroll Costs: Sum up your payroll costs from the last twelve months for employees whose primary residence is in the United States.
- Subtract Excess Compensation: For each employee, subtract any compensation exceeding an annual salary of $100,000. Similarly, subtract any payments to independent contractors or sole proprietors exceeding $100,000 per year.
- Calculate Average Monthly Payroll: Divide the amount from Step 2 by 12 to get your average monthly payroll costs.
- Multiply by 2.5: Multiply your average monthly payroll costs from Step 3 by 2.5. This forms the base loan amount.
- Add Outstanding EIDL (if applicable): If you received an Economic Injury Disaster Loan (EIDL) between January 31, 2020, and April 3, 2020, add the outstanding amount of that EIDL loan to the amount from Step 4. However, subtract any “advance” amount you received under an EIDL COVID-19 loan, as these advances did not need to be repaid.
Examples of Loan Amount Calculation
To illustrate this calculation, consider these examples:
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Example 1: No employee exceeds $100,000 salary
- Annual Payroll: $120,000
- Average Monthly Payroll: $10,000 ($120,000 / 12)
- Multiply by 2.5: $25,000 ($10,000 x 2.5)
- Maximum Loan Amount: $25,000
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Example 2: Some employees exceed $100,000 salary
- Annual Payroll: $1,500,000
- Subtract Excess Compensation (above $100,000): $1,200,000 (Assuming $300,000 is for amounts exceeding $100,000 per employee)
- Average Monthly Qualifying Payroll: $100,000 ($1,200,000 / 12)
- Multiply by 2.5: $250,000 ($100,000 x 2.5)
- Maximum Loan Amount: $250,000
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Example 3: No employee exceeds $100,000 salary, with outstanding EIDL loan
- Annual Payroll: $120,000
- Average Monthly Payroll: $10,000
- Multiply by 2.5: $25,000
- Add EIDL Loan: $10,000 (Outstanding EIDL amount)
- Maximum Loan Amount: $35,000
Defining Payroll Costs
Payroll costs are a critical component in calculating your PPP loan amount. Eligible payroll costs included:
- Compensation to Employees: Salary, wages, commissions, or similar compensation.
- Cash Tips: Cash tips or the equivalent.
- Paid Leave: Payment for vacation, parental, family, medical, or sick leave.
- Separation or Dismissal Allowance: Allowance for separation or dismissal.
- Employee Benefits: Payments for group health care coverage (including insurance premiums) and retirement benefits.
- State and Local Taxes: Payment of state and local taxes assessed on employee compensation.
- Self-Employment Income: For independent contractors or sole proprietors, wages, commissions, income, or net earnings from self-employment.
Exclusions from Payroll Costs
Certain items were expressly excluded from the definition of payroll costs:
- Compensation to Non-US Residents: Compensation to employees whose primary residence is outside the United States.
- Excess Compensation: Compensation of any employee exceeding $100,000 in annualized salary (prorated as necessary).
- Federal Employment Taxes: Federal employment taxes imposed or withheld between February 15, 2020, and June 30, 2020, including FICA and Railroad Retirement Act taxes, and withheld income taxes.
- Qualified Sick and Family Leave Wages: Qualified sick and family leave wages for which a credit was allowed under the Families First Coronavirus Response Act.
It’s important to accurately calculate these costs to determine the correct loan amount you are eligible to apply for under the CARES Act Paycheck Protection Program.
How to Apply for a PPP Loan: Step-by-Step Guide
Now that you understand eligibility and loan amount calculation, let’s delve into the process of how to apply for the CARES Act Paycheck Protection Program. The application process involved several key steps:
- Find an Eligible Lender: PPP loans were issued by banks, credit unions, and other financial institutions authorized by the SBA. Start by contacting your existing bank or credit union, as they may have been participating PPP lenders. You could also search the SBA website for a list of approved lenders if your primary bank was not participating.
- Prepare Necessary Documents: Gather all required documentation to demonstrate your eligibility and payroll costs. This typically included:
- PPP Loan Application Form (SBA Form 2483): This form was essential and needed to be completed accurately.
- Payroll Documentation: This could include payroll processor records, payroll tax filings (IRS Form 941s, state income tax withholding forms), and Form 1099-MISC for independent contractors.
- Documentation for Loan Amount Calculation: Documents to substantiate your payroll costs for the last 12 months or other relevant period used for calculation.
- Other Supporting Documents: For businesses without standard payroll documentation, alternative documents like bank records demonstrating sufficient payroll amount were acceptable.
- Complete the Application Form (SBA Form 2483): Fill out SBA Form 2483 accurately and completely. This form required business information, ownership details, NAICS code, employee count, average monthly payroll, requested loan amount, and certifications.
- Submit Your Application and Documentation: Submit the completed application form and all supporting documents to your chosen PPP lender. Follow the lender’s specific instructions for submission, which may have been online or in person.
- Lender Review and SBA Approval: The lender would review your application and documentation to verify eligibility and loan amount. They then submitted SBA Form 2484 (Paycheck Protection Program Lender’s Application for 7(a) Loan Guaranty) to the SBA electronically to request a loan guarantee.
- Loan Disbursement: Once the SBA approved the loan guarantee, the lender disbursed the loan funds to your business.
Key Considerations During Application
- Certifications: The application required several critical certifications. You had to certify in good faith that:
- The business was operational on February 15, 2020, and had employees or paid independent contractors.
- Current economic uncertainty made the loan request necessary to support ongoing operations.
- Funds would be used to retain workers and maintain payroll, or for eligible mortgage interest, rent, and utility payments.
- You would provide documentation for payroll costs, mortgage interest, rent, and utilities for the 8-week period post-loan disbursement for forgiveness.
- Loan forgiveness would be for documented payroll costs, mortgage interest, rent, and utilities (with at least 75% for payroll costs).
- You had not and would not receive another PPP loan during the period from February 15, 2020, to December 31, 2020.
- All information provided in the application and supporting documents was true and accurate.
- “First-Come, First-Served” Basis: PPP loans were processed on a first-come, first-served basis, so timely application was essential.
- One PPP Loan per Borrower: Eligible borrowers could only receive one PPP loan.
Loan Forgiveness: Turning Your PPP Loan into a Grant
A significant feature of the PPP was the potential for loan forgiveness. Understanding loan forgiveness is vital in understanding the full benefits of how to apply for the CARES Act Paycheck Protection Program. Borrowers could be eligible for forgiveness of up to the full principal amount of the loan and any accrued interest.
Forgivable Expenses
The amount of loan forgiveness was tied to how the loan proceeds were spent during the eight-week period following the loan disbursement. Forgivable expenses included:
- Payroll Costs: As defined earlier, these were the primary focus and needed to constitute at least 75% of the forgiven amount.
- Mortgage Interest Payments: Payments of interest on mortgage obligations incurred before February 15, 2020 (not principal or prepayments).
- Rent Payments: Rent payments on leases dated before February 15, 2020.
- Utility Payments: Utility payments under service agreements dated before February 15, 2020.
It was critical to note that at least 75% of the loan forgiveness amount had to be attributable to payroll costs. This requirement was in place to ensure the program primarily supported employee retention and payroll continuity.
Reductions in Loan Forgiveness
The loan forgiveness amount could be reduced if:
- Reduction in Full-Time Equivalent (FTE) Employees: If the borrower reduced their FTE employee count during the covered period compared to a reference period (either February 15, 2019, to June 30, 2019, or January 1, 2020, to February 29, 2020; borrower’s choice). There were exceptions for rehiring employees or demonstrating an inability to rehire or find qualified employees.
- Reduction in Salary or Wages: If salary or wages were reduced by more than 25% for any employee earning less than $100,000 annually during the covered period, compared to the most recent full quarter before the covered period. Similar to FTE reductions, there were provisions to restore salary/wage levels to avoid forgiveness reduction.
Applying for Loan Forgiveness
To apply for loan forgiveness, borrowers needed to:
- Complete the Loan Forgiveness Application: Borrowers needed to obtain and complete the SBA Loan Forgiveness Application (SBA Form 3508 or lender equivalent).
- Gather Documentation: Provide documentation verifying payroll costs and eligible non-payroll costs (mortgage interest, rent, utilities) during the covered period. This included bank statements, tax forms, payment receipts, etc.
- Submit Application to Lender: Submit the forgiveness application and supporting documentation to the lender that issued the PPP loan.
- Lender Review and SBA Decision: The lender reviewed the forgiveness application and documentation. They made a decision on forgiveness and requested payment from the SBA. The SBA then made the final determination on loan forgiveness.
Loan Terms: Interest Rate, Maturity, and Deferment
Understanding the loan terms is another essential aspect when learning how to apply for the CARES Act Paycheck Protection Program. PPP loans had favorable terms designed to ease the burden on small businesses:
- Interest Rate: The interest rate was set at 1%, a very low rate intended to provide affordable capital during the economic crisis.
- Maturity: The loan maturity was initially set at two years. Later legislation extended the maturity for loans made after a certain date to five years.
- Deferment: Payments of principal and interest were deferred for six months from the date of loan disbursement. Interest, however, accrued during this deferment period.
No Collateral or Personal Guarantees
PPP loans were designed to be as accessible as possible for small businesses. Therefore, no collateral was required, and personal guarantees were waived, further reducing the risk and burden for borrowers.
Conclusion: Leveraging the PPP for Your Business
The CARES Act Paycheck Protection Program provided a critical lifeline for small businesses during an unprecedented economic crisis. Understanding how to apply for the CARES Act Paycheck Protection Program, from eligibility and loan calculation to application procedures and forgiveness rules, was crucial for businesses seeking to access these vital funds. By carefully preparing your application and adhering to program guidelines, you could effectively leverage the PPP to support your payroll, cover essential operating costs, and navigate the challenges posed by the COVID-19 pandemic. While the initial application period has closed, the information remains valuable for understanding potential future programs and the types of support available to small businesses in times of crisis.
