Paycheck Protection Program (PPP): Forgivable SBA Loans For 2.5x Monthly Payroll

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If you are a small business impacted by COVID-19, including self-employed and independent contractors, you have hopefully been following the developments of the Paycheck Protection Program (PPP) and the Economic Injury Disaster Loan Emergency Advance (EIDL) being rolled out by the Small Business Administration (SBA) and U.S. Treasury. Details are still being ironed out, but PPP could cover up to 2.5 months of your payroll costs. Here are some general highlights from the Treasury PPP overview PDF along with some details from the Bank of America PPP application:

Loan Amount = 2.5 times Average Monthly Payroll. “The Paycheck Protection Program provides small businesses with funds to pay up to 8 weeks of payroll costs including benefits. Funds can also be used to pay interest on mortgages, rent, and utilities.” In the Bank of America PPP application, two possible options given were to use 2019 payroll or 2019 1099-MISC totals, and then multiple the average monthly payroll by 2.5. So if you averaged $6,000 per month, you can ask for a loan for $15,000. Income over $100,000 annually per employee isn’t covered. Here are some details:

For purposes of calculating “Average Monthly Payroll”, most Applicants will use the average monthly payroll for 2019, excluding costs over $100,000 on an annualized basis for each employee. For seasonal businesses, the Applicant may elect to instead use average monthly payroll for the time period between February 15, 2019 and June 30, 2019, excluding costs over $100,000 on an annualized basis for each employee. For new businesses, average monthly payroll may be calculated using the time period from January 1, 2020 to February 29, 2020, excluding costs over $100,000 on an annualized basis for each employee.

Fully Forgiven. “Funds are provided in the form of loans that will be fully forgiven when used for payroll costs, interest on mortgages, rent, and utilities (due to likely high subscription, at least 75% of the forgiven amount must have been used for payroll). Loan payments will also be deferred for six months. No collateral or personal guarantees are required. Neither the government nor lenders will charge small businesses any fees.”

In my Bank of America, the details are given that it is a 2-year loan at fixed 1% interest. As noted, payments are deferred for the first 6 months. If you use the money in an eligible manner (see below), it is fully forgiven and not treated as taxable income.

Must Keep Employees on the Payroll—or Rehire Quickly. “Forgiveness is based on the employer maintaining or quickly rehiring employees and maintaining salary levels. Forgiveness will be reduced if full-time headcount declines, or if salaries and wages decrease.” In other words, this is supposed to encourage companies to keep employees and is separate from unemployment insurance.

All Small Businesses Eligible. “Small businesses with 500 or fewer employees—including nonprofits, veterans organizations, tribal concerns, self-employed individuals, sole proprietorships, and independent contractors— are eligible. Businesses with more than 500 employees are eligible in certain industries.”

Businesses are limited to one PPP loan. Each loan will be registered under a Taxpayer Identification Number at the Small Business Administration (SBA) to prevent multiple loans to the same entity. Owners with more than one business may apply for a separate loan for each entity.

Application Dates and Details. “Starting April 3, 2020, small businesses and sole proprietorships can apply. Starting April 10, 2020, independent contractors and self-employed individuals can apply. We encourage you to apply as quickly as you can because there is a funding cap. […] You can apply through any existing SBA 7(a) lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating.”

While technically you can apply at any SBA 7(a) lender, as of 4/5 many of them don’t even have any formal application process at all! Bank of America started accepting applications early, but first required both an existing BofA business checking relationship AND a BofA loan relationship as of 2/15/20. They later relaxed the rules to require at least an existing BofA business checking relationship as of 2/15/20. Most banks are limiting the applications to existing clients, but I’ve tried to list a few that don’t have such a restriction.

In addition, the US Treasury now has a paper application that you can submit to any eligible lender. I have no idea what will be the best. Small local bank? Mega bank? I would assume that if you have an existing relationship with a bank, they would be able to just deposit the money into your primary business account. But I’ve learned to stop making assumptions in 2020!

The funds are supposed to go out first come, first served, although they may expand the amount available. I’m sure that is not helping the chaos. No documentation was required upfront for BofA, but I would get your payroll documentation ready to submit as soon as they ask for it.

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  1. Wow!!

    So a self-employed person, say running a barber shop, will be able to get 8 weeks of their paycheck, plus rent & utilities fully covered under this SBA loan…and then it will all just be “forgiven”??
    And all Tax -Free!!

    Wow, so most folks laid off can’t pay their rent or mortgage but yet small business owners will be fully covered fir their salaries, rent, utilities, & benefits!!!

    So, I guess this also means that REIT market won’t take too bad of a hit nor does commercial Real Estate!

    Must be nice to be a millionaire!!

    • Well, that barber shop is probably closed right now and let’s say had 5 employees in 2019. It needs to keep all 5 employees at the same salary level through 6/30 at least, so yes the salaries will be covered but that means those 5 employees will keep their jobs and full paychecks during that time as well. The business owner can’t just pay themselves only.

      • CF Frost says

        I wonder what checks & balances are in place to keep someone from double-dipping state unemployment & getting paid by their employer somewhere down the line.

        Unemployment pay will require taxes to be paid on it.

        I wonder if PPP requires taxes to be paid??

  2. Tim Adler says

    I’ve heard of some online lenders that are willing to work with anyone.

    See for example

  3. If I file taxes as a sole proprietorship (the only employee is me with 1099-MISC income), can i borrow money (quantity based on net income from last year) from a bank and I don’t have to pay it back because the loan is forgiven? It seems too good to be true.

  4. Good summary. Do you know we a franchise of a big corporation considered as small business? i heard it it but want to confirm. Also can you provide summary on EIDL as well? Thanks as always!!

  5. Employees would prefer to be furloughed through July 31 if they made less than $30 an hour bc of the design of CARES. State unemployment pays $15 an hour and CARES $15 an hour to not work.

    For the PPP its headcount after loan versus a few months ago or last year (your choice) that determines forgiveness, doesnt have to be the same employees that you had as of a few months ago or last year. So if better for employees leave em furloughed and hire some people you can trust (children/relatives need a job?). At least thats how it seems to me.

  6. “Please note that business owners who apply for a Paycheck Protection Program Loan through Capital One must have a business banking relationship with us as of February 15, 2020. If you are not an existing Capital One customer, we encourage you to contact your primary bank for support with the Paycheck Protection Program.”

    This is the response I am getting from every bank. No one wants to deal with you if you were not already a customer on Feb 15. I applied for multiple banks to become a business customer last week and they are not accepting new customers to deal with the rush of PPP loans. It’s a Catch-22 and small business owners are getting caught in the middle. Hopefully some banks start opening up their loan process soon to non-customers.

  7. My company applied on Friday (first day of applications) and by Monday, we were notified that we were approved.

  8. For a 1099 self employed individual who doesn’t have a payroll, do you know how you would document to qualify for loan forgiveness? I hear conflicting views about opening up second bank accounts to track things better. I have yet to be approved, but I figured I should think ahead!

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