Paycheck Protection Program Loan Explained

Chris Wittich

Paycheck Protection Program (PPP) Loans, non-recourse

The Coronavirus Aid, Relief, and Economic Security (CARES) Act allocated $350 billion to help small businesses keep workers employed amid the pandemic and economic downturn.

Who’s eligible-

Business and non-profits with fewer than 500 employees, self-employed, certain tribal businesses.

Special provisions for food service companies and certain franchise businesses.

Borrower must certify

  • In operations as of February 15, 2020 and had employee wages and related payroll taxes
  • Current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.
  • Funds will be used to retain workers, pay rent, utilities, mortgage and certain other expenses.
  • Not another application pending for under this loan program nor funding under this program.
  • Other routine items are part of the application.

Loan Maximum (Capped at $10 million)

  • Borrow up to 2.5x average monthly payroll costs (wages, salaries, commissions) including group health benefits and retirement and state unemployment tax paid by employer (payments to independent contractors are not included) from the 2019 year or the prior 12-month period (SBA application has 2019 calendar year) and wages over 100k per person are excluded.
  • Plus – the outstanding balance of SBA Disaster Loan Program after January 31, 2020.
  • Special seasonal business computations and businesses that didn’t exist last year. If the business didn’t exist last year, take 2.5 average monthly payroll costs from January 1, 2020 to February 29, 2020.
  • Once the loan is approved the lender has a maximum of 10 days to fund the loan
  • We have a PPP loan calculator on our COVID 19 page, please use this template to navigate both the loan calculation and potential loan forgiveness provisions.

Key provisions –

  • Intended to cover payroll costs, rent, utilities, interest on mortgages (up to 8 weeks are forgivable)
  • 100% Federally backed loans through SBA or other designated lenders
  • For the period from February 15. 2020 to June 30, 2020 (covered period)
  • Forgivable debt is based on the amount of eligible payroll costs (as defined above), rent, utilities, mortgage interest – the company has for the 8 -week period from the date of loan origination. A 25% cap for the non payroll costs when looking at the forgiveness. Eligible for forgiveness if borrowers maintain payroll and full-time equivalents or restores them by June 30, 2020 (restoration by 6/30 to headcount levels that existed at 2/14/20)
  • Loans not forgiven are deferred for 6 months (interest does accrue) and then amortized over 2 years at 1% interest
  • No guarantee or collateral can be obtained by lending institution
  • No prepayment penalty, no income tax on debt forgiveness


  • These loans are very generous with very little downside – any business that has been impacted by disruptions in their business that meet the eligibility requirements, should call their bank and get the ball rolling on this.
  • Businesses that were looking at layoffs, furloughs, cuts, reduced hours – this loan is big and will keep your key people in place for two months or more and buy more time for ownership, your team, the economy and all stakeholders.
  • This sends a great message to your company, employees – we’re looking at everything to keep the team and business together!
  • Important timing – non-critical businesses are on lockdown until at least April 10, really April 13, the following Monday – strategy – consider furlough now for 2-3 or more weeks while business is shut down, apply for PPP loan asap and coordinate PPP origination with bringing back employees to maximize debt forgiveness
  • 8- week covered period – you want to have full team back to maximize debt forgiveness.
  • Banks will be slammed in the next three months and will likely have more applications than they can fulfill, there is also risk that $350 billion will go very quickly, so they will need to prioritize clients and applications. Get organized and complete PPP application that is available now and assemble supporting documents to deliver a complete package to the bank.  If you need help, let our team know. Another $250 billion has been agreed to by key members of congress, so we don’t expect them to let the money run out.
  • Apply for both this and EIDL (SBA disaster loan) is what recommend, especially if you have long-term debt needs. Smaller organizations should be also applying for the EIDL Emergency grant – which you can accept with a PPP loan.
  • Layoff or furlough and bring back staff by June 30 can be a good strategy for non-critical businesses or businesses shut down the 1st Governors order – Restaurant, breweries, health clubs, etc. Restore by 6/30 the employment levels that existed at 2/14/20.  PPP loans can provide working capital and forgiveness of rent, utilities, mortgage interest type expenses and payroll to the extent incurred during the 8-week period after origination.
  • You won’t qualify for employee retention credit ($5,000 max per employee) or the payroll tax deferral program with this or EIDL loan.
  • If you have two or more separate businesses and that apply for PPP loan, you will likely have one loan as and co-borrowers. Guidance has made it clear that you can only have one PPP loan so the maximum should be applied for with the combined businesses.
  • Interpretation considerations on payroll costs and for what period:

A) independent contractor and self-employed – it is clear now that independent contractor payments will not be included in the definition of payroll costs for a business. This is because the independent contractors will be able to apply for PPP loans in their respective businesses. Self-employed people can use up to 100k of their income, plus employee payroll costs to determine their funding in their business.

B) It is now clear that the gross wages should be used, and no adjustments for Federal withholding, FICA and Medicare taxes withheld from employee wages will adjust the gross payroll numbers. State unemployment costs are added to compensation costs (workforce enhancement fee is not included in addback in MN). State taxes paid by employer based on compensation is not an adjustment.

C) Loan amount is based on 2.5 x average monthly payroll costs as we know. SBA has interpreted that monthly payroll costs will be based on 1-1-19 to 12-31-19 in their application, form 2483 reflects this. SBA guidance clarified that 2019 calendar year is ok or the prior 12 months, your choice.  We’re recommending, make it simple and use calendar year 2019 payroll information for your application regardless of your specific year end date.

D) Again, please use our calculator on our website “PPP 7a-loan calculator”, these computations, are not simple.

  • Certifications in PPP application – Applicants with one owner should physically initial (not typed in) the SBA from 2483 form on electronic submissions, businesses with multiple owners are ok to electronically initial per the SBA guidance on 4-2-20.

If you’re business is doing very well despite the current economic situation you’ll have to assess if you can certify, in good faith to the following – “Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant” .  We’ve had few clients struggle with this, but most truly uncertain of what will happen next and as a result are still applying.  This is a judgment call that each business will need to make, no judgment from us either way.

  • Set up a separate bank account for loan proceeds and track very close expenditures and that they meet the criteria of PPP program.
  • Some complexity in forgiveness computation – forgiveness reduced based on reduction in FTE or compensation. FTE’s have a baseline measurement –

FTE computation:

Average number of FTEs per month during the 8-week period beginning with loan origination    – Divided by

  • option 1 Average FTEs per month from February 15, 2019 to June 30, 2019 or
  • option 2 Average FTEs per month from January 1, 2020 to February 2020.

Borrowers option – borrower can choose the lesser of the two

FTE definition.  All employees over 30 hours per week count as 1.  All of the hours for part time employees at less than 30 hours per week are added up and then divided by 30 to get the FTE for part time.  Total FTE is the full time FTE + the part time FTE.

There is rehire exception to this formula when there has been a reduction in force from February 15, 2020 to April 27th which allows for the FTE to be measured just on June 30th.  Realistically this is what many businesses will use if layoffs or furloughs have already occurred, the FTE can be measured on June 30th, 2020 if they have staffed back up and qualify for 100% loan forgiveness based on the FTE calculations.

 Compensation computation:

Reduction in employee compensation measured at employee level, more than 25% from previous quarter is aggregated by employee and subtracted from debt forgiveness

For more information on this and other COVID-19 resources, contact any the Boyum Barenscheer leadership. Contact info available at our website’s Our Leadership page.


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